Arizona House Bill 2434

The Arizona legislature recently enacted a regulatory sandbox program (see definition below) to allow companies to test innovative financial service products without a licensing requirement, effective August 3, 2018.

“Applicable agency” means an Arizona department or agency established by law to regulate certain types of business activity in Arizona and persons engaged in such business, including the issuance of licenses or other types of authorization, that the Arizona Attorney General determines would regulate a sandbox participant if the person was not a regulatory sandbox participant.

“Consumer” means a person that purchases or otherwise enters into a transaction or agreement to receive an innovative financial product or service that is being tested by a sandbox participant.

“Financial product or service” means a product or service that requires licensure under Title 6 pertaining to Banks and Financial Institutions, 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 Title 6.

“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 Arizona Attorney General to have a comparable widespread offering in Arizona.

“Innovative financial product or service” means a financial product or service that includes an innovation.

“Regulatory sandbox” means the program that allows a person to temporarily test innovative financial products or services on a limited basis without otherwise being licensed or authorized to act under the laws of the state of Arizona.

“Sandbox participant” means a person whose application to participate in the regulatory sandbox is approved.

“Test” means to provide products and services as allowed by this law.

The Arizona Attorney General must establish a regulatory sandbox program in consultation with applicable Arizona agencies to enable a person to obtain limited access to the market in Arizona to test innovative financial products or services without obtaining a license or other authorization that otherwise might be required.

Any person may apply to enter the regulatory sandbox to test an innovation.  The Arizona Attorney General must accept and review each application for entry into the regulatory sandbox on a rolling basis.  An application must demonstrate that an applicant both:

• Is an entity or individual that is subject to the jurisdiction of the Arizona Attorney General through incorporation, residency, presence, agreement or otherwise; and
• Has established a location, whether physical or virtual, that is adequately accessible to the Arizona Attorney General, from which testing will be developed and performed and where all required records, documents and data will be maintained.

Persons that already possess a license or other authorization under Arizona laws that regulate a financial product or service must file an application with the Arizona Attorney General to test innovative financial products or services within the regulatory sandbox.

The Arizona Attorney General must consult with an applicable agency before admitting a person into the regulatory sandbox which may include seeking information about:

• Whether the applicable agency has either issued a license or other authorization to the applicant or investigated, sanctioned or pursued legal action against the applicant; and
• Whether the applicant could obtain a license or other authorization from an applicable agency after exiting the regulatory sandbox.

The Arizona Attorney General has sole authority to make the final decision whether to admit a person into the regulatory sandbox.

If the applicant is approved for entry into the regulatory sandbox:

• The sandbox participant has 24 months after the date of approval to test the innovative financial product or service described in their application; and
• The Arizona Attorney General must issue the sandbox participant a registration number.

Innovative financial products or services that are provided within the regulatory sandbox are subject to the following restrictions:

• Consumers must be residents of Arizona;
• Except as otherwise provided, not more than 10,000 consumers may transact through or enter into an agreement to use the innovation;
• For a sandbox participant testing consumer lender loans, an individual consumer lender loan may be issued for up to $15,000 except that aggregate loans per consumer may not exceed $50,000.  All consumer lender loans issued in the regulatory sandbox, including loans in excess of $10,000, are subject to restrictions on balloon payments and requirements and limitations for consumer lender loans.

If a sandbox participant demonstrates adequate financial capitalization, risk management process and management oversight, the Arizona Attorney General may allow up to 17,500 consumers to transact through or enter into an agreement to use the innovation.

A sandbox participant is deemed to possess an appropriate license under the laws of Arizona for purposes of any provision of federal law requiring state licensure or authorization.  A sandbox participant who holds a license or other authorization in another jurisdiction is not prohibited from acting pursuant to and in accordance with that license or other authorization.

Except as otherwise provided, a sandbox participant is not subject to Arizona laws that regulate a financial product or service.

The law also addresses:

• Information required to be included in an application for participation in the regulatory sandbox;
• Required consumer disclosures;
• Requirements for exiting the regulatory sandbox;
• Extension of the regulatory sandbox testing period; and
• Recordkeeping and reporting requirements.