If you’re a fintech start-up, it could be time to get your bucket and spade ready.
Yesterday, the Australian Securities and Investments Commission (ASIC) released two ASIC instruments establishing a ‘regulatory sandbox’ exemption for certain fintech businesses. The exemption allows eligible businesses to test particular financial services or credit activities for 12 months in a less onerous regulatory environment, without needing to hold an Australian Financial Services Licence (AFSL) or Australian Credit Licence.
The sandbox exemption is a world-first in terms of ease of access. Eligible Australian fintech businesses can rely on the ASIC sandbox exemption simply by notifying ASIC and providing the required information. This is unlike similar exemptions in other jurisdictions, which require businesses to make individual sandbox exemption applications to the regulator.
Why play in the sandbox?
The purpose of the sandbox exemption is to give an eligible fintech start-up an opportunity to concept-test and validate its business model for 12 months in an environment with fewer regulatory burdens.
ASIC hopes that the sandbox exemption will promote innovation in financial and credit services by temporarily removing one main barrier faced by many emerging businesses: the need to be licensed.
This potentially allows businesses to test the viability of their services before expending resources on obtaining the necessary licenses, while simultaneously providing an opportunity for such businesses to enter the market and attract investors.
Are you eligible?
Not every fintech business is eligible to rely on the sandbox exemption. The main eligibility requirement is that your business must involve either:
- providing financial product advice in relation to, or dealing in (other than by issuing), certain products prescribed by the exemption (discussed below); or
- acting as an intermediary or providing credit assistance in relation to certain credit contracts prescribed by the exemption (also discussed below), but not providing credit itself.
Additionally:
- you must be an Australian company or a foreign company registered under the Corporations Act; and
- you cannot already hold an AFSL or credit licence, be an authorised representative of an AFSL holder or credit licensee, or be a related body corporate of an AFSL holder or credit licensee.
Financial product advice and dealing
On the financial product advice and dealing side, the sandbox exemption only allows businesses to provide advice in relation to, or deal in (but not issue):
- listed or quoted Australian securities;
- simple registered managed investment schemes;
- deposit products;
- home contents or personal and domestic insurance products; and
- payment products issued by banks.
Credit activities
On the credit activities side, the sandbox exemption only allows businesses to act as an intermediary or provide credit assistance (but not provide credit) in relation a credit contract that:
- provides for a maximum of $25,000 in credit;
- has a maximum annual cost rate of 24%;
- is not secured over residential property;
- is not subject to additional responsible lending obligations under the National Consumer Credit Protection Act (e.g. reverse mortgages and small amount credit contracts); and
- is not a consumer lease.
What’s the catch?
Even if you satisfy the relevant eligibility criteria, it’s important to keep in mind that your time in the sandbox is limited to one 12-month period (subject to obtaining additional individual relief).
This means that you’ll need to plan for your post-sandbox arrangements while relying on the exemption. Specifically, if you wish to continue business after the sandbox period, you’ll need to ensure that you either:
- hold an AFSL or credit licence, or have an arrangement in place to provide the relevant financial services or credit activities as a representative of an AFSL holder or credit licensee; or
- have been granted individual relief from ASIC to extend the sandbox period.
If you’re planning to go down the licensing path, ASIC recommends that businesses apply for the licence early during the sandbox period.
Relief conditions
Like any playground, ASIC’s sandbox comes with rules.
To rely on the sandbox exemption, a business must (among other things):
- provide financial or credit services to no more than 100 retail clients;
- ensure that each retail client’s exposure to financial products through the service does not exceed $10,000, or in the case of a general insurance contract ensure that the sum insured does not exceed $50,000;
- in the case of credit services, ensure that the amount of credit under a credit contract in relation to which services are provided does not exceed $25,000; and
- ensure that the total exposure of all clients (both retail and wholesale) does not exceed $5 million.
There are also disclosure requirements, including obligations to:
- tell clients that the business is not licensed and is relying on the sandbox exemption;
- if the business provides financial services to retail clients, provide some of the information normally contained in a Financial Services Guide; and
- if the business provides credit assistance to consumers, provide consumers with the information normally contained in a credit guide, along with a quote and a proposal document.
Finally, a business must:
- have adequate arrangements in place for compensating clients for loss or damage, at a minimum by holding professional indemnity insurance cover with a limit of at least $1 million for any one claim and for aggregated claims, and by taking reasonable steps to obtain run-off cover for a 12-month period; and
- have compliant internal dispute resolution procedures in place and be a member of an ASIC-approved external dispute resolution scheme;
How to play
To rely on the sandbox exemption, you must provide written notice to ASIC along with certain prescribed information about your business, including:
- your name, ABN/ACN, contact person, address and director/controller details;
- certified copies of recent bankruptcy and national criminal history checks for each director/controller; and
- confirmation of external dispute resolution scheme membership and adequate compensation arrangements.
Unless ASIC takes any further action, your sandbox period will begin 14 days after providing the written notice to ASIC.
Within 2 months after the end of the sandbox period, you will also have to provide a short report to ASIC about your business’s results during that period (including number of clients, complaints, any issues faced and financial information). ASIC states that it won’t release these reports publicly, unless required to do so.
I’m not eligible – what should I do?
If you don’t satisfy the sandbox conditions, you still have some options available to you.
Firstly, the sandbox exemption is not the only available exemption. Depending on your business, you may be able to rely on some other form of relief. For example, ASIC relief is available for some low-value non-cash payment products, some services in relation to mortgage offset accounts, and for the provision of generic financial calculators.
Secondly, you could apply to ASIC to tailor your sandbox. ASIC will consider individual applications to extend the sandbox period (e.g. for an extra 12 months), increase the client limits, or vary the sandbox conditions in some other way. This includes applications from fintech businesses that may wish to test a financial service or credit activity that falls outside the prescribed categories of the sandbox exemption.
Such applications will be considered in the same way that ASIC considers any other individual relief application. ASIC has published details of some of the factors that it will consider in assessing such applications, both in the context of the sandbox exemption and in general, so you should generally seek legal advice to ensure that your application addresses the relevant factors and complies with ASIC policy.
Finally, you could apply for the necessary AFSL or credit licence. While this may seem a daunting task, you may be eligible to request ASIC’s informal guidance about the licensing process through its new online Innovation Hub, which is designed to help fintech start-ups understand the applicable regulatory environment.
The fintech future
The availability of the ASIC sandbox exemption, along with ASIC’s newly established Innovation Hub, ASIC’s recent guidance on other fintech areas such as marketplace lending and robo-advice, and the recently released crowd-sourced equity funding bill, mean that it’s never been a better time for fintech start-ups in Australia.
If you would like to take advantage of these developments in Australia’s fintech landscape and need further advice about the regulatory environment that applies to your business, we’re here to help.
1.ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175 and ASIC Credit (Concept Validation Licensing Exemption) Instrument 2016/1175. See ASIC Regulatory Guide 257 for further information.
2. ASIC Corporations (Non-cash Payment Facilities) Instrument 2016/211, Class Order CO 03/1048 (“Mortgage offset accounts”) and ASIC Corporations (Generic Calculators) Instrument 2016/207.
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