In 2016, ASIC introduced a regulatory sandbox regime for FinTech products, allowing eligible businesses to test particular financial services or credit activities in a less onerous regulatory environment.1
The Treasury Laws Amendment (2018 Measures No. 2) Bill 2019 (Bill) proposes substantial changes to the regime, in response to limited utilisation of the sandbox by FinTech businesses. The Bill aims to enhance the existing regime by enabling more businesses to test a wider range of financial products and services, for a longer period of time. The Federal Government anticipates that this will help drive competition in the financial services industry, incentivising financial providers to be more responsive to the needs of consumers.2 While the Bill broadens the types of credit products and services which are eligible for the regime, it simultaneously imposes stricter requirements on credit services which are already subject to the regime.
The Bill was introduced on 4 July 2019 and is currently before the House of Representatives.
Nature of Exemption – Conditional vs. Unconditional
The current regime allows only for unconditional exemptions from Australian Financial Services Licence (AFSL) and Australian Credit Licence (ACL) requirements.
The new regime would provide an additional regulatory option for conditional exemptions from AFSL and ACL requirements for the purpose of testing financial and credit products and services. The conditions will limit:
- the types of products and services that can be provided to both wholesale and retail clients;
- the exposure of clients to the products and services, including total investment activity; and
- the total number of clients who are provided the products and services.
A conditional exemption will automatically cease if a business fails to meet any of these conditions.
Other consumer-protection conditions which would apply under the new regime include:
- notifying clients before and while providing an exempt product or service;
- maintaining certain procedures, memberships and arrangements;
- best interests obligations;
- client money obligations; and
- providing statements of advice to clients.
Failure to meet these conditions may result in ASIC cancelling the exemption or applying to court for an order requiring a business to comply with the conditions in a particular way. Under the new regime, ASIC would also be empowered to make decisions regarding how the exemption starts and ceases to apply to a business.
Each exemption granted under the new regime would be subject to all of the conditions set out in the regulations.3 However, the inclusion of the conditions in the regulations (rather than the Bill) is designed to give the Government and ASIC the flexibility to make timely changes to the conditions in response to changes in the market.
Eligible Financial Products and Services
Under the current regime, the sandbox is available for businesses providing financial product advice in relation to, or dealing in (other than by issuing):
- 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.
The new regime would expand the products included in the sandbox to include:
- life and general insurance;
- listed international securities; and
- all financial products for wholesale clients except margin lending facilities and derivatives.
In addition, the issuing of non-cash payment facilities and the provision of crowd-funding services would be included in the new regime.
Eligible Credit Products and Services
The sandbox is currently available for businesses acting only as an intermediary or providing credit assistance (but not providing credit) in relation to 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; and
- is not a consumer lease.
The new regime would impose additional requirements, that is, the credit contract must:
- not exceed 4 years; and
- provide for a minimum of $2,000 in credit.
Further, the issuing of consumer credit contracts would be eligible under the new sandbox regime. Previously, the sandbox was available for businesses which were acting as an intermediary or providing credit assistance in relation to a credit contract, but was unavailable to credit providers themselves.
Extended Time Frame
Currently, the sandbox is available for businesses for 12 months only (subject to obtaining additional individual relief from ASIC). The new regime would allow businesses to use the sandbox for up to 24 months.
Where to from here?
Whilst draft regulations were released for public consultation in 2017, final regulations are yet to be released.4 Details concerning eligibility criteria, the types of products and services that can be tested and conditions that need to be met during testing will be set out in the regulations. An independent review will take place 12 months after the regulations commence, to ensure that the regime is operating effectively and is fit for purpose.
The Government has made clear that its primary rationale for expanding the regime is to maintain a competitive FinTech sector and to facilitate innovative offerings by FinTech businesses. The aim is to provide the ideal climate for FinTech businesses looking to establish a presence or expand 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. For further information, please see our previous focus paper ‘It’s time to play: Australia’s world-first regulatory sandbox for fintech start-ups’. 2. Treasury Laws Amendment (2018 Measures No. 2) Bill 2019 Explanatory Memorandum, at paragraph 1.4.
3. Ibid 1.14.
4. Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2017; National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2017.
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