The Consumer Financial Protection Bureau has proposed a no-action letter policy under which the agency would issue letters stating that its staff “has no present intention to recommend initiation of an enforcement or supervisory action” with respect to specified matters involving innovative financial products or services. The proposal is an encouraging step to allow providers of innovative financial products and services to gain clarity where the application of laws and regulations is uncertain. However, our initial understanding of the new CFPB policy is that its details may make this process, if finalized as proposed, too narrow to provide meaningful benefits either to providers or consumers of consumer financial products and services, or to the market in general. Below we provide some background, a summary of the no-action letter proposed policy, and our assessment of the proposal.
In various speeches and testimony before Congress over the last 18 months, CFPB Director Richard Cordray has noted that the CFPB was considering ways to provide scenario-specific opinions, including no-action letters similar to those issued by the Securities and Exchange Commission and private letter rulings similar to those issued by the Internal Revenue Service. In a similar vein, in December 2013, the CFPB instituted a trial disclosure program as part of “Project Catalyst” that allows companies to conduct in-market tests of innovative consumer disclosures that are approved by the CFPB and explicitly deemed to be in compliance with or exempt from applicable federal disclosure requirements.
Meanwhile, there has been pressure from members of Congress for the CFPB to institute an advisory-letter program. Rep. Bill Posey introduced H.R. 4662, The Bureau Advisory Opinion Act, in May 2014, which would have required the CFPB to assess whether particular practices might violate Federal consumer financial law for enforcement purposes. Rep. Ed Royce also expressed his interest in the CFPB’s potential issuance of advisory opinions during an exchange with CFPB Director Cordray at a June 2014 hearing before the House Financial Services Committee. (See a YouTube clip of their discussion here.) Thus, the proposed policy may be an attempt by the CFPB to preempt legislative action in order to preserve its flexibility to interpret statutory and regulatory provisions through enforcement actions and guidance.
No-Action Letter Proposed Policy
The CFPB published the proposed no-action letter policy as part of Project Catalyst on October 16, 2014. The policy would allow the CFPB to issue or deny no-action letters addressing regulatory uncertainties associated with the offering of innovative financial products and services. The CFPB’s notice and request for comment on the proposed policy indicates the CFPB will only issue no-action letters “where there is substantial uncertainty whether or how specific provisions of statutes or regulations implemented by the CFPB would be applied (for example if, because of intervening technological developments, the application of statutes and regulations to a new product is novel and complicated).” Thus, the CFPB expects its policy will be used “only rarely and on the basis of exceptional circumstances.” Moreover, as drafted, the policy contains significant limitations that will likely limit its value. For example, if a no-action letter is issued, it will be non-binding on the CFPB and revocable at any time. A summary of the proposed policy follows.
1) Purpose. The purpose of a no-action letter would be to “provide some form of notification that [the CFPB] does not intend to recommend initiation of an enforcement or supervisory action against an entity based on the application of specific identified provisions of statutes or regulations to its offering of a particular product.” No-action letters would only be appropriate for certain types of products and issues:
- Only products expected to be offered. No-action letters would not be intended for well-established products or purely hypothetical products. Rather, they are solely intended for products that are expected to be offered.
- Not for issues pending before the CFPB. No-action letters would not be permitted to address issues pending before the CFPB, including in enforcement investigations, supervisory reviews, enforcement actions, or anticipated rulemakings.
- Not for UDAAP matters: Certain legal or product environment issues, including matters involving the assessment of potentially unfair, deceptive, or abusive acts or practices (UDAAP), would be inappropriate for a no-action letter.
2) Applications. Requests for no-action letters must be submitted by e-mail to the CFPB’s Project Catalyst team. As proposed, a request for a no-action letter must identify the entity and individuals providing the product; anonymous requests would be denied. The financial product or services functions and terms must be described, along with the parties involved and manner in which it is offered and used by consumers, including consumer disclosures. A timetable for the offering of the product would be needed. Substantial benefits for consumers beyond what exists in the marketplace must be identified and measured, along with risks compared to other products or services in the market. The specific provisions of statutes and regulations as to which there is uncertainty must be identified, along with an explanation of why they should not apply, including analysis of relevant legal authorities and policy considerations. The applicant must also describe the data it intends to share with the CFPB, which must include data regarding the impact of the product on consumers. Requests for confidentiality must be filed in a separate letter with the no-action letter request. The requester may withdraw a request for a no-action letter at any time.
