Meme with sand, toy shovel, and do not enter sign

During the Illinois General Assembly veto session the last week of October, Woodstock Institute and other consumer groups made the case that lawmakers should not proceed with a regulatory “sandbox”-like licensing scheme whereby a financial technology (“fintech”) company could apply for a special license to test “innovations” on consumers.

Legislators agreed to remove the fintech licensing scheme and instead focus on establishing special purpose trusts within the Corporate Fiduciary Act to enable corporate fiduciaries to hold cryptocurrency.

What is a sandbox and why were advocates worried?

Various states have adopted similar fintech licensing schemes, calling them “regulatory sandboxes.” They are intended to allow fintechs to test innovations on consumers without fully complying with existing regulatory safeguards.

“Sandbox-like regulatory schemes are an invitation for unscrupulous actors to experiment on vulnerable consumers,” said Col. Paul Kantwill, USA (Ret.), Loyola law professor and one of the architects of the Military Lending Act:

Concerns with the proposed legislation included:

  • A potential loophole for predatory lenders. The innovation program language stated that PLPA’s 36% rate cap would apply to program participants “for loans,” but some lenders claim not to make loans under the PLPA. See, e.g., Pawnbrokers v. IDFPR (granting pawnbrokers’ injunction).
  • No specific data collection or reporting requirements, no mention of Freedom of Information Act (FOIA) requests, and no requirement that the IL Department of Financial and Professional Regulation (IDFPR) publish any data.
  • No monetary penalties for violations.
  • No specific protections for consumers who transmit money electronically.
  • Required IDFPR to give “reasonable notice” to licensees before inspection.

A new licensing scheme with such a large potential impact should be introduced during the regular session when there is an opportunity for meaningful dialogue and multiple hearings – not rushed through in the last three days of veto session. Importantly, advocates still do not know the identity of the proponents of the proposal.

Groups opposing the sandbox proposal included Capital Good Fund, Financial Inclusion for All Illinois, Heartland Alliance, Illinois People’s Action, Illinois PIRG, Legal Action Chicago, NAACP, National Consumer Law Center, and New America Chicago, among others.