Fintech News: State Licensing Streamlined, More States Step into the Sandbox

Financial Services Law

The Conference of State Bank Supervisors (CSBS) recently announced that 23 states have now agreed to participate in a streamlined licensing process under which nonbanks requiring a license to operate under state law can benefit from the cooperative efforts of the state regulators in approval of their applications.

State regulatory sandbox laws are increasing, with Nevada and Utah also permitting developers of innovative financial products and services to conduct test programs in those states.

What happened

State regulators, through the CSBS, are continuing their efforts to streamline the licensing process for nonbanks such as fintech companies. The CSBS announced in late June that 23 states now have signed on to an agreement under which they will coordinate the licensing review process for MSBs and others seeking a state license. This is an increase over the seven states that initially signed on to the agreement in February 2018, and the CSBS hopes more will join the compact.

Pursuant to the agreement, when one state conducts a review of common licensing requirements, such as the business plan, background checks of the direct and indirect owners, financial information and compliance with the anti-money laundering provisions of the Bank Secrecy Act, the other participating states will accept the findings and limit their own review to state-specific elements.

Fifteen companies are involved in a pilot of the initiative, the CSBS said, and have already received a total of 72 licenses. Participating states include California, Connecticut, Georgia, Iowa, Idaho, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, North Carolina, North Dakota, Nebraska, Ohio, Rhode Island, South Dakota, Texas, Tennessee, Utah, Vermont, Washington and Wyoming.

Joining Arizona and Wyoming, Nevada passed a law creating a sandbox program that permits participants to test products on state consumers with some relief from statutory and regulatory requirements for financial products and services.

Pursuant to Senate Bill 161, not more than 5,000 consumers may be provided the product or service during the two-year period of participation in the program. After two years, a participant may ask for an extension in order to apply for a license or other authorization required for the product or service to continue operations in the state.

Certain disclosures are required to consumers, including that the participant does not hold a license for the product or service outside of the program (if applicable). Participants must also provide consumers with a means of submitting complaints.

Oversight will be provided by the Director of the Department of Business and Industry. This includes mandating additional disclosures to consumers, granting permission for the number of consumers receiving the product or service to increase to 7,500, and establishing reporting requirements for participants.

The legislation took immediate effect for administrative purposes with full application set for January 1, 2020.

Not to be outdone, Utah’s new sandbox program recently took effect, freeing participants from some state licensing and regulatory requirements for a two-year period to test new products in the state. Federal laws and state criminal laws remain applicable to participants, who must apply via the Department of Commerce.

Similar to the Nevada program, Utah imposed disclosure requirements and set a two-year period for participation. At the end of the period, participants need to either request a six-month extension to obtain the necessary approvals to continue offering their product or service in the state or stop providing it. 

Unlike Nevada’s law, House Bill 378 did not cap the number of consumers who can receive their product or service from participants, although the Department may impose a limit on a case-by-case basis.

The new law took effect on May 13.

To read Nevada’s law, click here.

To read Utah’s law, click here.

Why it matters

It is encouraging that the CSBS is continuing its work to streamline the multistate application process by encouraging states to sign its Multistate Licensing Agreement. Hopefully, this arrangement will speed the process for applicants and reduce duplicative efforts by states. This initiative is part of the group’s Vision 2020 initiatives which are aimed at coordinating regulatory oversight for nonbank financial services providers. This is consistent with efforts by the states to position themselves as the preferred bodies to regulate nonbanks that offer financial products and services.

Although some states have been quite critical of the sandbox concept, it is encouraging to see more establish such programs.  Federal regulators also have embraced sandboxes.  Last year, the Consumer Financial Protection Bureau (CFPB) pitched a “Disclosure Sandbox” aimed at encouraging trial disclosure programs, while the Office of the Comptroller of the Currency (OCC) proposed a program that would allow banks to obtain input from the regulator during the testing phase of a new product or service.



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