News & Analysis

ASIC releases consultation paper on regulatory sandbox licensing exemption to facilitate fintech innovation

- June 9, 2016 3 MIN READ

ASIC has released a consultation paper on proposed regulatory sandbox licensing exemption to further facilitate fintech innovation. The proposal follows on from ASIC’s announcement last month to provide additional steps to assist early stage fintech startup companies navigate through regulatory framework.

ASIC Commissioner John Price said, “ASIC is committed to facilitating innovation in financial services, especially where it has the potential to improve consumer outcomes. We are looking forward to engaging with industry on the proposed measures.”

Barriers faced by new fintech businesses seeking to enter the market were previously identified as speed to market and meeting organisational competence requirements of a licensee. ASIC has built upon its experience in this field through its Innovation Hub and now seeks to address these specific barriers to innovation.

The consultation paper is proposing to assess the organisational competence of a licensee applicant by providing examples on how ASIC exercises its discretion under existing policy. The paper also reveals ASIC will seek to modify its policy on organisational competence of a licensee to allow some limited-in-scale and heavily automated businesses to rely on professional, third party compliance sign offs, and demonstrates how it will implement a limited industry-wide licensing exemption to allow startups to test certain fintech ideas for six months.

Price says the measures proposed in the consultation paper will help lower barriers to entry faced by fintech startups. Cost reductions and improved efficiency in the provision of fintech services will help startups test their concepts and products in a safe environment to determine whether their ideas are viable or not.

“The proposed licensing exemption compares favourably to measures in other jurisdictions as it will allow some fintech businesses to commence testing of certain product offerings in the absence of detailed assessment by the regulator,” said Price.

The consultation proposals have been prepared with the input from representatives in the fintech industry including ASIC’s Digital Finance Advisory Committee (DFAC) and the Treasurer’s Fintech Advisory Group.

Earlier this year the regulatory sandbox was first proposed to the Treasury by Fintech Australia, the fintech body and industry association and has now been recognised by ASIC as an important step towards fintech innovation.

For some startups it takes years for their concepts and products to get regulatory approval, and with this space changing and growing month on month, the waiting game is a challenge that needs to be overcome.

Stuart Stoyan, CEO of peer-to-peer lending startup MoneyPlace says the consultation paper is a much needed initiative from ASIC that will help fintech companies speed up the process of getting to market and proving their business.

“The proposal is promising and reasonable in terms of limiting customer numbers and dollars at risk, as the sandbox should be used to test and prove business models.”

“It took MoneyPlace around eighteen months to get regulatory approval. We were fortunate enough to have patient investors but this sandbox would have enabled us to test and prove our business model more quickly.”

ASIC has suggested that fintech startups must be sponsored to be able to use the sandbox, and Stoyan says he hopes this doesn’t create a situation where fintechs need to go for paid services to access support.

“The concern here is that if the sponsors become gatekeepers they are essentially going to monetise this. While the reliance on sponsorship does provide oversight and additional checks, there needs to be avenues for up and coming fintechs to access the sandbox without having to pay a fee for the service,” he explained.

Patrick Garrett, CEO of online financial service Six Park says the regulatory sandbox initiative would have significantly improved their speed to market.

“Assuming that prudent rules are in place to ensure that consumers’ interests are not put at risk, this ability to effectively beta test an innovative business model in a controlled environment would have changed our commercialisation approach.”

“It was a huge challenge for us to build and test our end-to-end offering and secure the appropriate authorisations at the same time. As long as the testing environment is managed well, this initiative should be terrific for the startup community.”

This year particularly, the world has experienced enormous growth in the fintech sector and according to KPMG’s Pulse of Fintech report venture capital-backed fintech companies in Asia raised $2.6 billion in the first quarter of 2016.

Australia is well on its way to dominate the Asia-Pacific market and the ASIC consultation paper is a further demonstration of ASIC’s commitment to encourage innovation to improve consumer and market outcomes for local and international fintech startups.

Previously, Price has said as ASIC continues to promote fintech innovation it will not compromise the fundamental principles of financial services regulation. “We continue to prioritise appropriate regulation to promote consumer and investor trust and confidence.”

In relation to automated financial advice, crowd-sourced equity funding and digital marketplace lending ASIC has established internal working groups to ensure that the regulation of new products and services is appropriate, effective and promotes consumer and investor trust.