Arizona’s Governor recently signed into law legislation that directs the state’s Attorney General to establish a “regulatory sandbox program” for the purpose of “enabl[ing] a person to obtain limited access to the market in this state to test innovative financial products or services without obtaining a license or other authorization that would otherwise apply.”  Businesses that are already licensed “under state laws that regulate a financial product or service” can also participate in the program.

On Tuesday, April 10, 2018, I will moderate a panel at the LendIt Fintech conferenceduring which the Arizona program will be discussed with Arizona Representative Jeff Weninger, who wrote the sandbox legislation, joined by former OCC Comptroller Thomas Curry and Cross River Bank CEO Gilles Gade.

Key definitions in the Arizona law include:

• An “innovative financial product or service” means “a financial product or service that includes an innovation.”

• “Financial product or service” means a “product or service that requires licensure under [specified Arizona laws] or a product or service that includes a business model, delivery mechanism or element that may otherwise require a license or other authorization to act as a financial institution or enterprise or other entity that is regulated by [specified Arizona laws].”

• “Innovation” means “the use or incorporation of new or emerging technology or the reimagination of uses for existing technology to address a problem, provide a benefit or otherwise offer a product, service, business model, or delivery mechanism that is not known by the attorney general to have a comparable widespread offering in this state.”

Applicants for the program must provide specified information that includes the benefits and risks to consumers using the innovative financial product or service and must satisfy certain conditions, including that the applicant “has established a location, whether physical or virtual, that is adequately accessible to the attorney general, from which testing will be developed and performed and where all required records, documents and data will be maintained.”

If an applicant is approved for the program, the “sandbox participant” will have 24 months to test its innovative financial product or service.  Requirements and limitations that apply to approved participants include the following:

• Participants generally may not enter into transactions with more than 10,000 consumers and participants testing consumer loans (as defined under specified Arizona law) may issue individual loans for an amount up to $15,000 but not issue more than $50,000 in aggregate loans per consumer.

• Participants testing products or services as a money transmitter (as defined under specified Arizona law) may enter into a transaction with a consumer in an amount up to $500 but may not enter in more than $2500 in aggregate transactions per consumer

• If a participant demonstrates adequate capitalization, risk management process and management oversight, the Attorney General can allow the participant to enter into transactions with up to 17,500 consumers and, if the participant is also testing products or services as a money transmitter, the Attorney General can allow the participant to enter into a transaction with a consumer in an amount up to $15,000 and up to $50,000 in aggregate transactions per consumer

• Participants must comply with specified provisions of Arizona law, including consumer fraud provisions, and any additional state law requirements applicable to a financial product or service as determined by the Attorney General

• Before providing an innovative financial product or service to a consumer, a participant must provide specified disclosures to the consumer and any additional disclosures required by the Attorney General

Participants are not exempt from compliance with federal law, including the enumerated federal consumer financial services laws as defined in the Consumer Financial Protection Act and the CFPA’s UDAAP prohibition.  However, the Arizona law provides that a participant “is deemed to possess an appropriate license under the laws of this state for purposes of any provision of federal law requiring state licensure or authorization.”  Also, while the program only covers transactions with consumers who are Arizona residents, the law authorizes the Arizona Attorney General to “enter into agreements with state, federal or foreign regulators that allow sandbox participants to operate in other jurisdictions and allow entities authorized to operate in other jurisdictions to be recognized as sandbox participants in this state.”