3) Staff assessment of applications. CFPB staff would be required to consider a variety of factors when assessing no-action letter requests, including: whether the product enables consumers to understand and appreciate its terms, characteristics, costs and benefits; evidence of substantial benefit to consumers and whether those benefits are currently available from other products in the market; the requester’s controls over risks to consumers; whether the requester is demonstrably in compliance with other federal and state regulatory requirements; limitations on scope, including time and volume of transactions; whether public disclosure of relevant data may be permitted; and whether the regulatory uncertainty would be reduced by a no-action letter, or if it might be better addressed by other means, including rulemakings, guidance or a trial disclosure program.
4) Staff response. Based on an assessment of a no-action letter application, CFPB staff would have the discretion to either grant the request, deny the request, or decline to grant or deny the request, with or without an explanation.
5) Limitations. Should a no-action letter be issued, it may be limited in scope with respect to the product, sales methods, sales volume, or time. The letter may also be conditioned on specific consumer protections that “satisfy – or even exceed – applicable disclosure requirements and substantive protections.” Finally, no action letters would be:
- Subject to immediate modification and/or revocation. No-action letters would be “subject to immediate modification and/or revocation upon notice” from the CFPB.
- Disclaimed as a waiver and non-binding. No-action letters would disclaim any intention to convey a determination, exception, waiver, safe harbor, or any official expression of the CFPB’s views, and would not be binding on the CFPB.
- Subject to retrospective enforcement. No-action letters would state that CFPB staff may recommend initiating a retrospective enforcement or supervisory action when appropriate, for example, when terms of the no-action letter have been violated.
- Not binding or worthy of deference. No-action letters would state that no court or regulatory agency (e.g. a prudential regulator) has “any obligation to honor or defer to it in any way.”
6) Disclosure of no-action letters and supporting data. The CFPB would disclose granted no-action letters and reserve the right to publish denials and refusals to grant or deny requests, to the extent it believes such publication “is in the public interest.” Supporting data behind granted no-action letters would be disclosed in accordance with its separate rules on the Disclosure of Records and Information, though the policy notes that the CFPB may enter into a separate agreement with the requester regarding affirmative disclosure of data.
Comments on the proposal are due Dec. 15, 2014.
An Assessment of the Proposal
The CFPB’s efforts at outreach to innovative providers of consumer financial products and services through the proposed no-action letter policy is a worthy expression of intent but seems unlikely (without substantial modification) to have a material impact on speeding the introduction of new products. Time will tell, of course, and we look forward to the reactions of innovative companies to the terms of the proposal.
Some shortcomings in the proposal are the result of limited CFPB authority and cannot readily be addressed through revisions. For example, the inability to bind courts, other regulators (state or federal), or the class action bar to statements issued in a no-action letter is an inherent limitation of the CFPB’s powers. At the same time, the proposal unnecessarily emphasizes this point when it disclaims any “obligation” to honor it or accord it deference on the part of any other organization. If the no-action letter is worth issuing – is it not worthy of whatever deference others are prepared to grant it? The CFPB has invested considerable time and resources in efforts to coordinate its activities with other state and federal agencies, including by entering into memoranda of understanding. Why would it not be appropriate for the CFPB to offer its good offices to persuade others through such coordination mechanisms of the reasonableness of the no-action position?
Other areas of concern arise from the very conservative terms of the policy and the need for the policy to better accommodate the realities of launching new products. As such, these issues can be mitigated through revisions to the proposal. Some revisions to consider that might make the policy more effective and useful are discussed below.
- The high threshold in terms of the substantive showing necessary to qualify for a no-action letter will require a large compliance expenditure by the provider before it even knows if the product is viable. This approach will favor incumbents rather than innovators or disruptors. The Silicon Valley culture of offering a “minimum viable product” that is then iterated in response to customer feedback is perennially in tension with the regulated financial institution reflex (honed in part in response to CFPB supervisory and enforcement actions) to build every product to “bank grade” before a pilot product can be offered to consumers. But the proposed no-action letter policy seems to tilt too far in the “bank grade” direction and, as a result, could stifle innovation.
- As a corollary, the CFPB expects the applicant to demonstrate that there is no better way to address the uncertainty for which no-action is requested, such as through modification of the product, rulemakings, guidance, or a trial disclosure program.
- With respect to product modifications, the proposed policy implies that companies should anticipate, describe, and reject the various iterations of an innovative product that the company has chosen not to pursue but that might comply with existing regulations. One way to perform this onerous task would be to submit a cost-benefit analysis that allows the applicant to show how modifications would be detrimental in terms of the net impact on consumer welfare, but this criterion seems very unlikely to be met. Such analyses are difficult and expensive and require market data – which may be unobtainable without already having the product in market. As currently drafted, this could operate as a subjective means for the CFPB to determine the fate of an innovative product as a winner or a loser.
