ASIC has released a consultation paper on proposals to facilitate innovation in the financial services sector. The proposals include details of the long-awaited 'regulatory sandbox'. It will be of interest to both emerging companies who may rely on the relief, as well as investors in this space. Senior Associate Simun Soljo and Law Graduate Antonia Ross look at what the paper proposes.
ASIC identified three key barriers facing new providers of financial services:
- Speed to market: getting an AFS licence can be slow and expensive, but without one a new business may not be able to provide financial services and prove that it can be viable.
- Organisational competence: finding the right people to act as responsible managers and complying with ASIC requirements can be a big challenge.
- Access to capital: Attracting investment or finance can also be challenging for new businesses.
To tackle the challenges, ASIC's consultation paper has made three key proposals:
Guidance on assessing a responsible manager's knowledge and skills
ASIC proposes providing additional guidance about the existing requirements, and in particular about Option 5 in RG 105 which allows applicants for an AFS licence to demonstrate their responsible manager's knowledge and skills without having the specific qualifications and years of relevant experience specified under the other options.
Many emerging companies will rely on this exemption because their founders will not necessarily have relevant experience or qualifications in relation to all of the services they want to provide. Additional guidance and examples will perhaps provide greater certainty to applicants about whether they will be able to meet this very general requirement, but it will not significantly reduce the regulatory burden.
Allowing 'small, heavily automated businesses' to appoint third-parties to provide sign-off to meet their obligations
This proposal would allow AFS licence applicants to show that their responsible managers have the relevant knowledge and skills for some of the financial services they propose to provide, and they could rely on appropriately regulated and experienced third parties to provide sign-off for the remaining aspects of the business.
It is proposed to apply only to companies that rely heavily on technology and automation because they would be expected to rely less heavily on their responsible managers – in short, their responsible managers will have less to do, and decisions made in the initial stages will be more important and so third-party sign-off or review could be adequate (eg review of an algorithm providing advice). ASIC is proposing that sign-off be required every 12 months or on significant changes to operations.
The relief would be available where services are provided to a limited number of clients – although this is to be confirmed, ASIC has given 1000 retail clients as an example, and these services would be limited to advice on liquid financial products, non-cash payment facilities and products issued by regulated businesses.
The 'regulatory sandbox' exemption – testing financial services for up to six months without holding an AFS licence
Licensing relief would be a huge help to early stage businesses because it would allow them to test business models, gain customers and prove that they have a viable business idea before seeking funding or approaching an AFS licensee for authorisation as a representative.
The licensing relief for providers ('testing businesses') would be subject to a number of restrictions:
- It would be limited to one 6-month testing period. So new businesses still need to have a well formed idea when they start.
- It would only apply to testing businesses advising on or arranging for others to deal in certain liquid financial products: listed or quoted Australian securities, managed investment schemes and deposit products. It would not apply to issuing of products – because the business may not continue after the testing period and so customers shouldn't be stuck with an unlicensed provider.
- It would not apply to existing AFS licensees. ASIC will continue to assess applications for relief by existing licensees on a case-by-case basis.
- It would only apply to businesses that:
- provide services to no more than 100 retail clients (each with a maximum exposure limit of $10,000); and
- have a total wholesale client exposure of less than $5 million.
- Testing businesses would still need to maintain adequate compensation arrangements, maintain an external dispute resolution scheme, comply with disclosure requirements (to give a financial services guide) and comply with the best interests duty and conflicted remuneration provisions.
- Finally, testing businesses would need to be sponsored by an ASIC-recognised organisation ('sandbox sponsor') – which may be not-for-profit industry associations or other Government-recognised entities. They would need to make an assessment of the testing business's proposed business model. If not well designed, this requirement could prove a major hurdle for startups wanting to take advantage of the relief, especially if sponsors will have any liability for the conduct of testing businesses.
ASIC's proposals come only a couple of days after the Monetary Authority of Singapore announced its own proposals for a regulatory sandbox, and follows similar developments in the UK and the US.
There is growing competition not only between fintech startups (and established providers), but clearly also between international regulators and nations all trying to attract and retain the most promising ideas and talent.
ASIC wants your feedback on the proposals, any alternatives that should be considered, and in particular the effect of the proposals on the compliance costs, effect of compliance and other impacts or benefits.
Submissions are due on Friday 22 July 2016.
ASIC is expected to release regulatory guidance and/or licencing exemptions in December 2016.
We think the initiatives are cautious, but the proposed licensing relief in particular will be welcomed by emerging financial services providers, many of whom now operate in a regulatory grey area as they start providing services before being properly licensed. Given the competition for emerging fintech companies globally, we would hope ASIC could act sooner.