Today, the Australian Government released “Backing Australian Fintech”, setting out strategies and priorities to encourage and develop the growth of Australia’s FinTech marketplace. The statement is a road map rather than a rule book and outlines key areas of focus and consideration. However, for those in finance, in technology, and for anyone who works with either of those areas, this is an important foundation on which the future of fundamental change may be built.
FinTech (a combination of “Finance” and “Technology”) is one of the key themes in developments in finance and financial markets. It is changing services, products and the fabric of the marketplace itself. In a simple form, it can be thought of as the use of “Tech” to take the worry out of “Fin” for consumers and business alike. The sector includes start-ups, existing providers of financial services and financial market infrastructure and technology companies. In its policy statement (a link can be found here) the Australian Government sets out a framework to make the Australian FinTech sector transformative for the economy and internationally competitive. The priorities charted in the statement reveal the initial direction which these developments could take. In this Alert we summarise those initial priorities.
For this Alert, we have grouped the priorities into the following ten areas:
- Regulatory Sandbox
- Data collection and use
- Government procurement
- Taxation (Venture Capital and Digital Currencies)
- Payment Systems
These are briefly summarised in turn.
A Regulatory Sandbox is a label which is often used to describe a part of a regulated system which is a “safe-place” in which businesses can test new products and services without immediately incurring all of the regulatory consequences of those activities. With the appropriate safeguards in place, it seeks to allow innovative ideas to develop on a more accelerated basis than would be otherwise possible.
The Government FinTech statement recognises the need for the regulatory environment to provide consumers with confidence whilst not unnecessarily restricting opportunities for innovation. It notes also, industry’s desire for the establishment of a regulatory sandbox as well as the work already undertaken between ASIC and the Government on the development of such a sandbox for Australian FinTech start-ups. Further, in the statement, the Government notes:
- that Australia’s financial system can support a regulatory sandbox
- the existing flexibility and responsiveness in the ability of ASIC to use its waiver powers
- the Government’s support of ASIC and other regulators on the development of a regulatory sandbox for the purpose of positioning Australia as a leading market for FinTech innovation and investment in Asia.
Some context in relation to the creation of a regulatory sandbox in the United Kingdom can be found here.
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically through the internet. It has been successfully used in a number of markets around the world for funding new businesses, or new products and services. More on crowdfunding can be found here.
The growth and expansion of crowdfunding is recognised in the Australian Government’s statement, as is the Crowd Sourced Equity Funding framework which was introduced into the Australian Parliament in December 2015.
The Government’s FinTech statement outlines that the developments in this area include:
- evolution of the crowd sources equity funding framework, including consideration of changes to its eligibility criteria, the application of cooling off periods and application of market licence requirements
- consideration of extension to debt funding by the introduction of a crowd sourced debt funding framework. Peer-to-peer lending is sometimes considered part of such a framework.
Robo-advice is financial advice which is automated and algorithm based and which does not have a need for a human advisor. Although elements of the Australian regulatory framework cover the provision of robo-advice, there is a need for clarity around a number of specific issues. More on robo-advice can be found here.
The Government FinTech statement notes:
- the need for this additional clarity in order for reduce costs to industry and improve compliance
- the Government’s work with ASIC to determine the necessary updates to regulatory guidelines to facilitate the uptake of robo-advice
- the draft regulatory guidance published by ASIC on meeting the ‘best interests’ duty obligations in the context of the robo-advice (a link to this draft guidance is here).
Data collection and use
The Government’s FinTech statement covers data both generally and in relation to comprehensive credit reporting data.
Comprehensive credit reporting data can provide lenders with more information to determine a potential borrower’s true ability to repay amounts due under a loan. Access to this data should facilitate the development of peer-to-peer lending products and marketplaces. The Government’s FinTech statement indicates that it is keen to support industry efforts to expand the access and use of this data across the economy. On a more general basis, the Government’s FinTech statement:
- reiterates the Government’s Public Data Policy Statement and its message of openness of non-sensitive data
- notes the commissioning of the Productivity Commission to examine the benefits and costs of improving availability and use of data across the economy
- notes the desire of the FinTech industry for more standard practices on financial data aggregation and government support for standard open-data application programming interfaces (APIs).
