North Carolina’s “Regulatory Sandbox Act” Is a Win for Innovation | Citizens Against Government Waste

North Carolina’s “Regulatory Sandbox Act” Is a Win for Innovation

The WasteWatcher

In a win for entrepreneurs, consumers, and taxpayers in North Carolina, Governor Roy Cooper (D) signed HB 624, the “North Carolina Regulatory Sandbox Act,” into law on October 15, 2021.  Under the new law, which was passed unanimously by both the House and the Senate, insurance and financial companies will be able to apply for waivers to bypass certain regulations for a two-year period and provide innovative products or services to consumers that are not currently permitted under state law.  A new 11-member North Carolina Innovation Council, comprised of the banking and insurance commissioners, attorney general, secretary of state, or their respective designees, and public representatives appointed by the governor, lieutenant governor, and leaders of the legislature, will review applications and choose which companies may participate.  Applicants will pay an initial $50 application fee and, upon approval, a $450 participation fee, in addition to any other fees assessed by the council.

First developed by the United Kingdom’s Financial Conduct Authority (FCA) in 2015, regulatory sandboxes allow businesses to “test innovative products, services, business models and delivery mechanisms without” going through the usual red tape.  In a sandbox, businesses are given one to two years to test new products before petitioning regulators for full approval.  As the businesses try out their strategies, policymakers also receive the opportunity to observe the advantages of decreased regulation and can adjust laws accordingly. 

Since their inception, regulatory sandboxes have had a positive impact.  The first sandbox created by the FCA, for example, has experienced a 40 percent reduction in the amount of time needed to authorize applications, and 80 percent of the firms “successfully tested” are still in operation.  

Through the removal of outdated and cumbersome regulations that increase barriers to entry, sandbox participants that would struggle to gain access to the marketplace receive an opportunity to enter the playing field.  They provide new competitive services to consumers and increase job opportunities.  Further, sandboxes promote the development of new products and services in a free market, rather than under strict government control.

With the passage of HB 264, North Carolina joins states like Arizona, Florida, Kentucky, Nevada, South Dakota, Utah, Vermont, West Virginia, and Wyoming in lifting barriers to entry for new businesses and technologies through the adoption of regulatory sandboxes.  Legislators in Connecticut, Louisiana, New York, North Dakota, Ohio, Oklahoma, and Pennsylvania also considered or are currently considering similar legislation this year.

However, the adoption of regulatory sandbox legislation in these states does not mean that the job is done.  For example, while North Carolina’s law applies to both insurance and financial technologies, Arizona and Nevada’s regulatory sandboxes apply only to financial technology, also known as “fintech,” while Kentucky and Vermont’s sandboxes are exclusive to insurance technology, also known as “insurtech.”  The expansion into other fields, including legal services, or expanding existing but limited sandbox laws to all industries, as enacted in Utah earlier this year, will open the door to even greater innovation.  

Moving forward, state legislators should follow the examples set by North Carolina and Utah and expand regulatory sandboxes beyond a single industry or a limited group of industries.  Given the successes and benefits provided by sandboxes, they should certainly be adopted in lieu of increased regulations or taxpayer-funded business subsidies.