There were three announcements this week that will serve to bolster the emerging Australian FinTech sector. The Government released a statement in support of FinTech as part of its National Innovation and Science Agenda, while ASIC issued two sets of guidance: an information sheet for providers of marketplace lending products, and draft guidance to providers of digital financial product advice. Partner Gavin Smith, Managing Associate Valeska Bloch, Senior Associate Simun Soljo and Senior Paralegal Connie Ye report.
The Federal Government's statement, 'Backing Australian FinTech', recognises the importance of FinTech to the transformation of the financial system and the economy, and sets out what the Government will do to assist in creating an 'internationally competitive' FinTech sector.
A number of the initiatives have previously been announced as part of the National Innovation and Science Agenda and closely follow a list of initiatives proposed to government by the recently established Fintech Australia Association.
The Government has already introduced a Bill to provide for an equity crowd funding framework. Following significant pressure from the equity crowd funding industry, it has said that it will consider further refinements proposed by the industry, including:
- increasing the assets and turnover threshold used to determine eligibility for equity crowdfunding to $25 million; and
- adjusting the cooling-off rules.
It will also consult on a crowd sourced debt funding framework during 2016.
A key aspect of the statement is the Government's support for ASIC and other regulators developing a 'regulatory sandbox' for innovators to be better able to manage regulatory risk during the testing phase of their product development. It expects ASIC to work with the industry and use its existing powers to grant relief as required. A key question for the sandbox rules to be developed by ASIC will be whether eligibility will be defined by the characteristics of the product or by the entity which wishes to test the product. The UK's Financial Conduct Authority recently issued a paper canvassing options on a similar sandbox structure and we expect ASIC will look to the UK model for guidance.
The Government has already asked the Productivity Commission to review and identify options for increasing financial data availability, and specifically credit reporting data. Many players in the alternative finance market have called for the Government to enact legislation to mandate comprehensive credit reporting in order to force the major banks to make their positive credit reporting data available to others. The Government's statement keeps the issue on the agenda without advancing the timeframe.
The Government will also address the 'double GST' treatment on electronic currencies (mainly affecting Bitcoin), and will look at making digital currencies subject to adequate anti‑money laundering and counter‑terrorism financing rules.
ASIC released a consultation paper and a draft regulatory guide for providers of digital financial product advice or 'robo-advice'.
We are seeing an increasing number of providers offering automated financial product advice using algorithms and technology. The industry asked for further guidance on how advice providers can meet their obligations, in particular when providing personal advice through 'robo-advice' tools.
The draft guidance is intended to respond to some of the regulatory uncertainty. However, in our view it does not go very much further than guidance already issued by ASIC on the best interests duty and how to appropriately 'scale' advice (the most difficult issues to deal with for most providers).
What is new is ASIC's proposal to impose additional requirements on providers of digital advice. Advice providers will be required to have at least one responsible manager who meets the minimum training and competence standards for advisers (set out in Regulatory Guide 146) in order to comply with a licensee's organisational competence requirements. ASIC also sets out guidance on how advice providers should monitor and test the algorithms underpinning the digital advice being provided. While it seeks feedback on whether self-certification or independent third-party monitoring and testing of algorithms should be required, it says that, at this stage, it is not proposing to introduce self-certification because of the additional regulatory burden that would impose.
Feedback on the consultation paper and the draft Regulatory Guide is due by 16 May 2016.
Finally, ASIC has released an information sheet to assist providers of marketplace lending services with regulatory compliance. The guidance is set out in ASIC information sheet 213.
(These are sometimes referred to as 'peer-to-peer' or 'P2P' lending platforms, but ASIC prefers the term 'marketplace lending'.)
While ASIC acknowledges that various business models can be used to provide a marketplace lending service, the guidance focuses on the managed investment scheme structure, which is the most common model currently used in Australia.
ASIC sets out a high-level overview of the relevant legal obligations, including:
- Australian financial services and credit licencing obligations;
- the obligations of a responsible entity of a registered scheme;
- consumer protection and consumer credit laws; and
- obligations to provide appropriate disclosure to retail investors.
It identifies the key risks in providing marketplace lending products as being:
- fraud and cyber security risk;
- risks of poorly managed conflicts of interest, leading to problems such as lowered credit assessment standards; and
- risks of poor knowledge among investors and borrowers entering the market.
It finally sets out some 'good practice' principles that marketplace lending providers may consider implementing, including:
- referring investors to information about marketplace lending available on the ASIC MoneySmart website;
- providing investors with an appropriate risk warning statement;
- providing investors with optional knowledge tests; and
- providing information about policies and procedures for managing selection of borrowers and monitoring of loans policies, and providing aggregate information about the loan book.