Category Archives: Policy Making

ASIC’s new regulatory sandbox for #FinTech #startups

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Last week, ASIC published its eagerly awaited public consultation paper on the so-called FinTech regulatory sandbox. ASIC Commissioner, John Price and his colleague Mark Adams launched the paper at a special meeting of the FinTech Melbourne group, hosted by KPMG. There was also participation by FinTech Australia represented by its new CEO, Danielle Szetho, and by the Digital Finance Advisory Committee, represented by Deborah Ralston.

sandbox-295256The Commissioner was at pains to stress that, notwithstanding the developments within FinTech, and ASIC’s contribution via the Innovation Hub, the primary focus of the regulator is to “promote confident and informed consumers and investors, and to promote fair, transparent, orderly and efficient markets”.

To reiterate the point, Mr Price stressed that while the Innovation Hub is designed to help FinTech startups navigate the regulatory system, as well as reducing red tape, there should
be no compromise in ASIC’s fundamental regulatory and licensing regime.

ASIC will continue to adopt what it calls a modular approach to licensing and regulatory oversight, that includes: the ability to operate as a representative of an existing licensee; a focus on organisational competence; and the use of waivers and the “no-action” policy and decisions.

However, ASIC recognises the issues and barriers to entry that face some FinTech startups such as speed to market (a function of technology outpacing compliance?) and organisational competence (do firms need to hire in these skills and/or provide specific undertakings to that effect, or can they make use of third-party resources?). In ASIC’s view, by helping firms to reduce the time to market and to enhance their organisational competence, FinTech startups will be able to overcome the further barrier of access to capital. But there still needs to be acceptable consumer and investor outcomes, and efficient markets.

The proposals include additional guidance and discretion on organisational competence, and a limited license model that makes use of third parties as an alternative to establishing in-house organisational competence from day 1 (e.g., using an accounting firm as an external reviewer or sign-off), and limited exemptions during a defined test phase, yet still subject to some constraints to maintain a balance.

To clarify, ASIC currently exercises its discretion when assessing organisational competence based on the nature of the financial services and financial products to be offered, and the collective knowledge and skills of the people in the business. Under the proposals, the limited license will offer some additional flexibility to heavily automated business services and models, whereby the business can rely on professional third-party sign-off for compliance plans.

The sandbox exemptions will only be available to new Australian entities (to focus on startups) and only for a 6-month duration. It will be confined to certain financial services only – such as providing advice and arranging transactions. It will not include market making, and consumer protection will remain paramount. Once the limited license has expired, companies will either be instructed to cease operations, become an authorised representative of an existing licensee, or submit a full license application.

Other restrictions on the sandbox exemptions mean that applicants must be advising or dealing in liquid products (equities, managed funds and deposits), so not superannuation, insurance or derivatives. There will also be a cap on the number of investors (e.g., 100 retail clients), and on individual exposures (e.g., $10,000 per client), with an overall cap of $5m (but possibly unlimited in respect to wholesale clients?).

Participants must demonstrate they have adequate compensation arrangements, such as holding appropriate professional indemnity insurance and participating in an external dispute resolution process. They must also operate under core conduct and disclosure principles (e.g., disclosing trailing commissions).

There is some thought that sandbox participation could be “sponsored”, by third-party advisers, startup hubs or venture capital funds. This would operate on a “no liability” basis, and would primarily offer a preliminary health check of the FinTech applicant’s proposed business model. Above all, there will need to be adequate notification and reporting requirements, including a feedback process.

When comparing these proposals to what some international regulators are doing, ASIC believes they are more progressive than their counterparts. The UK is adopting a restricted licensing model, the US is using a “No action” process (more focused on credit providers?), and Singapore has recently announced a hybrid sandbox proposal.

During the Q&A session, the following issues were aired:

  • Is ASIC in favour of mandatory client recording? No, it will continue to rely on industry best practice
  • Is general insurance included in the sandbox? No, ASIC is not looking at risk-management products to be part of the exemptions.
  • If incubators and/or VC’s are able to be sandbox “sponsors”, how will ASIC deal with potential bias? ASIC says it is alert to practices such as unreasonable “fees”.
  • Would a new entity or product from an existing authorised representative be able to access the sandbox? It wasn’t clear whether this would be covered, but presumably not if it did not meet the “new business” requirement?
  • Would the sandbox be available to non-financial services co-creating products for existing AFSL holders? Again, it wasn’t clear – but if it was a new business applicant, presumably it would. (This also raised the issue of “mature” businesses using disruptive or outsourced services as a way to access the sandbox.)
  • ASIC will encourage companies to apply for a full license prior to end of the six month test, to ensure timely compliance
  • What will happen as a result of people playing in the sandbox? Clearly, ASIC has a vested self-interest in learning about and getting exposure to innovation, but it needs to demonstrate a pro-active and efficient approach.
  • What are the key criteria for the sandbox exemption? ASIC does not have a prescriptive approach (subject to the sandbox restrictions), so it will look at each application on its merits (e.g., short vs long-dated products, simple vs complex, retail clients vs wholesale), and focus on the financials, the organisational competence, and the business model. And obviously, experience counts.
  • Timing of the sandbox? ASIC hope to see it operating by the end of September (Responses to the CP260 are due in by July 22).

