U.S. House Bill Aims to Set Up ‘Sandbox’ for Fintech Innovation

By Rachel Witkowski for WSJ

WASHINGTON—A House bill intended to keep the U.S. from losing financial innovators to the U.K.’s budding “sandbox” regulatory program was introduced Thursday.

The financial technology industry, from digital currencies to peer-to-peer online lending, has raised concerns that U.S. regulation isn’t keeping pace, potentially causing businesses to consider moving operations to the U.K. The sandbox program, kicked off in May, lets companies work alongside a regulator when testing a fintech product or service.

That gives the firms the ability to test a new product or business model with a limited launch, without going through the full regulatory process. Hong Kong also announced a sandbox initiative earlier this month.

In response, Rep. Patrick McHenry (R., N.C.) introduced a bill that would mirror the U.K. sandbox, requiring many federal agencies including the Federal Reserve Board, the Treasury Department and the Securities and Exchange Commission to develop an internal “Financial Services Innovation Office” where companies can seek help in testing a product.

Many of these agencies, such as the Consumer Financial Protection Bureau, already have an innovation team, but Mr. McHenry said his bill would require agencies to formalize the process, share data and report periodically to Congress.

“This is where innovators want to be and it’s only regulation that’s driving them offshore,” said Mr. McHenry, a top Republican on the House Financial Services Committee, told The Wall Street Journal. “This [bill] would, in many ways, would force regulators to be much more attuned to what’s happening in the marketplace.”

Many fintech firms favor a “sandbox” approach in the U.S., but they raise concerns about the creation of an even more fragmented regulatory system if each agency has its own innovation office.

Bruce Wallace, chief digital officer at SVB Financial Group, the Santa Clara, Calif., parent of Silicon Valley Bank, said the patchwork approach would be messy, adding that he would prefer that the Commerce Department oversee a “sandbox” lab.

“The Commerce Department is in a really unique position where their charter is to help drive GDP and commerce in the United States,” said Mr. Wallace, speaking generally about a sandbox approach at the FinTech Forum in Silicon Valley on Wednesday, before the bill was introduced. “At least in the interactions I’ve had with them, they absolutely understand, appreciate and recognize the necessity to help the innovation economy because it helps the economy over all.”

If the bill is enacted, the federal agencies would then have 60 days to identify at least three areas of existing regulation that could apply to financial innovation and what areas they would consider waiving or modifying regulation upon petition from a fintech firm. The agencies would also have to develop procedures that would reduce the time and costs to test a product, as well as regarding when they could take enforcement action against a firm going through this process.

“We have this wide variety of prudential regulators and their responsibility traditionally is to kill it before it grows,” Mr. McHenry said. “We want to have a mind-set shift in how regulators function and we want them to be responsive in order to enable financial innovation and…to drive it forward.”

Mr. McHenry acknowledged it would be tough for the bill to pass this year, but he said he wanted to get the conversation started now and arrive at a consensus approach that could pass the new Congress next year.

Under the McHenry proposal, fintech firms would be required to prove to the regulator that their innovation serves a public interest, improves access to financial products or services, and doesn’t pose a system risk to the financial system or consumers.

Another concern raised by fintech firms about a sandbox approach in general was that its popularity could overwhelm the regulators.

“It could conceivably become a very crowded sandbox and that’s not to say that’s a bad thing,” said Patrick Pinschmidt during the FinTech Forum on Wednesday. Mr. Pinschmidt, a former deputy assistant secretary at the Treasury Department and executive director of the Financial Stability Oversight Council, later told The Wall Street Journal that any sandbox approach in the U.S. would really depend on how it is used “to the extent it was a vehicle for effective collaboration among regulators and engagement with the industry.”

The bill is the latest in a series of measures Mr. McHenry has introduced this summer as part of his “Innovation Initiative.” In July, Mr. McHenry introduced two bills. One would allow debt buyers such as peer-to-peer lenders to bypass state interest-rate caps, letting them charge the same rate as the banks that originated the debt.

The other would require the Internal Revenue Service to use “website-based, real time responses” when a lender asks the IRS for a document to verify a person’s income and other data to approve a loan. Both bills are pending before committees.

First appeared at WSJ