- With respect to regulatory alternatives, the proposed policy asks the applicant to determine whether an area of regulatory uncertainty “may be better addressed through other regulatory means,” including a rulemaking, guidance, or waiver under a trial disclosure program. But this fails to appreciate embedded timing and other features of the various regulatory alternatives:
- New or revised rules and guidance typically govern an entire market of existing products and the trial disclosure program permits enhancements to current disclosures for consumer testing with respect to products currently being offered. A no-action letter would instead be focused on products that fall somewhere between “purely hypothetical” and “well-established”, and thus not address issues that could be the subject of broadly applicable rules, guidance, or market testing;
- Companies seeking no-action letters are not likely to be at the right point in a product life-cycle to conduct a trial disclosure program in the market;
- No-action letters should address compliance issues that extend beyond disclosures covered by a trial disclosure program; and
- It seems highly subjective as to whether “no-action” can ever be a better way to resolve regulatory uncertainty as compared to changing the underlying regulation at issue. At the same time, if the intention is to speed innovations to market that will enhance consumer welfare – how can that goal ever be reconciled with the timing of the administrative rulemaking process?
- The CFPB’s avowed policy to grant few no-action letters clearly suggests it does not intend to be generous in its review. Since the CFPB retains the ability to revoke a letter (more about this below), this aspect of the policy statement seems unnecessary. To the extent worthy products are presented, we would think the no-action process would be an excellent use of CFPB resources. As noted in the CFPB’s proposal, no-action letter applications provide the CFPB with market intelligence, consumers benefit from early regulatory oversight of new products, and the need for enforcement resources should be reduced. In addition, successful innovation will generate pressure on other providers to innovate or lose out. These significant potential benefits of a robust and active no-action letter program would be lost if the policy is adopted in its currently narrow form.
- The CFPB can revoke a no-action letter at any time, apparently without any obligation to honor the letter with respect to acts conducted after the letter is granted and before it is revoked. This approach is likely to substantially chill enthusiasm for operating any test program at the scale necessary to obtain useful market feedback.
- The confidentiality terms afforded the provider’s information seem unlikely to provide much comfort to providers The disclosure of an early-stage idea to any regulator may expose the concept and the program to competitors and other regulators who may either exploit the idea or take adverse action. Moreover, since the CFPB’s proposed policy requires a request for confidentiality to be submitted at the same time as a no-action letter application, no rational actor would submit secrets under the proposed policy unless it was comfortable with a confidentiality request being denied by the CFPB and having its information disclosed. Similarly, the publication requirements will permit “free riding” by others who did not take the time, expense, and risk of exposing their proposed products to the CFPB. The CFPB might mitigate these concerns, which are particularly acute for the innovators to whom this policy is directed, by broadening the confidentiality terms.
- The proposed timing for when a product is ripe for assessment in a no-action letter – when the product is neither “widely-offered” or “hypothetical” – seems open to wide variation in interpretation. Many products result from collaboration between regulated and unregulated institutions. Any truly innovative product will have significant development, launch, and marketing costs, even if offered on a modest scale. A smaller venture-backed disruptive provider will have a certain view as to when in its financing lifecycle it needs the level of certainty a no-action letter might offer, while a major established financial institution may have a different point of view as to the optimal timing, given budget cycles, risk and compliance reviews, board and committee meeting schedules, etc. To foster useful innovation, the proposal will need to anticipate and respect the different imperatives of different types of innovators.
- Finally, the exclusion of UDAAP from the no-action proposal is a major self-imposed limitation on the utility of the proposal to potential applicants. The broad and vague nature of the UDAAP standard and the readiness with which the CFPB has invoked its UDAAP authority in enforcement actions combine to make UDAAP a key concern when evaluating a new product. (Please see our survey of recent CFPB UDAAP enforcement actions here). If an applicant cannot obtain the CFPB’s position under UDAAP with respect to a proposed product under a specific set of assumed facts and circumstances, we suspect such a position may cause many applicants to reject the opportunity to seek a no–action letter, since a substantial degree of regulatory uncertainty will remain even if a letter is obtained. On the other hand, the likely informal estoppel effect of a no-action letter by the CFPB on contrary conclusions by state attorneys general (under the state Baby FTC Acts ) or the Federal Trade Commission (under Section 5 of the FTC Act) could be very helpful in fostering appropriate risk-taking by innovators. This opportunity would be lost if the CFPB excludes UDAAP from the process. Importantly, the CFPB would not foreclose itself from future UDAAP enforcement activity if a no-action letter is limited to a narrow set of facts and circumstances.
We look forward to re-evaluating the no-action proposal in light of the changes that doubtless will be suggested in the course of the notice and comment process.