Subject to the consultation feedback, there seems to be general industry consensus that the sandbox proposals are to be welcomed. But there are still some grey areas, as evidenced by the Q&A, and nowhere did I here anything specifically relating to the new emerging class of programmable currencies and other digital assets, many of which are pushing the regulatory boundaries, as well as disrupting traditional markets. And with current equity crowdfunding proposals stuck in Parliament, nothing happening there either.

(For some other responses to Consultation Paper CP260, check the following articles:

http://m.smh.com.au/business/banking-and-finance/asic-to-build-fintech-startups-a-regulatory-sandbox-to-test-ideas-20160608-gpe4l7.html

http://www.financialobserver.com.au/articles/fintechs-welcome-regulatory-sandbox-proposal

http://www.fintechaustralia.org.au/#!Why-the-Fintech-Regulatory-Sandbox-is-a-Game-Changer/ll9ed/5757cd8f0cf245cf71a32089)

Next week: Customer service revisited

Latest #FinTech Round-Up

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The first quarter of 2016 has seen some significant FinTech developments in Australia. It feels the sector has finally “come of age”, at least in terms of government policy, as well as some significant deals. For anyone who may have missed the action, here is a very brief round-up:

FinTech_AustraliaThe formation of FinTech Australia as an umbrella group in late 2015 was seen as an important step in reducing inter-state rivalry. Following its first AGM in March, hopefully it will help the industry to attract further visibility, gain critical mass and co-ordinate the debate around legislation, funding, compliance and regulatory licensing, as well as fostering innovation and collaboration.

At the same time, the Federal Government has established the FinTech Advisory Group composed of some heavy hitters and key influencers. One of the first outcomes has been the Treasury’s response to a number of regulatory changes that the industry is prioritizing.

Having spoken to several members of both the Advisory Group and the FinTech Australia Committee, there is a clear sense that the industry has finally “broken through” to get on the ideas and innovation agenda.

FinTech Melbourne hosted a very interesting Meetup on Women in Fintech, set against the backdrop of the continuing gender diversity debate (in particular, across tech startups). An all-women panel comprising Charlotte Petris from Timelio and Jemma Enright from MoneyBrilliant, and facilitated by Anita Kimber from EY, explored some of the opportunities and challenges (and the struggles along the way) of being a startup co-founder, their experiences of launching new businesses and products, and how they go about hiring the right talent and building great teams.

Meanwhile, in London, The FINTECH Book was being launched, which includes a contribution written by DragonBIll‘s Melbourne-based CEO, Luke Hally.

Over at the MBTC , the Melbourne Bitcoin Meetup group hosted Brave New Coin‘s CEO, Fran Strajnar. Fran gave a detailed presentation on the market news, financial data and analytical infrastructure that Brave New Coin is building to support crypto-currencies and block chain technology, including the new Bitcoin Weighted Average Price (aka B-WAP). This new analytic will likely prove to be a key component for real-time and historical pricing data on specific bilateral transactions (e.g., calculating end of day evaluations or annual tax reconciliations), as well as providing underlying reference data (e.g., for index-linked instruments and associated derivatives, swaps, options and forwards). Exciting stuff indeed!

Finally, ASIC, as part of its work in building a more supportive regulatory environment (under its Innovation Hub) has announced a bilateral agreement with the UK’s FCA on greater co-operation between the respective market regulators, that may lead to mutual recognition for FinTech companies. Another similar deal is being explored with Singapore.

Next week: 4 more #startup hopefuls pitch at Startup Victoria

 

Technology vs The Human Factor

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Several times over the past month I have been reminded that the pursuit of technology for its own sake can give rise to misguided innovation; so-called solutions that are divorced from real world problems cannot justify the effort or resources. It feels like we are entering a new phase of the post-industrial revolution era, where a lack of “the human touch” will render many new inventions as worthless, irrelevant or redundant.

Street scultpure, Nagoya. Photo © Rory Manchee (all rights reserved)

Street sculpture, Nagoya. Photo © Rory Manchee (all rights reserved)

In no particular order:

  • At the second Above All Human conference in Melbourne, there was a consistent theme: how do we make sure there is a real connection between human needs and bleeding edge technology?
  • A Slow School of Business excursion to an eco-friendly homestead in rural Victoria offered a practical lesson on how to create harmony between technology and nature, and still achieve a modern (but modest), highly personal and comfortable home.
  • The economic debate about whether technology is improving our standard of living (as reported in the latest CPA magazine), which also echoes a recent CEDA report on automation and the implications for job losses.
  • A Q&A with Shayne Elliott, the new CEO of ANZ Bank, which prompted the observation that big data analytics, process automation and digital disruption are all very well, but will prove meaningless unless they can improve the customer experience. (But Elliott also conceded that the likes of Uber and Airbnb have succeeded because of complacency among industry incumbents.)

