Utah has joined an elite club making financial services more innovative, competitive and responsive to people’s changing needs.
House Bill 378, sponsored by Rep. Marc Roberts, R-Santaquin, and signed by Gov. Gary Herbert in March, made Utah the third state to establish a “regulatory sandbox” for next-generation financial products.
Services like Venmo, the popular cashless transfer app, are changing things for the better, but some can’t get past regulations designed for another era. Utah’s project could help change that, and bring business and jobs with it.
What is a “regulatory sandbox?” It is a tool that allows firms trying new and innovative things to test their products, for a limited time, on a limited number of willing customers. In this relaxed regulatory environment, businesspeople and politicians can assess whether products work and comply with the law. Critically, however, firms are still required to protect consumers and compensate them if the test fails.
Why have a regulatory sandbox? Because technology is changing how financial services are provided, but regulation has not kept pace. This means good ideas and innovative new businesses can be sidelined due to outdated rules. The pace of technology also make regulators’ jobs difficult.
The ultimate victims of both of these problems are consumers, who are denied the benefits of a maximally innovative market and regulations that best protect them. The sandbox is meant to address these problems by providing a vehicle for collaboration between firms and regulators. Firms experiment and regulators learn.
There is another potential benefit to Utah’s sandbox: It might encourage innovative firms to relocate to, or remain in, Utah as opposed to going to traditional tech or finance hotbeds like San Francisco or New York. As firms experiment and gain valuable market validation within Utah, the relationship between the state and the firm may become “stickier,” and in turn result in more jobs and tax revenue.
This isn’t to say there are no risks to a sandbox. With any experiment, there is a risk of failure that could result in consumer harm. That is why Utah’s law requires that firms seeking entry to its sandbox spell out credible consumer protection plans. This is designed to ensure that only firms with the means to execute those plans are allowed to experiment. Participating firms are also required to clearly disclose that the product is experimental, and that being in the sandbox does imply an endorsement by the state.
Another, less obvious risk posed by sandboxes is the risk to competition. Any advantage for one firm could be a harm to its competitors. This is not unique to a regulatory sandbox, however. Every regulatory system has winners and losers. Utah’s sandbox mitigates the risk to competition by weighing a competitor’s presence in the sandbox as a point in favor of admitting a firm.
It also provides for an annual report with recommendations for improvement to be provided to the Legislature, in part to help prevent the sandbox from becoming an undue source of cronyism or government-granted privilege. Hopefully, this report will also help ensure that anything learned from the sandbox experiments, other than legitimate trade secrets, will be made public and the market generally can use it.
Regulatory sandboxes are an exciting idea with lots of potential, but like everything else, it will depend on good execution. Utah’s legislature has made a significant effort to establish their state as a place for innovation and competition.
Whether it will pay off remains to be seen, but there are reasons to hope that it will work. Ideally, Utah’s example will inspire other states to make their own laws more open to what the future can bring.
Brian Knight is a senior research fellow and director of innovation and governance with the Mercatus Center at George Mason University, Arlington, Va. He spoke with a sponsor of the legislation in an educational capacity.
Correction: 9:39 a.m., May 6, 2019 • A photo that incorrectly identified a legislator as Rep. Marc Roberts was replaced.