Government publishes draft legislation for testing fintech products without licence

The draft legislation and regulations states that eligible Australian fintech businesses will be able to test their products and services with up to 100 customers for a maximum period of 24 months.

The Australian government has published draft legislation and regulations that will enable fintech businesses to test certain products and services for a limited period of time with retail and wholesale clients without having to obtain a financial services or credit licence.

The purpose of the Australian Financial Services Licence and the Australian Credit Licence exemption regulations is to "create a 'regulatory sandbox' to encourage and support the design and delivery of new financial and credit services that will benefit consumers and businesses", the government said in its exposure draft explanatory statement [PDF].

"The regulatory sandbox will help overcome regulatory burden and cost that may hinder businesses in developing innovative offerings," it added.

"The regulatory sandbox will enable fintech firms to bring innovative services and products to market faster and at lower cost, while still providing for important consumer outcomes such as dispute resolution and consumer compensation arrangements."

Both the Corporations Act and the Credit Act will be amended to enable eligible businesses to test, for a maximum period of 24 months, a wider range of fintech products and services, provided they meet certain consumer protection and disclosure conditions under the National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2017 and Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2017.

"Firms will need to adhere to robust consumer protections and disclosure requirements including responsible lending obligations, best interests duty, and the need for adequate compensation and dispute resolution arrangements," Australian Treasurer Scott Morrison added.

Businesses will be able to commence testing new products and services with a maximum of 100 clients 14 days after the Australian Securities and Investments Commission (ASIC) receives written notice that the business intends to use the exemption.

Morrison said the 24‑month testing timeframe, which applies to each individual product or service, will improve a business' ability to evaluate the commercial viability of new concepts.

Under the National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2017, an eligible business must have total customer exposure that does not exceed AU$5 million. This includes the value of credit contracts entered into in relation to eligible credit activities; sum insureds for eligible general insurance and life risk insurance products; contributions in eligible superannuation products; and investments in other kinds of financial products.

Additional limits apply for retail clients under the Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2017. For general products -- excluding general insurance, life insurance, and superannuation products -- retail clients cannot invest more than AU$10,000 across the testing period. For general insurance, life insurance, and superannuation products, retail clients can invest up to AU$85,000, AU$300,000, and AU$40,000, respectively.

Businesses that will benefit from the licensing exemption include those looking to provide "holistic" financial advice in relation to superannuation, life insurance, and domestic and international securities; issue and facilitate consumer credit; issue non-cash payment products; and provide a crowdfunding service.

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

"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," Liolios said in October 2016, a sentiment that has been echoed by the Australian fintech startup community.

"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."

However, Verifier CEO Lisa Schutz had previously criticised ASIC's regulatory sandbox policy introduced in December last year -- which the draft legislation is based on -- saying that the changes only impact businesses 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 at the time. "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."

The draft legislation additionally states that ASIC may have the power to decide how the exemption starts and ceases to apply based on compliance with specified conditions.

It can also apply for a court order that requires an entity to comply with conditions in a particular way.

"This provides that the regulations can enable ASIC to monitor access to the regime to prevent misuse of the licencing exemption and provide for effective arrangements to allow providers to transition out of the regulatory sandbox and become licensed," the government's exposure draft explanatory memorandum [PDF] states.

Consultation on the draft legislation and explanatory memorandum is open until November 3, 2017, and on the draft regulations and explanatory statement until December 1, 2017.