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Australia's enhanced fintech sandbox encourages innovation through regulatory relief

Will it result in greater participation?

30 October 2020

In September 2020, the Australian Securities & Investments Commission (ASIC) launched its Enhanced Regulatory Sandbox (ERS). The ERS replaces the regulatory sandbox introduced in December 2016, which was launched to encourage start-up businesses to begin testing the viability of their innovative services on consumers before incurring significant regulatory costs.

The sandboxes have allowed financial technology businesses to test certain services without holding the requisite licences.  Engagement with the initial sandbox was underwhelming, with ASIC announcing that only seven eligible entities had participated since 2016.  The new sandbox regime will allow a longer testing period for a broader range of financial services and credit activities, and a wider range of businesses will be eligible with the aim of increasing participation.   

Existing licence regimes

Normally, ASIC requires that businesses or individuals hold an Australian financial services licence (AFSL) in order to conduct a financial service, such as providing financial product advice to clients, dealing in a financial product or providing a custodial or depository service. 

Further, businesses or individuals are also usually required to hold an Australian credit licence in order to engage in credit activity, such as providing credit under a credit contract or consumer lease, or suggesting or assisting with a particular credit contract or consumer lease. 

Businesses operating in the ERS are relieved of the requirement to hold these licences, allowing them space to test the viability of their product.  Licensed businesses are also now eligible for the ERS in order to allow for testing of new services that they are not currently authorised to provide.

Eligibility and limits

To be eligible for the new ERS sandbox, an individual or business must lodge a prescribed form with ASIC, as well as satisfy the new "net public benefit test" and "innovation test". 

  • Net public benefit test: an applicant must adequately explain why the exemption will result, or will likely result, in a benefit to the public.  The benefit must outweigh any detriment that will, or will likely, result from exempting that service. 
  • Innovation test: an applicant must adequately explain why each service, product or credit activity is considered either new or a new adaption or improvement of another licence or service. 

Under the new ERS, individuals and businesses can now use the sandbox multiple times to test different products and activities for which they do not have a licence and have not already tested. 

Testing parameters

The sandbox testing timeframe has been increased from 12 months to 24 months (now with no option to apply for an extension).  Some fintech sandboxes, such as that seen in Canada, adopt a 'case by case' approach to determining time limits which may be a preferable approach to encourage participation.  The extended timeframe provided by ASIC is nonetheless a welcome change and provides a longer testing period than most.   

Further, there are now no limits on the number of clients that services can be offered to, which is a notable change from the maximum of 100 retail clients in the predecessor sandbox. 

Client exposure limits have also been removed for certain products issued by an entity regulated by the Australian Prudential Regulation Authority, such as general and life insurances, superannuation, deposits and non-cash payments.  Otherwise, an individual or business working within the sandbox is still restricted to providing services of up to a $10,000 per individual for retail clients and an aggregate $5 million total exposure limit.   

The scope of services and activities available has also been expanded.  Under the ERS, wholesale clients can be provided with any financial product except derivatives or margin lending products.  The services and products that can be offered to retail clients have also been expanded to include life insurance, superannuation products, securities in foreign approved markets, crowd-funding services and more. 

Consumer protections

Individuals and businesses utilising the ERS must still maintain adequate compensation arrangements, such as professional indemnity insurance, and appropriate dispute resolution processes.  Further, the ERS now requires notification to clients and/or ASIC when certain events occur (such as a material change in the offering). 

ASIC now has the power to issue a "make-good" order where they determine, after consultation with the entity and affected parties, that a financial service or credit activity has resulted, or will likely result, in significant detriment to clients or credit consumers.  A participant in the ERS must comply with a "make-good" order within 30 days and give notice to ASIC stating that the order has been complied with.

ASIC has further clarified that unfair contract term protections, and other protections under consumer credit laws, as well as crowd-sourced funding intermediary obligations must be adhered to while operating within the sandbox exemptions. 

Post-testing

After participating in the ERS, ASIC has requested that individuals and businesses provide a short report on their experience while testing their financial service or credit activity in order to assess the operation and effectiveness of the sandbox exemptions.  The report should be provided with 2 months of the exemption expiring and should provide information regarding the number of clients, the client demographics, any regulatory requirements identified as barriers to viability and financial report information including revenue and expenses. 

A legislative requirement to review the extended scope of the ERS after 12 months of operation will allow ASIC to determine whether the enhanced regime has promoted further innovation in this space. 

Take-aways

Reflecting on the original fintech sandbox announced in 2016, ASIC has said "we went as far as we felt we could go".  In comparing participation rates with other fintech sandboxes globally however, it appears the original sandbox didn't go far enough.  Although there were only seven entities that participated in the original sandbox, ASIC had received a further 44 preliminary notifications which did not meet the criteria to qualify.  With this new formulation of the sandbox providing wider licensing exemption powers, ASIC hopes to encourage greater participation by ensuring that more entities are eligible.

Tegan Kelly contributed to the writing of this article.