A US Regulatory Sandbox?

58 Pages Posted: 23 Oct 2017 Last revised: 24 Feb 2018

See all articles by Hilary J. Allen

Hilary J. Allen

American University Washington College of Law

Date Written: October 20, 2017

Abstract

“Fintech” has become an increasingly important part of the financial landscape over the last decade, but financial regulation remains a barrier to entry for many fintech firms. The “regulatory sandbox” pioneered by the United Kingdom’s Financial Conduct Authority is intended to ease these barriers in a controlled way. The UK regulatory sandbox allows fintech startups to conduct a limited test of their products with fewer regulatory constraints, less risk of regulatory enforcement action, and ongoing guidance from regulators – and versions of the sandbox are becoming increasingly popular around the world. However, despite their popularity, there has been almost no critical analysis of any regulatory sandbox model adopted to date. As commentators start to clamor for the US to adopt a regulatory sandbox, this Article argues that thought must first be given to the benefits and drawbacks associated with such a regulatory approach.

This Article finds that it is too soon to come to any definitive conclusion about whether the merits of using a regulatory sandbox outweigh its disadvantages – but notes that it is already evident that there are some pitfalls to be avoided in adopting such a regulatory structure. Anticipating that there may nonetheless be political support for introducing a regulatory sandbox in the US, this Article draws on administrative law literature relating to new governance theory and principles-based regulation, as well as financial regulatory literature pertaining to consumer protection and financial stability, to offer suggestions on how such a sandbox might best be designed to avoid these pitfalls.

It also tackles a design challenge that arises because of the United States’ peculiarly fragmented financial regulatory architecture: for a regulatory sandbox to be valuable to firms operating in the US, the sandbox must be designed to preempt enforcement actions by a range of federal and state regulatory actors. This Article therefore proposes a model whereby a committee of regulators will make decisions about whether to admit a firm to the regulatory sandbox, and any relief granted will preempt enforcement actions by all federal and state financial regulators. In this way, a regulatory sandbox could serve as a pilot program for trialing new approaches to regulating financial innovation – this is perhaps the best argument that can be advanced for adopting a regulatory sandbox in the US.

Suggested Citation

Allen, Hilary J., A US Regulatory Sandbox? (October 20, 2017). Available at SSRN: https://ssrn.com/abstract=3056993 or http://dx.doi.org/10.2139/ssrn.3056993

Hilary J. Allen (Contact Author)

American University Washington College of Law ( email )

4300 Nebraska Ave NW, Washington, DC
4300 Nebraska Ave NW, Washington, DC
Washington, DC 20016
United States

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