Find more on ‘big data’ here.
Blockchain is an encryption and distributed ledger technology which has the potential to transform key elements of the financial marketplace and its infrastructure. A one page explainer on blockchain can be found here and more can be found here.
The Government’s FinTech Statement:
- notes the interest in, and application of, blockchain in the international financial system and the provision of financial services
- welcomes the announcement of the ASX that it is exploring the use of blockchain technology for a new post-trade solution for the Australian equity market
- notes the potential for blockchain to simplify the way in which the financial markets operate with benefits to investors, participants, regulators and government agencies.
Cyber-security is often referred to as the technologies and practices designed to protect systems, networks and data from attack, damage or unauthorised access.
The Government’s FinTech statement:
- notes that strong cyber security is essential to allow business and individuals to take advantage of the economic possibilities of digital technology
- notes the Government’s support for a new industry-led Cyber Security Growth Centre to grow and strengthen Australia’s cyber security industry.
More on cyber-security can be found here.
The Government’s FinTech Statement highlights the significant opportunities afforded by FinTech organisations in respect of Government procurement and service delivery needs. Accordingly, the Government will be looking to innovative FinTech solutions to foster diversity, choice and responsiveness of government services. As examples, the Statement notes the opportunity for Fintech organisations to develop more convenient, safer and more transparent payment systems. This may offer potential benefits to government agencies and departments. The Government supports reviewing the uptake of FinTech services by public agencies.
Taxation (Venture Capital and Digital Currencies)
Industry has made a number of submissions to the Government on the taxation treatment applicable to particular FinTech issues. These include the application of tax concessions for investments made through Early Stage Venture Capital Limited Partnerships and the application of goods and services tax to transactions in digital currencies such as bitcoin.
The Government’s Fintech Statement:
- states that the Government will introduce a new mechanism by which Innovation Australia can issue binding advice in relation to the definition of ineligible activities and other limited powers to clarify eligibility for the venture capital tax concession
- states that the Government will ensure that start-ups involved in FinTech, including in insurance and finance related activities can be eligible investments for the purpose of the venture capital tax concession
- states that the Government is committed to addressing the current ‘double taxation’ effect of the application of GST to digital currencies and will work with industry on legislative options for reform.
More on the venture capital tax concession can be found here.
FinTech firms which are looking to create payment solutions need access to payment and settlement infrastructure which applies to payments which are in currencies other than Australian dollars. Access to this infrastructure can be complex for FinTech start-ups.
The Government’s Fintech Statement says that improving this access is important in order to lead to new opportunites for Australian FinTech, and notes the creation of the Payment System for the Chinese currency (RMB) by the ASX (see more on this here).
Insurance is recognised as a sector of our financial system which can be significantly transformed by FinTech, producing bespoke and personalised policies and pricing. Industry has asked the Government to support increased flexibility to support emerging micro-insurance and quasi-insurance models which are not easily operated under current models. More information on Australia’s insurance authorisation framework can be found here.
The Government’s FinTech statement notes that the Government will consider the impact of allowing licensed brokers to sell policies from unauthorised foreign insurers where they offer consumers a better price and appropriate consumer protection.
Where to from here?
This morning, Treasurer Scott Morrison remarked, “FinTech is a positive disruption which a successful economy like Australia can and must embrace. Growing Australia’s FinTech capabilities will position Australia to seize new opportunities to develop export markets for our financial services technology in the transitioning economies of our major trading partners.”
The Government’s FinTech statement released today describes how the Government is embracing FinTech in the Australian marketplace. The statement indicates that the Government will be working with the FinTech industry, regulators and other stakeholders on these priorities and other key issues which underpin the continued innovation in financial services. It also notes that the Government has established a FinTech Advisory Group to advise the Treasurer directly on issues important to Australia’s FinTech industry (see more on this here). Through this, and other measures, the Government is growing Australia’s FinTech capabilities and supporting the industry’s objective of making Australia the leading market for FinTech innovation and investment in Asia by 2017.