ASIC releases licensing exemption for fintech startups

The Australian Securities and Investments Commission (ASIC) on Thursday released its regulatory sandbox policy that will allow fintech businesses to test certain products or services for a limited period of time without having to hold an Australian financial services or credit licence.

Eligible businesses will be able to commence testing without a licence for a maximum period of 12 months with up to 100 retail customers provided they also meet certain consumer protection conditions and notify ASIC before they commence testing. The business must also have total customer exposure that doesn't exceed AU$5 million.

ASIC will, however, accept applications to extend the testing period by an additional 12 months and increase the retail client limit to 200 for "exceptional cases". Variations to other conditions will also be considered by the regulator on a case-by-case basis.

The eligibility criteria excludes businesses like marketplace lenders. However, startups in the payments space will be able to take advantage of the class waiver.

CEO of Peer Estate Adam Broder said it is unfortunate but understandable that the relief excludes marketplace lenders.

"From a fiduciary perspective, I can understand this as we are, in effect, the custodians of our clients savings and should be held to a higher standard," he said.

The financial regulator has also released the regulatory guide, Testing fintech products and services without holding an AFS or credit licence, which contains information about the new regulatory sandbox framework.

"Fintech and startup businesses now have more pathways than ever to begin testing the viability of innovative financial services and credit services consumers, before incurring many of the regulatory costs normally associated with running their business," said ASIC Commissioner John Price.

The fintech licensing exemption was initially proposed in a consultation paper in June, however ASIC amended its proposal based on the feedback it received from the fintech industry.

While the fintech industry has not been granted all its wishes, ASIC has extended the testing period from six to 12 months and expanded the eligibility criteria for products and services that can be tested.

ASIC is willing to judge fintech businesses on a case-by-case basis, meaning that those that are not eligible for the licensing exemption are able to seek an individual exemption.

"Individual applications are an important part of Australia's regulatory sandbox framework," Price said. "For instance, this option is open to existing licensees who wish to test an innovative product or service and comply with a modified version of the law."

Price added that ASIC wants to be a facilitator of innovation while still ensuring that appropriate regulations are in place to protect corporate and retail customers.

Lisa Schutz, CEO of Verifier, thinks the changes only impact companies seeking to innovate at the customer facing side of financial services.

"A lot of what is going on in financial services is at the infrastructure level, supporting lower cost and more competition amongst existing participants," she said. "Those early stage fintech companies are not affected by the sandbox so, while the sandbox is a great start, it doesn't really touch the sides in terms of what can be done."

A big challenge for fintech startups has been slow approval processes, Nektarios Liolios, co-founder and CEO of Startupbootcamp FinTech, told ZDNet in October.

"They don't allow entrepreneurs to go through [approval processes] quickly, and that's what you need as an early-stage startup, because your runway is limited," said Liolios.

"Smarter regulators like FCA [Financial Conduct Authority] in London or MAS [Monetary Authority of Singapore] recognise that there is a lot [of technology] that consumers will benefit from, so they see it as their responsibility to find a new pathway for startups to get through to the next stage quicker so they can bring new technologies to market."

Price said ASIC has been making an effort to do the same.

Updated 4.55 pm AEDT 15 December 2016: Added comments from Peer Estate and Verifier.