ASIC consults on regulatory sandbox for Fintech startups

What you need to know

• On 8 June 2016, ASIC released Consultation Paper 260 Further measures to facilitate innovation in financial services, which sets out proposed approaches to developing the regulations for startup financial technology. A key feature of this paper is the proposal of a regulatory sandbox which aims to encourage fintech startups to fast-track innovation and development of new technologies by allowing them to test certain financial services for six months without holding an AFS licence.
• These proposals represent a new approach to the regulation of startup financial services businesses in Australia. It has never been possible to test a new concept without regulation. It is also clear that ASIC is prepared to undertake a higher level of informal consultation with startup fintechs than it has in the past.
• On a practical note, the ASIC proposals have their limitations. This article outlines and key features of the proposal and some of the limitations apparent on the face of the current proposal.

What you need to do

• There is the opportunity for industry to shape the proposals by making submissions in response. Submissions are due by 22 July 2016. ASIC intends to finalise any regulatory guidance or licensing exemption by December 2016.

The core sandbox proposal

Currently, ASIC identifies three barriers to innovation for startup businesses:

• the speed to which they can deliver their service or product to the market;
• their organisational competence and compliance with particular standards of qualifications, training and experience; and
• accessibility to capital and finance.

ASIC's proposed limited, industry-wide AFS licensing exemption would allow new Australian business to test their proposed financial services without need to comply with all the obligations under the existing regulatory framework.

ASIC says this exemption will facilitate rapid development and business model changes and remove barriers to entry into the financial services market which will foster increased competition and ultimately benefit consumers. As the proposed regulatory exemption will remove most of the consumer protections under the Corporations Act, ASIC proposes certain restrictions and conditions on businesses applying for the exemption.

Other global sandbox proposals

ASIC's proposal is informed by developments in other jurisdictions, such as the regulatory sandbox established by the UK Financial Conduct Authority (FCA) which was opened up to fintechs on 9 May this year. Under the UK regulatory sandbox, eligible "sandbox firms" will be able to test their innovative products or services for a specified period without having to obtain full authorisation. However, this approach is still subject to limitations as businesses will need to become authorised and satisfy particular requirements before they can start testing, which can takes time and resources. In contrast, ASIC's proposal would allow businesses to begin testing their ideas without having to undergo any form of vigorous assessment by ASIC provided certain conditions are met.

On 6 June 2016, the Monetary Authority of Singapore (MAS) released a consultation paper also proposing a regulatory sandbox that would allow businesses to test new ideas in a relaxed legal and regulatory environment. As Singapore's consultation paper focusses on the objectives and principles of the sandbox rather than the precise conditions of the regulatory exemption, it is difficult to compare how the proposed Australian and Singapore sandboxes will work in practice.

Key features of the ASIC proposal and comparison

The key features of ASIC's proposed regulatory sandbox and comparisons to other jurisdictions are summarised in the table below:

Implications of proposed regulatory sandbox

One of the biggest challenges to stimulating the growth of the fintech industry is the barrier to innovation created by the strict licensing requirements under the regulatory and legal framework. In this regard, Australia has traditionally lagged behind its global fintech counterparts, with some startup fintechs having to wait for up to 18 months for regulatory approval.

ASIC's proposed regulatory sandbox licensing will be very welcome news for fintech startups as it will give them an opportunity to test and prove their business models in a "safe space" to determine whether their ideas are viable. The exemption also has broader benefits for the economy as a whole as it has the potential to reduce the time and cost of getting new ideas to market and promote competition which will ensure that consumers are exposed to the most innovative and technologically advanced products and services.

However, ASIC's proposed licensing exemption is not without limitation or conditions. Some key limitations and difficulties which are apparent from the current proposal include:

• The limits on the nature of the businesses that can utilise the sandbox. The existing proposed limitations would mean that many of the fintech businesses which the authors have advised to date would not be able to utilise the new sandbox regime. This would be a disadvantage faced by Australian fintech startups to those in other jurisdictions which do not have artificial limitations placed on the nature of the product that can be tested using the new regime.
• The sponsorship requirement, which could have definite value, but will only work if there are a sufficient number of such organisations so that they do not operate to limit competition in the sector (especially against those who have already been sponsored).
• The concept of the exemption only being available for six months, without extension. Given the cost and expense of hiring staff, locating premises, building technology and otherwise completing the tasks necessary for the launch of a new fintech business, there would be value in allowing a business to continue to trade while ASIC considers its regulatory applications (including applications for relief which may be required to deal with existing laws which do not allow the new business to operate as proposed). If the approval is not forthcoming then the exemption can expire.

What is not really discussed on the face of the consultation paper is the position of consumers who may have claims against the business if they suffer loss as a result of investing with a business that is 'playing in the sandbox'. If it is the intention that consumers will not have the same rights as they would have under the law (for example, the ability to access remedies which would be available if the fintech was fully regulated) then this would require clear disclosure along with a description of the consumer’s rights in the absence of full regulation. A mandated disclosure that the business is in the sandbox and of the consequences would be one way of addressing this issue.

It is an important step in the development of Australia as a fintech hub that measures such as the regulatory sandbox are introduced. ASIC is to be congratulated on bringing this concept to consultation phase so quickly. However it is apparent that other sovereign countries with significant financial services industries are taking similar steps, and as quickly. To give Australia the best opportunity to attract global (and local) financial services startups, it is important that these types of changes are rapidly implemented and that any changes necessary to make them operate effectively to encourage the establishment of new fintech businesses are made.