Advances in technology don’t have to lead us to the dystopian worlds of “Modern Times” or “Metropolis” (or any of the other post-apocalyptic visions that cinema and literature like to give us). However, the understandable focus on innovation must take the “human factor” into greater account when making design decisions, undertaking cost-benefit analysis and opting for one technology format over another.

Conclusion? It’s not totally clear whether we are entering another dot.com market correction, but there is a case to be made for whether or not we are seeing enough of a “technology dividend” from the current digital disruption and economic displacement centred on the use of cloud, social and mobile platforms; and whether we need a new methodology to measure the impact of the Internet of Things, robotics, AI, nano-technology, AR/VR, cognitive apps, wearables, 3-D printing, etc.

Next week: It’s never too late to change….

Is this The Conversation we should be having?

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Here’s a barbecue topic for Australia Day: What is happening to the quality of public discourse? Over the holidays, I read The Conversation’s 2015 yearbook, “Politics, policy & the chance of change”. It’s a collection of individual articles from the past 12 months, grouped into broad themes, covering key issues of the day, at least among the academic and chattering classes. As a summary of the year in Australian political, economic, cultural and social reportage, it’s not a bad effort. With “news” increasingly bifurcated between a dominant commercial duopoly and a disintermediated social media maelstrom, The Conversation can offer a calm rational voice and an objective alternative.

Screen Shot 2016-01-24 at 6.43.50 PMThe title promises a new direction in political debate, and I went to the book’s Melbourne launch at the start of the summer, where Michelle Grattan, The Conversation’s Chief Political Correspondent held court in an audience Q&A. I was looking forward to the event, because part of The Conversation’s remit is to foster informed debate that is more than tabloid headlines, news soundbites and party room gossip. It has also positioned itself as a non-partisan, independent and authoritative source of news analysis.

I was hoping the Q&A would provide a considered discussion on some of the key policy issues facing the country – long-term tax reform, addressing climate change, updating Federation, dealing with the post-mining boom economy, improving the quality and efficiency of our education, health and infrastructure systems, etc.

Instead, the first three questions from the audience concerned Mal Brough, Ian Macfarlane and Tony Abbot. How demoralising. Haven’t we moved on from this cult of personality? Haven’t we learnt anything from the past 10 years or so? If the same event had been held during Julia Gillard’s term as PM, the names would have been different (Craig Thomson, Peter Slipper, Kevin Rudd?) – and for quite separate reasons, I hasten to add – but the context and implication would have been very similar: “Never mind policies, what’s the chance of (another) leadership spill? How are the numbers stacking up in Parliament? When’s the court case?”

Although I admire the aims of The Conversation, and I understand why it exists, I have some concerns about the type of discourse that The Conversation is actually fostering among its audience. As with many public institutions, I appreciate that it’s there (even though I am not a frequent reader), but like other news media, it risks confirming the bias and prejudices of its audience. It can also feel as if it is serving only the vested interests of its contributors, partners and sponsors.

So much of Australia’s recent political history has been dominated by self-delusional egos, nefarious party factions, insidious vested interests and character assassination (which I blame for giving us five prime ministers in as many years).

When it was my turn to ask a question, it concerned the recent bipartisan compromise between the Coalition and The Greens to publish the tax records of companies generating more than $200m in revenue (as a step towards tackling corporate tax avoidance). I asked, “Should we expect to see more of this seemingly new approach to politics?” Although Ms Grattan gave a detailed (and somewhat technical) explanation for this particular Parliamentary outcome and its likely implications, I felt that most of the audience were not interested. They would probably have preferred to be talking about the ins and outs of the party rooms. For me, this does not bode well for the level and quality of public debate we are having on (non-party) political issues that really matter.

I also have a few other niggles about The Conversation and the 2015 Yearbook:

  1. By only sourcing content from “recognised” academic experts and policy wonks, I think this overlooks contributions from commercial and industry experts which are just as valid. As long as such authors also declare any interests, it should ensure balanced commentary – but to exclude them from the debate just because they don’t have academic, public or research tenure is self-limiting.
  2. The site as a whole (and the book in particular) is rather thin on actual data references, and when research data is included in articles, there are rarely any charts, tables or infographics. I think this is a shame and a missed opportunity.
  3. The book hardly mentions the critical issue of tax reform (which barely merits half a dozen pages). Whereas, reform of the education system (including academic research funding) gets around 40 pages – which rather smacks of self-interest (and bias?) on the part of the academic authors

Finally, The Conversation provides a valuable (and from what I have seen, an impartial) service via its factcheck section, which in tandem with the ABC’s Fact Check is doing a sterling job of trying to keep our pollies honest (at least in Parliament…). More power to it.

Next week: David Bowie Was – “It’s a god-awful small affair”