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From Banking and Finance Law Daily, April 30, 2019

OCC proposes regulatory sandbox program

By Richard A. Roth, J.D.

The OCC has proposed an Innovation Pilot Program—a regulatory sandbox that would provide regulatory certainty to banks while they develop innovative financial products or services.

The Office of the Comptroller of the Currency has taken another step intended to help financial institutions devise creative products, services, or systems by proposing an Innovation Pilot Program. The OCC says the program would support innovation, provide regulatory certainty, and improve the agency’s ability to understand and supervise the activities.

According to the OCC’s proposal, the program would help banks understand how to engage in novel activities that remain within the existing banking laws and regulations. It also would help the agency develop needed safety and soundness, risk management, and consumer compliance controls for these activities.

The agency made clear that there would be no safe harbors or exemptions from federal or state laws or regulations. Existing consumer protection requirements would continue to be in effect, and proposals with features that could be predatory or unfair, could pose risk to consumers, or could threaten an institution’s safety and soundness would not be eligible.

Eligibility. Banks and savings associations would be eligible to propose activities, alone or in cooperation with other financial institutions. Nonbanks could partner with banks, but they could not participate alone.

For a proposal to be approved, there would need to be some element of legal or regulatory uncertainty that discourages its development without the OCC’s involvement. Also, the proposed activity would need to offer some benefit to consumers or the community, enhance the efficiency of financial services, or help manage risks of the participants or the financial system.

OCC tools. Although the program would not offer any immunity, the OCC said it would be able to use interpretive letters and supervisory feedback to resolve participants’ uncertainty. Technical assistance could be offered by the agency, and the OCC also might offer opinions on whether a specified activity is legal. However, the agency’s tools would not be used in a way that violated any existing laws, the OCC says.

Evaluation process. The proposal envisions a four-step process, beginning with discussions between the agency and the financial institution before a proposal is submitted. Submission would be the second step, followed by an OCC evaluation. Proposals that pass that evaluation would proceed to testing.

Once testing begins, the participants would be required to provide periodic reports to the agency. The agency says it also might make public some of what is learned during tests, although it would keep proprietary information confidential to the extent that is possible.

The OCC also provided a set of frequently asked questions to explain the program further.

Comments on the proposal are due by June14, 2019.

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