Earlier this month, the Consumer Financial Protection Bureau (CFPB or Bureau) issued new policy statements regarding its Compliance Assistance Sandbox (CAS) and No-Action Letters (NAL) programs. These policies ostensibly aim to promote innovation, competition, ethics, and transparency in the consumer financial products and services market. However, the policies also introduce significant restrictions, particularly concerning applications from firms with prior federal or state enforcement actions and those represented by former CFPB attorneys.
The CFPB’s CAS and NAL policies were initially launched under the former Trump administration. The CAS policy offered regulatory relief to encourage the testing of new products, while the NAL policy provided the possibility that the CFPB would not bring supervisory or enforcement actions against companies in certain cases.
Under Director Rohit Chopra, the Bureau rescinded both policies after determining in a 2022 review that they “failed to advance their stated objective of facilitating consumer-beneficial innovation,” while also failing to meet “appropriate standards for transparency and stakeholder participation.” The restrictions contained in the new policy statements are purportedly aimed at correcting the Trump policies’ “shortcomings.”
Policy Overview
CAS Policy: The CAS policy is designed to provide a safe harbor from liability under specific federal consumer financial laws for innovative products and services that address unmet consumer needs. Key conditions include:
- Market Problem: Applicants must demonstrate that their product or service solves a significant market problem.
- Competitive Fairness: The CFPB will not grant approvals to single firms to avoid first-mover advantages and will invite competitors to apply for similar approvals.
- Ethical Standards: Applications from firms represented by former CFPB attorneys or those with recent enforcement actions are generally not considered.
- Transparency: Applications will be posted for public comment, and approvals cannot be used for marketing purposes.
NAL Policy: The NAL policy provides assurances that the CFPB will not take supervisory or enforcement actions against firms for specific practices. The conditions are similar to those of the CAS policy, emphasizing the need for genuine innovation, competitive fairness, and high ethical standards.
Key Restrictions
- Representation by Former CFPB Attorneys: The CFPB will generally not consider applications from firms represented by former CFPB attorneys. According to the CFPB, this measure is needed to avoid ethical conflicts and the appearance of special treatment.
- Recent Enforcement Actions: The CFPB will not consider applications from companies that have been the subject of an enforcement action involving violations of federal consumer financial law in the last five years, or who are subject to a pending enforcement investigation by federal or state authorities. This prohibition extends to companies that are under investigation, not just to those where violations have been found.
- CFPB Supervision: Applicants are required to consent to the CFPB’s supervision and all that entails.
Our Take
The recent changes to the CFPB’s CAS and NAL policies appear to be an effort to restrict the availability of innovation channels based on past enforcement experience. It signifies an effort by the outgoing CFPB leadership to restrict access to the Bureau’s innovation tools and seems calculated to put the Bureau’s new leadership in the position of having to walk back this pronouncement.
Likewise, the restriction on former CFPB attorneys as outside counsel is a continuation of the Director’s previous statements critical of former CFPB lawyers who enter private practice on the industry side and seems predicated on the notion that personnel at the Bureau would be unable to control their bias in favor of former colleagues, which seems quite far-fetched to us.
We anticipate that these restrictions will not survive the current Trump Administration. The administration is likely to prioritize deregulation and the promotion of innovation in the financial sector. As such, we expect that the restrictions on entities with past enforcement actions and representation by former CFPB attorneys will be rolled back to encourage greater participation in the CAS and NAL programs.