The Federal Budget 2017/18 has a significant focus on increasing competition in the financial services sector. While some of these changes reflect sector-wide reforms, such as an inquiry into ‘open banking’, a Productivity Commission inquiry into competition in Australian financial services and funding for Australian Competition and Consumer Commission oversight of financial services (discussed in our Financial Services budget update), there are also specific initiatives focused on fintech and financial services innovation.
The fintech and innovation focused reforms include reduced barriers to entry to the banking industry, removing double taxation of digital currency and enhancing existing regulatory sandbox initiatives. A summary of these changes is set out in this update.
Reduced barriers to entry to establish a bank
These changes focus on easing existing legislative and prudential requirements which prohibit the establishment of banks. These changes include:
- Government consideration of a relaxation of the legislated 15% ownership cap, which applies under the Financial Sector (Shareholdings) Act 1998 (Cth), for innovative new entrants. Currently, this cap prevents a person from holding a stake in a financial sector company of more than 15% without approval. Under the existing regime, approvals can be sought to exempt shareholders from the 15% cap, so presumably some form of class exemption will be made available for innovative new entrants.
- The current prohibition on authorised deposit-taking institutions (ADIs) using the term “bank” to describe their activities, will also be lifted in certain circumstances. This will expand the range of institutions which can use “bank” in branding and marketing. For instance, certain credit unions and building societies may now be able to brand themselves as a “bank”, while newly registered ADIs will also be able to use “bank” branding.
- The Australian Prudential and Regulation Authority will review prudential licensing arrangements for banks and consider how best to licence banks.
The Government believes these measures will increase competition in the banking sector, leading to more choice and lower prices for Australian consumers.
Removing double taxation of digital currency
From 1 July 2017, purchases of digital currency (i.e. crypto-currency, such as tokens) will not be subject to GST. Previously, consumers making purchases using digital currency would suffer double taxation, paying GST on the purchase of the digital currency and paying GST on the purchase of any goods or services using the digital currency.
Instead, GST will only be charged on purchases made with digital currency. The effect of this reform is that a key impediment to the competitiveness of digital currencies will be removed.
Enhancing the regulatory sandbox
The Government will legislate an enhanced regulatory sandbox that encouraging testing of a wider range of financial products and services without a licence. The Government has stated that this regulatory sandbox will include providing more holistic financial advice, issuing consumer credit, offering short-term deposit or payment products, and operating a CSEF intermediary. The regulatory sandbox will include an extended 24 month testing timeframe, providing eligible businesses with a greater window to test their products.
There are currently multiple regulatory sandboxes operating. The Australian Securities and Investments Commission operates one with a class exemption for eligible businesses (as discussed in a previous update) and the Australian Transaction Reports and Analysis Centre also offers a separate regulatory sandbox within its Innovation Hub (as discussed in our April fintech update).
The fintech and financial services innovation agenda announced in the Budget includes:
- an investment in optical astronomy to facilitate international collaboration;
- the development of a 2030 Strategic Plan for Australia’s Innovation, Science and Research System to be completed by Innovation and Science Australia;
- a Research Infrastructure Investment Plan, to be developed by Government and which will inform research infrastructure facilities and projects; and
- amendment of the recently enacted crowd-sourced equity funding legislation to extend the framework to proprietary companies (as discussed in a separate update here).
This Budget targets fintech businesses with a range of initiatives, incentives and mechanisms to encourage greater competition in the financial services sector from new entrants. It is unprecedented for an Australian Government to specifically cater to fintech businesses in this manner in a Federal Budget. This is proof of the emergence of fintech as a force in both Australian business and the Australian economy more broadly.
Many of these initiatives address gaps or issues in the existing regulatory framework, which have been identified by industry participants and communicated to regulator stakeholders in the context of a recent trend towards encouraging industry consultation and dialogue. For instance, extending access to the crowd-sourced equity funding framework to proprietary companies and removing double taxation of digital currencies. However, some of these commitments are merely promises to inquire, such as those relating to prudential licensing, and whether these commitments will actually lower barriers to entry remains to be seen.
Nonetheless, this Budget is particularly promising for innovative financial services businesses.