The Consumer Financial Protection Bureau recently released for public comment a proposed Policy on No-Action Letters. The Policy is aimed at innovative financial products or services promising substantial consumer benefit, but also having substantial uncertainty whether or how specific statutory or regulatory provisions would be applied. Written comments on the new Policy are due December 15, 2014.
Mention of No-Action Letters tends to bring to mind SEC No-Action Letters which typically involve situations where the requester is uncertain whether a particular product, service, or action violates federal securities law. In its Letters, SEC staff agrees not to recommend enforcement action against the requester based on the particular facts presented. Alternatively, SEC staff may issue an interpretive letter to clarify a rule or regulation.
CFPB No-Action Letters are similar to the SEC Letters in that they would inform the requesting business that staff is not planning to recommend supervisory or enforcement action for specific aspects of a particular legal requirement. But the CFPB No-Action Letters Policy differs in that it applies only to consumer-friendly innovative products or services for which there is the requisite legal uncertainty.
Limiting the CFPB Policy to consumer-friendly products or services in this way is consistent with the CFPB's interpretation that Title X of the Dodd-Frank Consumer Protection Act of 2010, which governs the Bureau, is intended to be consumer-friendly and provide all consumers access to fair, transparent, competitive, and innovative markets. In addition, the CFPB has a statutory mandate, also set out in Dodd-Frank, to "facilitate access and innovation" in markets for consumer financial products and services.
Toward these ends, the CFPB launched its innovation project known as "Project Catalyst" in the Fall of 2012 to support innovators creating consumer-friendly products and services. The No-Action Letter Policy is the most recent component of Project Catalyst.
Consumer-friendly financial innovations can use the assist offered by CFPB No-Action Letters. Consumer spending led the United States into the recent financial crisis, although more sophisticated financial institutions and transactions ultimately exerted a multiplier effect. Considerable effort has been expended dealing with more sophisticated businesses in the recovery from the recession. Less attention has been given to the unbanked, under-banked, and low-income communities, as well as consumers who may have bank accounts but use non-traditional means of payment.
Earlier this year, the CFPB began an effort to shine light on these sectors when it announced an inquiry into mobile financial services. The Bureau pointed out at the time that approximately 90 percent of U.S. consumers own a cell phone, 60 percent of which are smart phones, and 90 million Americans have tablets. It also referred to a Federal Reserve Board study finding that one-third of cell phone users and more than one-half of smart phone users gain greater access to bank or credit union accounts through these devices. Transferring funds as needed and monitoring money flow among users of such devices through traditional accounts and other non-traditional means increasingly is the challenge. Need for such transfers increases as more people have to pay their portion of health care coverage made possible by the Affordable Care Act.
CFPB No-Action Letters can replace a potential regulatory barrier for innovative consumer products and services with a more collaborative approach at a particularly meaningful juncture in the innovation arc. The CFPB Policy is thoughtfully designed not to strike early, but rather to target innovations sufficiently developed to satisfy the level of detail required in the submission and to withstand the public scrutiny involved in applying for a No-Action Letter. This could provide a significant benefit at a critical time for certain products and services.
Simultaneously, the innovator and the CFPB can gather data to inform the regulatory process going forward. Innovators oftentimes overlook such a collaborative opportunity to drive the regulatory process.
In terms of process, actual requests for CFPB No-Action Letters are to be quite detailed. Still, requests for confidentiality can be made. Among other things, the requester has to explain how the service or process works, the relationships of all parties to the transactions involving the product, and any risks to consumers as well as undertakings to minimize risk. A timetable by which the product is offered to, and used by, consumers must be submitted. The requester is to identify data it possesses and intends to develop supporting the request and, if the request is granted, agree to share data with the CFPB.
The substantial benefit expected from the product is to be explained, as well as the legal basis and uncertainty for the No-Action Letter. CFPB staff has sole discretion in responding to requests and may communicate with the requester before making its decision. No-Action Letters will be the exception rather than the norm given the Bureau's limited resources available for consideration in light of its other responsibilities. Still, for a genuinely innovative consumer-friendly product or service, a No-Action Letter can provide a significant regulatory accommodation at an important time in its development.
For a more detailed discussion of CFPB No-Action Letters, see my recent article in Bloomberg BNA Banking Report.