Australia’s financial regulator ASIC targets algorithms in offering carrots, sticks and exchange programs to fintech startups

Since establishing its Innovation Hub almost 12 months ago, ASIC has guided 75 fintech startups through the Australian regulatory regime and has granted 10 of them licenses. Through the Innovation Hub, fintech businesses, preferably with “potentially ground-breaking innovations”, can have access to a dedicated ASIC contact to navigate Australia’s financial services regulation, support them through the financial services licensing process and then during their first year of being licensed.

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After a year engaging with the fintech sector, late March 2016 saw a flurry of ASIC publications which revealed its particular interest in financial innovations which rely on automation and algorithms.

On 21 March 2016 ASIC released a consultation paper on ‘robo-advice’ and digital financial advice models, (click here for the paper) sharing its concern that errors in robo-advice algorithms will potentially affect large numbers of people. The consultation paper proposes comprehensive monitoring and testing requirements for those algorithms as a result.

Similarly, in an investigation into payday lender Nimble, ASIC found that Nimble relied on algorithms which did not properly take consumers’ financial information into account, in breach of credit laws. As a result Nimble agreed to refund AU $1.5 million to over 7,000 customers. In its press release ASIC stated that “… automated processes need to be rigorously and continually tested to ensure that the [credit licensee] who uses them is complying with their responsible lending obligations” (click here for the press release).

Also on 21 March 2016 ASIC cautioned marketplace lenders about this same issue in its new information sheet on marketplace lending (the information sheet can be found here), stating that lenders must be able to understand, amongst other things, a consumer’s financial situation and objectives for a loan.

Like many regulators, ASIC is facing a broader issue that the design of the laws that it administers is being tested by technological advances in the industries to which those laws apply. The integrity of robo-advice and credit assessment algorithms is one illustration of this. ASIC’s Innovation Hub provides a useful insight into the areas of concern that will occupy ASIC in the coming years.

Moving away from algorithms, on 23 March 2016 ASIC and the UK’s Financial Conduct Authority entered into a co-operation agreement to refer fintech companies to each other’s Innovation Hubs (click here for the agreement). This means that an Australian company that has been accepted into ASIC’s Innovation Hub will be fast tracked into the FCA’s Innovation Hub if it seeks to access the UK market. The co-operation agreement also encourages information sharing between the two regulators. For those companies worried about how the regulators might use and disclose information received from the other, the co-operation agreement contains a confidentiality and permissible uses clause, which is reassuring except that the agreement is not legally binding.

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