Australia Allows FinTech Businesses Two Years to Test Waters under New Regulatory Sandbox

The Australian Government will make it significantly easier for FinTech businesses to gauge the market and consumer response to their products from the 1st of September, 2020. Minister of Superannuation, Financial Services and Financial Technology Jane Hume announced the finalisation of regulations creating what is being referred to as the “enhanced regulatory sandbox”. This move builds upon the existing sandbox — the world’s first licensing exemption for FinTech — enacted by the Australian Securities and Investments Commission (‘ASIC’) in 2016.

The 2016 exemption created a regulatory sandbox which allowed businesses to offer financial services without holding an Australian Financial Services License (‘AFSL’). While it did in some ways make it easier for financial services and technology firms to test their products, a number of the regulations proved to be prohibitive for a large number of companies. This led to lacklustre participation from the industry, with only seven start-ups able and willing to participate in the exercise. Owing to a growing demand from FinTech firms, the Government aims to deliver on the promise they made in the 2017–18 budget, of a less restrictive sandbox. The new framework eases restrictions and provides greater exemptions, allowing firms more space to innovate.

Key Takeaways

The 2016 sandbox was described by many as a FinTech ecosystem with one foot in, and one foot out. While it was an effort to create a safe space for start-ups, it also placed a number of conditions on participation in an attempt to minimise consumer loss. Below, we look at some of those conditions, their criticisms and the changes which the 2020 regulatory exemptions will bring.

• Removal of the 100 Retail Client Limit
  The original sandbox placed a limit on testing businesses to only provide services to a maximum of 100 retail clients. This made it immensely difficult for a number of companies which offer high-volume low-value services. In addition, several industry experts pointed out that participating businesses would not be able to capitalise on the sandbox period with a client ceiling this low. Thus, the 2020 sandbox has not placed any restriction on the number of retail clients, providing a wider consumer base for businesses to test the waters.
• Change to Transaction Limits
  The enhanced sandbox removes the individual exposure limit for a range of financial products and services. The existing regime limited exposure to AUD 10,000 per retail client. A widely supported proposal at the time, was to place the limit at AUD 25,000 since anything below that was considered too low. For example, with reference to investment products, no product, service or advice could be offered to any person with an investment balance of over AUD 10,000. While there has been a change to the individual exposure limit, there is scepticism about the impact of this change since the overall exposure limit still remains the same.
• Overall Exposure Limit Unchanged
  What does remain, however, is the cap on the overall exposure limit on retail clients. The 5 million figure was a subject of much criticism in 2016, and is again this year. It was deemed to be too low, especially since its calculation includes an aggregate of a number of different transactions. These include the gross written premiums amounts on all insurance products, the entirety of superannuation contributions, all credit provided, suggested or even arranged under the aegis of the sandbox and finally, the total of the amounts committed and paid by clients for any and all products.

Other notable changes

• Period of Exemption Extended From 12 to 24 Months;
• Provision of Credit;
• Allowance of Non-Cash Payment Options, including those institutions not designated as ADI (Authorised Deposit-taking Institutions);
• A further change has been brought to provisions on lending, with loans being allowed only for a maximum of 4 years and for an amount no less than AUD 2,000.

New Regulatory Obligations

However, it is important to note that the 2020 sandbox does bring with it a number of regulatory requirements for any company wishing to participate. In terms of technical requirements which must be fulfilled, all participating businesses must have professional indemnity insurance, be a member of the Australian Financial Complaints Authority and maintain a healthy internal dispute resolution mechanism. The other change brought in is one to evaluate the viability of a product or service; a two-prong test wherein ASIC will look at public benefit and innovation. The test of public benefit involves a firm showing that their service provides a net benefit to the public which outweighs the detriment, if any. The innovation test requires the financial service to either be a new idea or concept, or a novel improvement of an existing service.

There have been criticisms of the enhanced regulatory sandbox due to the fear that there is a possibility of unlicensed financial services and advice being offered on key financial matters of individuals and businesses. However, the Morrison Government and the Australian FinTech industry have reaffirmed that regulation is good, but over-regulation harms the financial health of any industry; stifling growth, reducing competition and inhibiting innovation. The focus on public benefit and innovation is a step towards encouraging more businesses to adopt a more consumer-centric approach.

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