In an exciting and world first development, on 15 December 2016, ASIC released a set of licensing exemptions, which permit an eligible fintech business to test certain products for a period of 12 months without having to first obtain an Australian financial services licence (AFSL) or an Australian credit licence (ACL).
This is excellent news for Australian based fintechs and will provide many opportunities for those fintechs wishing to enter the market but finding our regulations burdensome in the initial testing phases. By passing these exemptions ASIC has demonstrated a commitment to innovation and ensuring consumers are the beneficiaries of the numerous fintech disruptors looking to offer financial product and credit solutions.
The exemptions are to be set out in the ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175 and ASIC Credit (Concept Validation Licensing Exemption) Instrument 2016/1176 (Exemption Instruments). While registration of the Exemption Instruments is still pending, ASIC has released a new Regulatory Guide 257 Testing fintech products and services without holding an AFS or credit licence (RG 257), which describes the relief provided under the Exemption Instruments.
ASIC states that the licensing exemption is intended to facilitate innovation in financial services and credit by allowing fintech business the opportunity to validate the concepts and viability of their services with a reduced set of regulatory obligations. However, importantly, the exemptions will still maintain fundamental consumer protections and limit the scope of eligible products and services to minimise the risk of loss to consumers.
Conditions of relief
RG 257 provides that in order to be eligible for the licensing relief, a person must:
- have no more than 100 retail clients;
- plan to test for no more than 12 months;
- have total customer exposure of no more than AU$5 million (with certain sub limits for exposure of retail clients and borrowers for particular product types);
- have adequate compensation arrangements (such as professional indemnity insurance);
- have dispute resolution processes in place, including membership with an ASIC-approved external dispute resolution scheme;
- meet disclosure and conduct requirements, including by providing the client with information that would ordinarily be contained in a Financial Services Guide, Credit Guide, quote or proposal document; and
- comply with responsible lending obligations under the National Consumer Credit Protection Act 2009 (Cth) when providing credit assistance (note, the exemption does not apply to providing credit as a credit provider).
The fintech licensing exemption is available for:
- giving general and personal financial product advice in relation to eligible financial products;
- dealing in the eligible financial products listed, other than by issuing those products; and
- providing credit services in relation to eligible credit contracts, other than as a credit provider.
The eligible financial products are:
- listed or quoted Australian securities;
- simple managed investment schemes (maximum AU$10,000 exposure);
- deposit products (maximum AU$10,000 balance);
- some kinds of general insurance products, being home contents insurance products and personal and domestic insurance products (maximum AU$50,000 insured); and
- payment products issued by ADIs (maximum AU$10,000 balance).
An eligible credit contract is one that:
- has an maximum amount of credit of no more than AU$25,000;
- has a maximum annual cost rate of 24%;
- is not subject to tailored responsible lending obligations (that is, a reverse mortgage or a small amount credit contract);
- is not secured by residential property; and
- is not a consumer lease.
Relying on the relief
Those who meet the conditions and eligibility criteria set out in the Exemption Instruments are entitled to rely on the fintech licensing relief for a period of 12 months while product testing is being carried out. However, before doing so, a fintech must first notify ASIC that it is relying on the exemption and provide ASIC with certain information.
After the expiry of 12 months the fintech will only be permitted to continue carrying on business if:
- they have been granted an AFSL or ACL;
- they have entered into an arrangement to provide services on behalf of an AFSL holder or ACL holder; or
- ASIC provides them individual relief extending their testing period.
Any fintechs who wish to take advantage of these new rules are welcome to contact our specialist Technology team to discuss your options.