After the financial crisis, a new agency was created with the promise of taking on Wall Street, but in a new and different way. Seemingly innocuous in name, the Consumer Financial Protection Bureau promised to be a 21st-century, data-driven agency. Its culture was to be based on technology, creativity and change. It would avoid the paralysis of a typical regulatory agency, adopting a startup culture that embraced the agency’s guiding principles: “Serve. Lead. Innovate.”
Embedded within this innovative agency was a select group of individuals who were solely dedicated to promoting financial innovation. Borrowing from the secretive, highly innovative labs in Silicon Valley — like Facebook’s Area 404 or Google X — the CFPB created Project Catalyst.
Project Catalyst was designed to allow the CFPB to collaborate with startups, nonprofits and banks to test new products that foster innovation. Last year, Project Catalyst established a process for innovators to seek a statement from the agency, called a no-action letter, which allow for a financial innovation to go to market without fear of enforcement.
What was designed to be a first-of-its-kind success story for financial innovation, has instead been the exact opposite.
When it comes to Project Catalyst’s no-action letter policy, the CFPB has become at worst a punch line, and at best a cautionary tale. The CFPB’s no-action letters are non-enforceable and non-transferrable, and they can be revoked at any time. It is little wonder that a total of zero no-action letters have been granted since the policy was announced last year. In short, the program has been a flop.
Of course, the failure of Project Catalyst is not for a lack of trying. Really, the story of Project Catalyst is that of an agency colliding with the cold realities of the laws and rules that govern what agencies can and cannot do to promote innovation.
In the age of handheld banking apps, digital currencies and online marketplace lending, updating archaic regulations is a difficult task. Not only do the regulators move too slowly, but they typically do not like what they do not understand. Thus, the inherent nature of our nation’s financial regulatory framework not only impedes innovation, but also bans agencies from being more flexible.
In the case of Project Catalyst, the most that the agency could muster without running into legal problems was a no-action letter that was barely worth the paper it was written on.
Project Catalyst is proof that congressional action is necessary to give financial regulators the tools they need to promote responsible innovation, something similar to pilot programs known as regulatory “sandboxes.” Agencies should stop pretending that the rules they created 80 years ago address financial innovation and the concerns of the American people today. Numerous countries, including the United Kingdom, have already created sandboxes that allow financial regulators to collaborate with innovators, test new products and provide an onramp for full compliance.
In the U.K., for example, innovators must still abide by consumer protections, prove their products are safe and sound, and follow all applicable laws. The difference is that, unlike American regulators, which can take years to answer the most basic questions, foreign regulators work directly with the innovators to test whether the products achieve the underlying policy goals.
American innovators deserve better.
While it is true that the American financial system — and therefore our financial regulators — are different than other countries, that does not mean we cannot put forward policies that allow for more regulatory flexibility. Congress needs to provide our federal regulators the ability to create a permanent beta testing environment that allows the agencies to test whether financial products are what they claim to be, while allowing a startup’s compliance officer — who is usually the company’s founder — peace of mind.
More important, a permanent beta model for financial innovation creates a virtuous cycle. Agencies have to be more efficient and responsive to the innovators, which in turn forces them to better understand the innovation, which in turn helps innovators better understand what is and is not permissible to the regulators. We should create the opposite of the fragmented, complex and overly bureaucratic process our innovators face today.
Let’s use the failed experiment that is the CFPB’s Project Catalyst to turn good intentions into real reform, creating a regulatory climate that promotes financial innovation and that ensures America remains the world’s leader for innovation and entrepreneurship.