- On 15 October 2019, the Treasury Laws Amendment (2018 Measures No 2) Bill 2019 (Bill) passed the House of Representatives. The Bill is currently before the Senate.
- The Bill proposes amendments to the Corporations Act 2001 (Cth) and the National Consumer Credit Protection Act 2009 (Cth) to expand the current FinTech regulatory sandbox, which allows firms to test new financial products and services without needing to obtain a Australian financial services licence (AFSL) or Australian Credit Licence (ACL).
- The expanded sandbox will:
- extend the maximum AFSL and ACL exemption period from 12 months to 24 months;
- expand the range of exempted financial products, so that the sandbox will include financial advice in relation to superannuation, life insurance and domestic and international securities, issuing and facilitating consumer credit, issuing non-cash payment products and providing a crowd-funding service;
- raise the individual product exposure limit for exempt general insurance products from $50,000 to $85,000.
- Providers seeking to use the sandbox will be subject to a number of conditions, including acting in the best interests of the consumer, notifying customers that they do not hold an AFSL or ACL, and maintaining internal and external dispute resolution regimes.
- If providers fail to meet the conditions of the licence exemption (i.e. ability to use the sandbox), ASIC may cancel the provider’s licence exemption or apply to the court for an order requiring the provider to comply.
The current FinTech sandbox
In December 2016, the government introduced the FinTech regulatory sandbox to reduce barriers to the development of new FinTech products in Australia. The sandbox allows eligible FinTech companies to test certain products or services for up to 12 months without an AFSL or ACL (subject to certain conditions).
The idea of a sandbox for FinTech firms was conceived by Britain’s former chief scientific adviser, Sir Mark Walport, who suggested the financial services industry would benefit from having something equivalent to the clinical trials of the health and pharmaceutical sectors. FinTech sandboxes exist in jurisdictions around the world including the United Kingdom, Singapore, the United States, Russia, Indonesia, Jersey, Sierra Leone, Denmark, Canada, Hong Kong and South Korea.
To strike a balance between encouraging product testing and consumer protection, ASIC has attached a number of conditions to the sandbox arrangements.
Providers utilising the sandbox must:
- inform consumers that the product sold to them is under testing in the regulatory sandbox, the provider is unlicensed and some of the normal consumer protections associated with receiving services from a licensed provider will not apply;
- notify consumers about its remuneration arrangements, any relationships they have with issuers of the financial products, and the available dispute mechanisms;
- notify consumers of certain key changes to the product, the service or the provider itself, including if the provider is placed into administration or becomes bankrupt, ceases to carry on a financial services business, obtains an AFS licence or ceases to rely on a licence exemption, or if the financial product or service it provided the consumer has changed or is no longer being offered to consumers;
- maintain an internal dispute resolution service and be a member of an external dispute resolution regime; and
- act in the best interests of the consumer.
The changes proposed in the Bill
The new expansion of the sandbox rules was initially proposed by the Federal Government in the 2017-18 budget. The government’s intention behind the Bill is to “further cement Australia’s position as a leading FinTech hub in the Asia‑Pacific”. The enhanced sandbox is intended to allow businesses to test matters such as the interest of the intended consumer segment, delivery approach, clarity of marketing and communications, pricing structures and the reliability of the underlying technology, as well as assisting businesses in ascertaining the requirements for licencing and reducing the burden in subsequently applying for a licence from ASIC.
The new rules would:
- extend the maximum licence exemption period from 12 months to 24 months;
- expand the range of exempt financial products, including:
- financial advice in relation to superannuation, life insurance and domestic and international securities;
- issuing and facilitating consumer credit;
- issuing non-cash payment products; and
- providing a crowd-funding service; and
- raise the individual product exposure limit for general insurance products from $50,000 to $85,000.
ASIC has the power to cancel a provider’s licence exemption if it believes the provider has not met the conditions, is not of good fame or character, or has failed to act fairly, efficiently or honestly in providing financial or credit services.
An independent review of the new changes will be undertaken 12 months after commencement of the regulations.
Labor Senators have suggested there should be a test on entry into the sandbox to evaluate whether the products to be tested are genuinely innovative and provide a consumer benefit. Similar tests exist in Singapore and the United Kingdom. It remains to be seen whether amendments to this effect will be made by the Senate.
We welcome government measures designed to foster innovation and attract start-ups into Australian markets. We expect the expanded sandbox will assist FinTech start-ups to attract investors, as acceptance into the sandbox is likely to be viewed by both investors and consumers as a kind of “stamp of approval” by ASIC which will have the effect of increasing a provider’s credibility.
Given the number of other jurisdictions around the world implementing FinTech sandboxes, having a viable sandbox in Australia is also important for Australia’s competitive edge in this space.
(In parallel with these reforms to the FinTech sandbox , the Senate Select Committee on Financial Technology and Regulatory Technology recently released an Issues Paper regarding the role of FinTech and RegTech in Australia, which will report on the size and scope of the opportunity that FinTech presents for Australian consumers and business (among other issues). We commented on this Issues Paper here).
We would suggest a simple and straightforward entry test be applied to providers seeking the benefit of the sandbox as a measure to ensure provider’s bona fides, and ensure a basic level of consumer protection, while not sacrificing the advantages of the sandbox in testing potentially ground-breaking new financial products and services in a controlled environment.
We think that as long as the provider makes it well known to the consumer that he or she is investing in an experimental product or service, then it becomes a risk assessment and investment decision for the consumer to make.
We think that the regulator should monitor the sandbox fairly closely and evict providers which flout the rules (whether expressly or by the “spirit of the rules”) in order to provide confidence that the sandbox products are better placed for growth once they no longer qualify for sandbox exemptions and move out into the broader marketplace.