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ASIC Builds Sandbox For Fintech

Starting next year, Australian fintech companies will be allowed to test certain services without a financial services or credit licence.

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In a world first, the Australian Securities and Investment Commission has downscaled fintech regulation, allowing companies to have up to $5 million total costumer exposure on a maximum of 100 retail clients while operating unlicensed. 

ASIC’s 'fintech licensing exemption' is unique. No other major jurisdiction has implemented a class waiver that allows eligible businesses to commence testing without an individual application process,” said Commissioner John Price.

Financial licensing in Australia is stricter than in some other countries, and relatively expensive to obtain and maintain. Adhering to licence terms usually means hiring skilled people, such as lawyers, whose fees can be out of reach for small businesses. They also require diverting resources away from innovation and growth and towards putting compliance systems in place. The application process is slow and time-consuming. Some fintech companies have waited up to 18 months to get approval, and many have complained that it is a burden.

An exemption—known as a “sandbox” on account of its limited scope and scale—aims to reduce the barriers to entry that startups face due to licensing, and to allow businesses to test new ideas by peeling back regulation. Financial service sandboxes have been trialled in other financial hubs such as Hong Kong, Singapore and London in an attempt to boost innovation.

Building off proposals made in the budget in May, the sandbox idea has been cheer-led from the beginning by industry leaders. Commenting on the proposals earlier this year, Stone & Chalk chief executive Alex Scandurra said it would be “potential game-changing”. Ashurst Australia, a law firm with ties to fintech, called the news “an early Christmas present”.

While welcomed by some, the sandbox has been slammed by activists. Kat Lane, acting coordinator at the Financial Rights Legal Centre, said “there is no requirement that unlicensed businesses must offer anything innovative… This change will hurt consumers.”

Choice, a leading consumer group, said “it baffles us that they are essentially deregulating… This is a sector that has caused significant damage to consumers.” In their submission to ASIC earlier this year, the group argued that "the effects of major financial advice scandals in the last decade have been catastrophic, resulting in consumers losing more than $5.7 billion in funds as well as their homes and life savings due to financial advisers". 

The sandbox excludes superannuation, consumer lending and credit secured through residential property. Loans are limited to $10,000, and consumer protection laws apply. 

The move comes as the latest sign that the government, and particularly Treasurer Scott Morrison, is an ally of fintech. Reporting on the development, Australian Financial Review commented that “it is understood that [Morrison’s] office has been encouraging ASIC to expand” the sandbox initially proposed in June. ASIC is nominally independent of the Treasury. 

It is too early to say how popular the sandbox may be. But evidence from the UK, which has perhaps the most advanced sandbox in the world, suggests it could be very popular indeed.

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