Tom Curry

Through its Office of Financial Innovation, the Office of the Comptroller of the Currency (OCC) introduced the Innovation Pilot Program for public comment on April 30. The pilot program is the latest government proposal endorsing this pilot or trial concept, in which banks and fintechs work with regulators on novel products and programs to achieve the best ways to foster innovation while balancing key safety and soundness and consumer protection rules and regulations. 

Jason J. Cabral

The pilot program is the most recent proposal by a major financial regulator. Banking regulators in the United Kingdom and elsewhere have adopted a trial and pilot approach, and the Consumer Financial Protection Bureau (CFPB) late last year proposed changes to its policy on no-action letters and a new product sandbox. Certain states such as Arizona and Wyoming have also adopted state-level sandbox programs for fintechs. 

Dan Hartman

How the Pilot Program Encourages Innovation 

The pilot program, like other existing or proposed models, is designed to allow OCC-regulated entities a voluntary opportunity to engage in developing innovative products or services where there is significant regulatory uncertainty by working with the OCC on small-scale and short-term programs to give both the entity and the regulator an opportunity to analyze whether a product or service could be expanded on a national basis and in a compliant way that avoids or mitigates potential consumer harm. The program would consist of ongoing dialogue between the OCC and each participant, allowing the OCC to familiarize itself with new and innovative products and services and strengthen its regulatory expertise, while educating regulated entities on the laws, rules and regulations applicable to those products and services. 

Most significantly, the OCC made clear that it will not accept any proposal with “potentially predatory, unfair or deceptive features, [or that] pose[s] undue risk to consumers, or pose[s] undue safety and soundness risk to an institution.” 

The pilot program encourages OCC-regulated entities that propose to offer an innovative product or service directly or through a third party to apply as either an individual entity, together with a third-party partner or collaboratively with other banks and/or third parties.  

For approval, each applicant must show why the OCC should be involved by demonstrating that there is an unclear or novel area of law with respect to the activity or an unclear impact on safety and soundness and/or consumer protection. In addition, the proposal also requires that each applicant show how the proposed activity would promote innovation, such as addressing the needs of consumers or the industry, mitigating risk, improving compliance and other processes or improving consumer protection. 

Participants and the details about the proposed products and services will, in general, be confidential. Yet in the cases in which the program leads to public relief such as interpretive letters, some aspect of novel products and services could also become public. 

Why Should Banks and Fintechs Participate? 

As is the case with similar voluntary government programs, banks and fintechs should be incentivized to participate so that policymakers, the private sector and the public at large are benefiting. And the issue of incentives – in the form of regulatory relief – presents the most significant policy difference on the issue of financial innovation. 

The OCC’s proposal would offer entities limited regulatory relief through tools such as “interpretive letters, supervisory feedback and technical assistance” where necessary. This relief can provide banks and fintechs with helpful insights as they develop new products and services.  

Most significantly, the pilot program, unlike the CFPB and certain proposals by other state and federal and non-U.S. regulatory bodies, does not include regulatory relief in the form of safe-harbor provisions, no-action letters or other waivers of applicable statutory and regulatory requirements under any circumstances, highlighting the OCC’s focus on preserving safety and soundness as well as consumer protection. 

The development of the pilot program takes a modest, yet flexible, approach to regulatory relief for banks and fintechs alike and represents encouraging progress for financial innovation. Even so, it is unclear whether the type of relief offered will entice regulated entities to pursue the program for new products and services. Some commentators have argued that the pilot program’s lack of safe-harbor provisions, no-action letters or other waivers of applicable statutory and regulatory requirements raises questions about how worthwhile it will be for banks and fintechs to participate.  

The OCC has responded that it does not believe the lack of waivers will deter banks or fintechs from applying. Indeed, the OCC’s efforts to focus on safety and soundness and consumer protection and not issuing blanket waivers may enhance the program’s results. A poorly designed pilot program or regulatory sandbox that results in consumer harm will have significant consequences on program participants as well as the broader banking and fintech industries. 

Thomas J. Curry and Jason J. Cabral are partners in Nutter’s corporate and transactions department. Daniel W. Hartman is an associate in Nutter’s litigation department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group.