In accordance with the Turnbull Government's call for an "innovation nation," the Australian Securities and Investments Commission (ASIC) has issued Consultation Paper 260: Further measures to facilitate innovation in financial services (CP 260) which examined various options to encourage and assist start-up financial technology (FinTech) businesses to test and navigate through Australia's financial services regulatory framework. One of the options presented by ASIC for public feedback includes a so-called "regulatory sandbox."
Addressing barriers to innovation for FinTech start-ups
According to CP 260, ASIC seeks to address the barriers to innovation for FinTech start-up. The main focuses that ASIC has identified are
- speed to market;
- organisational competence; and
- access to capital.
In order to tackle these barriers, ASIC has presented the following 5 options for public consultation and feedback:
- Option 1 - Provision of guidance on the suitability of a responsible manger who has appropriate knowledge and skills;
- Option 2 - Reliance of experienced third parties to meet an organisations organisational competence obligation;
- Option 3 - Provision of conditional, industry-wide exemptions permitting new Australian businesses to test their certain FinTech in a controlled regulatory space for 6 months without holding an Australian financial services licence (AFSL). Relief from other regulatory demands may also be available as part of this option (Regulatory Sandbox Exemptions);
- Option 4 - A combination of Options 1-3;
- Option 5 - Maintain the existing financial services regulatory framework without change.
ASIC has proposed the adoption of Option 4 (a combination of Options 1-3) and is currently considering the submissions that it has received as a response to CP 260. Regulatory guidance and/or licensing exemptions is expected to be finalised and released by ASIC in December 2016.
Key aspects of ASIC proposed Regulatory Sandbox
If ASIC decides to implement a combination of Options 1-3 (which includes a regulatory sandbox element) as per CP 260, it is likely that the following features will be adopted by ASIC:
1. Six months of unlicensed testing of financial services to retail clients
ASIC may excuse Australian FinTech start-up entities from holding an AFSL during a 6-month 'testing stage' of their products or services. This means that FinTech start-ups will have the opportunity to test their products with retail clients for one period of six months.
In addition to the exemption from having to obtain an AFSL, ASIC may also decide to grant relief from some of the time consuming and expensive regulatory demands (such as issuing a product disclosure statement).
2. Existing licensees
Existing AFSL holders may be able to apply for certain Regulatory Sandbox Exemptions. ASIC has indicted that it does not intent to grant industry-wide relief to existing AFSL holders; however, it is likely that ASIC will consider requests on a case-by-case basis.
3. Conditions of the Regulatory Sandbox Exemption
Two key conditions may apply to FinTech start-ups seeking to rely on the Regulatory Sandbox Exemptions are:
- the service or product should be provided to a maximum of 100 retail clients, each with a maximum exposure limit of A$10,000; and
- the total exposure of the product or service to all clients (wholesale and retail) must be less than A$5 million.
Advantages of Regulatory Sandbox Exemptions
The key advantages of the Regulatory Sandbox Exemptions and allowing FinTech start-ups to test in a regulatory sandbox (proposed in CP 260) are that:
- FinTech start-ups will be provided with greater opportunity to trial and attract business investments prior to entering into negotiations to become an authorised representative of an existing AFSL licensee or having to actually obtain an AFSL themselves which is often a costly and time-consuming process for start-up businesses with minimal capital;
- FinTech start-ups are given with the chance to test and adjust their business model to satisfy consumer demand without having to comply with the, otherwise, strict and burdensome financial services regulatory requirements;
- the remove barriers of entry into the financial services sector and create an environment of greater competition;
- consumers and investors are still protected during the sandbox period; and
- FinTech start-ups are presented with real opportunities to boost financial services exports, allowing them to exploit the increasing digitalisation of global commerce, especially to the growing middle class in Asia.
Which financial products is likely to be allowed to be tested?
CP 260 suggests that FinTech start-ups will be allow to test the following financial services within the regulatory sandbox environment:
- giving financial advice; and
- arranging for persons to deal in any of the following products:
- listed or quoted Australian securities;
- simple managed investment schemes; or
- deposit products.
What this means for our clients?
ASIC's proposal under CP 260, if adopted, presents an excellent opportunity for Baker & McKenzie clients who are interested in innovating and developing in the FinTech space.
The proposed regulatory sandbox relief will give our FinTech clients with a window to test and adjust their business processes without having to bear the burden of holding an AFSL and meeting strict regulatory requirements prior to maturity.
We note that the content of CP 260 that has been assess in the compiling of this Client Alert is only suggestive and not law. The full extent of the Regulatory Sandbox Exemptions is expected to be confirmed released by ASIC in December 2016.