The long-awaited fintech regulatory sandbox could be a step closer with the release on Wednesday 8 June 2016 of the consultation paper promised in the Federal Budget.
In addition to the sandbox proposal, the paper ‒ "Further measures to facilitate innovation in financial services" ‒ sets out two other proposals: third-party sign-off for small, heavily automated businesses, and more guidance on making a submission on a responsible manager’s knowledge and skills.
Our initial view of the consultation paper is that it will be of quite limited application, and will not assist with a range of other regulatory hurdles facing fintech innovators (including KYC, ACL and responsible lending obligations). Although many of these are not within ASIC's powers, it highlights the need for a cross-regulator approach to these matters if Australia is actually to take full advantage of the so-called "ideas boom".
At first glance ASIC's proposed sandbox does not seem as flexible as similar measures announced earlier this year in the UK by the FCA (for which applications for the first cohort close 8 July) and the Monetary Authority of Singapore on 6 June.
All comments and submissions are due by Friday 22 July.
The rationale for a regulatory sandbox exemption
ASIC has identified three reasons for this limited exemption for allowing providers to test new financial services:
- businesses would be able to attract investment before they begin negotiations with an AFS licensee about operating as an authorised representative, or incurring compliance costs such as obtaining an AFS licence;
- businesses would also be able to test and, where necessary, adapt their services at lower cost; and
- it would be pro-competitive as it would remove barriers to entry into the financial services market.
Who could play in the fintech regulatory sandbox?
ASIC proposes that the regulatory sandbox would be an industry-wide licensing waiver for new Australian businesses to test limited financial services provided to retail and wholesale clients.
As currently proposed, the exemption would be subject to the following restrictions:
- a limited time period;
- a limited range of products;
- a limited pool of customers;
- no exemption for existing AFS licensees (even, it would seem, for innovative products to which their current licence does not relate);
- a "sponsor" recognised by ASIC is required;
- modified set of conduct and disclosure obligations;
- membership of an external dispute resolution scheme;
- adequate compensation arrangements;
- compliance with AFS licensee "best interests" duty and conflicted remuneration requirements; and
- declaration to ASIC that the testing business has reasonable grounds to expect that it can operate its business for a period of six months
ASIC also propose to require a short report about a test following completion of the testing period (hopefully on a confidential basis), as well power to withdraw the exemption during the six-month testing period.
Limited time period
The waiver would apply to advice and dealing services only for a period of six months (and there will be no further relief to businesses who wish to test their services for an additional period). Payment products would not be eligible because there are already ongoing exemptions for low-value arrangements. As for other services, ASIC says it would be open to consider exemptions on a case-by-case basis, in line with existing policies.
Importantly, ASIC states in the proposal that "Testing businesses will need to consider how they intend to comply with the financial services laws after their six-month AFS licensing exemption expires (e.g. by applying for an AFS licence or acting as a representative of an existing AFS licensee). Testing businesses may need to cease operations for a period of time following the testing period until they can comply with the usual licensing obligations."
ASIC proposes that a person will only be able to rely on the exemption once. Presumably this is regardless of whether the exemption would be sought for a different financial product.
Limited range of products
The exemption would only apply to:
- giving financial advice in relation to listed or quoted Australian securities, simple managed investment schemes and deposit products; or
- arranging for other persons to deal in the products in paragraph (a).
A "simple managed investment scheme" is expressed to be a registered scheme that invests at least 80% of its assets in a bank account where funds can be withdrawn within three months, or in arrangements where the investments can be realised at market value within 10 days.
ASIC states that it would have concerns about services provided to retail clients that relate to:
- complex products (eg. derivatives);
- illiquid products or arrangements that cannot easily be reversed;
- products with a long-term focus (eg. superannuation); and
- products with a risk management focus (eg. general or life insurance).
The thrust of the exemption is towards exemption for services (eg. advice or distribution), rather than products issued by the testing businesses. This would seem to significantly limit the benefit of the exemption for many fintech businesses ‒ for example, market-based lenders who use a managed investment scheme structure are unlikely to fall within the definition of "simple managed investment scheme".
Limited pool of customers
The relevant service could be offered to:
- up to 100 retail clients, with a maximum $10,000 investment per retail client; and
- an unlimited number of wholesale clients,
provided that total investment (retail and wholesale) would be capped at$5 million.
ASIC has invited views on a graduated exposure limit, but in the first instance believes that the complexity of such an approach outweighs its benefits.
ASIC suggests sandbox sponsors be not-for-profit industry associations or other Government-recognised entities which:
- are operated by fit and proper persons; and
- have conducted a preliminary assessment that the testing business’s proposed business model is reasonably sound and does not present significant risks of consumer detriment.
The modified disclosure requirements would be some of the information typically included in a Financial Services Guide, such as:
- the kinds of services being provided;
- who the testing business acts for;
- any remuneration or other benefits the testing business receives; and
- the dispute resolution systems available;
or, where financial advice is given, some of the information typically included in a Statement of Advice:
- the advice provided (and the basis on which that advice is given);
- any remuneration or other benefits the testing business receives that could influence the advice; and
- any other interests or associations that could influence the advice.
Third-party sign-off for small, heavily automated businesses
Under this proposal, small, heavily automated businesses could appoint a third-party responsible manager to provide sign-off (ASIC suggests an accountant or auditor). The third party would be required to examine all the relevant material and certify that the AFS licensee is materially compliant with ASIC-administered legislation.
This proposal is designed for potential new AFS licensees establishing their business, who would then appoint additional responsible managers as their business grows, at which point ASIC could remove any tailored conditions from that their AFS licence.
ASIC stresses that this "does not change the AFS licensee’s underlying obligations under the financial services laws. We are proposing that a licensee may, in some circumstances, be able to meet these obligations in a slightly different way."
Eligible businesses would be those that:
- provide financial services to no more than 1,000 retail clients; and
- only give advice on, or arrange for another person to deal in, liquid financial products, non-cash payment facilities, and products issued by a prudentially regulated business.
The sign-off must be lodged with ASIC at regular intervals, and at least one responsible manager who makes significant day-to-day decisions must be nominated. Responsible managers who provide a sign-off that contains false or misleading statements may commit an offence under section 1308 of the Corporations Act.
Assessing submissions on a responsible manager’s knowledge and skills
Under Option 5 of RG 105, a prospective AFS licensee to provide submissions about why a responsible manager has appropriate knowledge and skills if they are unable to demonstrate the specific combinations of qualifications, training and experience set out in Options 1–4. As ASIC notes, "innovative start-up businesses frequently rely on Option 5 of RG 105 for one or more of their responsible managers".
ASIC is not proposing to change the way it assesses these submissions. It is, however, proposing to give more detail about what it expects a prospective AFS licensee to include in its submission, and give examples of where it would consider a responsible manager has (or does not have) the appropriate knowledge and skills.
Key dates for the regulatory sandbox consultation
22 July 2016: Comments due on the consultation paper.
September 2016: Drafting of regulatory guidance and/or licensing exemption.
December 2016: Regulatory guidance and/or licensing exemption finalised.