Regulation can be an innovation killer for fintech, and even the regulators see this. That’s why some regulators are developing ‘regulatory sandboxes’ for start-ups.
These sandboxes will allow start-ups to test their services in a live environment with a reduced level of regulation, much like a clinical trial for a new drug.
In the words of the UK’s Financial Conduct Authority (FCA), the regulatory sandbox is a ‘safe space’ for fintech start-ups. A regulatory sandbox scheme was launched by the FCA last year.
The Monetary Authority of Singapore (MAS), keen to promote Singapore as a fintech innovation centre, released a proposal paper on its regulatory sandbox on 6 June.
Hot on the heels of the UK and Singapore, ASIC issued its own regulatory sandbox proposal on 14 June as part of its consultation paper on measures to facilitate innovation in financial services (CP 260).
The novel element of ASIC’s proposal is that it would not involve a case-by-case approval before you get to sit in the sandbox; there would instead be an industry-wide licensing exemption subject to conditions.
The conditions are the catch – there are quite a few.
The exemption would be for six months (and only available once) for listed or quoted Australian securities, simple managed investment schemes and deposit products.
The exempted activities would be giving financial advice about these products or arranging for other persons to deal in them.
The testing business would not be able to actually issue products. What’s more, if you are an existing financial services licensee, you would not be eligible.
The scheme would not apply to consumer credit, which is subject to the separate Australian credit licence regime.
To limit the potential loss to consumers, there would be a limit of 100 retail clients and the maximum exposure for each retail client would be $10,000, with a total exposure for all clients of $5 million.
The testing business must also have adequate ‘compensation arrangements’ – professional indemnity insurance or some other arrangements to mitigate the risk of consumer loss arising from misconduct – and be a member of an ASIC-approved external dispute resolution scheme.
Then there is disclosure: ASIC expects that the testing business would clearly and prominently disclose that the services are being provided in a testing environment, which could dampen customer interest.
It would also need to give some information, usually included in a financial services guide, such as the services being provided, who the business acts for, remuneration it receives, and dispute resolution.
When providing advice to a retail client, some of the information that would otherwise appear in a statement of advice would have to be disclosed, including the advice given, remuneration details, and any interests that could influence the advice.
The testing business adviser would have to act in the best interests of the client when giving personal advice and would be barred from accepting remuneration that could reasonably be expected to influence the advice or recommended product choice.
On top of all these conditions, the ASIC sandbox proposal also requires that the testing business have a sponsor such as a not-for-profit industry association or other government-recognised entity.
The sandbox sponsor would act as a gatekeeper, sponsoring only testing businesses run by fit and proper people, and whose business model is deemed reasonably sound after a preliminary assessment.
Rather than seeking prior ASIC approval, testing businesses would have to notify them that it intends to rely on the exemption from a specified date, provide evidence of sponsorship, confirm that it has reasonable grounds to expect it can operate for the subsequent six months.
Once completed, the testing business would then have to give a report to ASIC about the results.
There are some other innovation proposals floated by ASIC in its consultation paper.
One of the big stumbling blocks for new market entrants in financial services is finding a nominated responsible manager who has the required level of knowledge and skills.
ASIC proposes that ‘heavily automated’ small-scale business (up to 1,000 retail clients) could meet the requirements by nominating managers with knowledge in some, but not all, aspects of the business, and having remaining aspects signed off by a regulated third-party.
This relief would be limited to licensees who only advise on or arrange for someone to deal in liquid financial products, non-cash payment facilities and products issued by a prudentially-regulated business.
ASIC’s current guidance on responsible manager requirements (RG 105) lists a number of criteria for knowledge and skills but also allows for prospective licensees to make submissions about why a person is appropriate even if they do not meet the standard criteria.
More than half of all innovative businesses seek to rely on this option when making their licence application. ASIC proposes to give additional guidance on what information an applicant can provide when making these submissions.
It’s good to see that fintech start-ups may get relief from the regulatory load when developing a new service, but from another standpoint it could result in an uneven playing field where new players receive preferential treatment for innovation over existing licensees.
Patrick Dwyer is a legal director at Dwyer Harris, a financial services and corporate law firm.
