In brief - Certain fintechs may be eligible for the fintech licensing exemption
Changes to ASIC's "Regulatory sandbox" framework came into effect in December 2016 to provide financial technology businesses (fintechs) the opportunity to test the viability of their services without the usual barriers associated with providing financial services or engaging in credit activities. Under the framework, certain fintechs will be provided with 12 months' immunity from the requirement to hold an Australian Financial Services Licence (AFSL) or an Australian Credit Licence (ACL) to enable them to test their product or service's viability.
This framework has come off the back of Federal Treasurer Scott Morrison's May 2016 announcement, Supporting Australia's FinTech Future, to implement a regulatory sandbox in a bid to encourage the Federal Government's "Innovation Boom".
FINANCIAL SERVICES AND CREDIT LICENCES REQUIREMENTS CREATE ENTRY BARRIERS FOR FINTECHS
Typically an AFSL or ACL is required before providing financial services or credit businesses. The licensing process ensures that financial services and credit businesses are competent, and the necessary consumer protections are in place. This encourages investor confidence in the financial markets and ensures that they operate in a fair, orderly and transparent way. However, these requirements also create barriers to entry as fintechs are faced with the issues of speed to market, organisational competence, and access to capital at the early stages of their conception.
REGULATORY SANDBOX INCLUDES NEW FINTECH LICENSING EXCEPTIONS
The regulatory sandbox refers to the current existing statutory exemptions and flexibility within the Corporations Act 2001 (Cth) and National Consumer Credit Protection Act 2009 (Cth), specific individual relief granted by ASIC, and the new fintech licensing exceptions.
The fintech licensing exemption allow for the testing of certain specified products and services under the ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175 or the ASIC Credit (Concept Validation Licensing Exemption) Instrument 2016/1176.
FINTECH LICENSING EXEMPTION - CRITERIA FOR ELIGIBILITY
To be eligible for the fintech licensing exemption, fintechs must only provide financial advice, or deal in or distribute a financial product; they cannot issue their own product, lend money to consumers, or operate their own managed investment scheme. Fintechs must also:
- have no more than 100 retail clients (or unlimited wholesale clients)
- plan to test for no more than 12 months
- have total customer exposure of no more than $5 million
- have adequate compensation arrangements (such as professional indemnity insurance)
- have dispute resolution processes in place, and
- meet disclosure and conduct requirements
The only products eligible to be advertised or distributed are:
- deposit products, with a maximum $10,000 balance
- payment products, if ADI-issued and with a maximum $10,000 balance
- general insurance, for personal property and home contents and with a maximum of $50,000 insured
- liquid investments, for listed Australian securities or simple schemes and with a maximum $10,000 exposure, and
- consumer credit contracts with certain features, and a loan size of between $2,001 and $25,000
BENEFITS OF REGULATORY SANDBOX AND THE FINTECH LICENSING EXEMPTION
The new addition to the regulatory sandbox will allow products and services to be validated and refined before fintechs encounter the issues of speed to market, organisational competence, and access to capital.
The removal of the requirement to obtain an AFSL or ACL will undoubtedly remove the time and cost of taking a service to market. The burden of innovative business founders also meeting organisation competence standards through obtaining specific qualifications, training and experience is also removed by allowing fintechs to outsource their organisational competence requirements. The fintech licensing exemption will provide increased opportunities for businesses to obtain investment that may assist with meeting the costs of complying with the licensing requirements once the trial period has concluded.
The narrow application and strict requirements of the fintech licensing exemption attempt to balance ASIC's commitment to facilitating innovation while ensuring appropriate regulation of new products and services. There is no doubt the new addition to the regulatory sandbox will facilitate innovation by providing an avenue to avoid the barriers of speed to market, organisational competence, and access to capital. What remains to be seen is whether the restrictions to the fintech licensing exemption will provide adequate protection to investors.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.