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Unravelled: Government launches innovation agenda – now wait for the ideas boom

8 December 2015

Written by Senior Associate Simun Soljo

You might be getting tired of all of the talk about 'innovation', and keen to see some of it actually happen. The Government's recent announcements could help, but there is a long way to go before the 'mining boom' becomes the 'ideas boom'.

'Mining boom' to 'ideas boom'

Innovation got a lot of attention in the Financial System Inquiry's (FSI) report, and was at the centre of the Government's National Innovation and Science Agenda launched yesterday.

The Prime Minister's announcement of the Agenda reflected a fascinating shift in rhetoric. The mining boom is almost over. What will take its place? Mr Turnbull thinks we could have an 'ideas boom'. But he says this will require becoming 'more innovative, more agile, more prepared to take on risk and become a culture of ideas because it is the ideas boom that will secure our prosperity in the future'.

Innovation is hard

Innovation implies doing something new, introducing something not seen before. This is difficult. Really original ideas are rare and hard to think up. Even harder are those that will make a profit. A lot of what passes for innovation is really doing the same thing a little differently or using a new means.

But governments can help foster innovation by supporting the sort of environments where new thinking happens, by making sure good ideas are not stifled by regulation, and by making it easier for innovators to find the money they need. The proposals recently announced in the Government's response to the FSI and the National Innovation and Science Agenda will help.

Incubating new ideas

Recently, we have seen a number of 'incubators' and 'hubs' established for emerging companies. Stone & Chalk in Sydney is concentrating on the FinTech sector and is busy with dozens of new businesses. The next big thing in financial services could come from a place like this. The proposals announced by the Government will perhaps be of most benefit to those emerging companies.

The Government has announced in the Agenda an $8 million 'Incubator Support Programme', which will include support and advice to new, as well as existing, 'high performing' incubators. While this money will be spread across all sectors, some of it will find its way into the FinTech incubators.

Clearing away road blocks

While regulation is important for maintaining stability in the financial system and protecting consumers, it can also inhibit new businesses from entering, especially in the financial services sector. Innovation requires some clearing away. There are three proposals from the FSI that stand out:

  • Talking with Government: While more talk will not necessarily lead to better ideas, the Government has decided to set up an 'innovation collaboration committee' to bring together industry and Government people to talk about new trends in financial services. It should help the Government better understands the impediments to innovation and respond to them more quickly with changes to regulation when required.
  • Making better use of data: If the 'ideas boom' is the new 'mining boom', then data is the new iron ore. Getting access to it and using it well (or 'mining' it, as the technology people say) will be crucial. Those who already have lots of good data are jealous to protect it. The FSI recommended improving access to credit data through the comprehensive credit reporting system. The Government for now supports industry efforts to improve data sharing, but not compulsion to share it. It will also ask the Productivity Commission to review access to data and recommend proposals for change. It has also already moved to make access to public data easier. As the industry gets access to more and better data, the race will be on to make better use of it. Obvious applications include better design of financial products to deal with customer behaviour and risks, and better targeting of products to the right customers.
  • Payment system regulation: A key area in financial services that came in for scrutiny in the FSI was payments. There are a lot of new entrants in this space, but it exemplifies the complexity of financial services regulation – multiple regulatory regimes and regulators, a recognition that the regime is too onerous which has led to regulators giving exemptions, which makes the system even more complex. The Government will ask the regulators to provide clearer guidance to the industry, and will give them clear powers to regulate new payment systems in a 'graduated' way – to take account of the scale and potential impact of the system.
Who's paying for all this?

It is not enough to have good ideas. Money is also required to turn them into reality. While there has been a lot of talk about a shortage of capital in this area, money has been flowing. Several venture capital funds have been formed just this year, raising around $200 million each. In fact, when I speak to investors in this area, what I tend to hear is that the money is there. What is lacking is enough good ideas that make real commercial sense and people who can turn them into reality.

Nevertheless, the government is keen to encourage investment. It has introduced legislation to make crowd-sourced equity funding easier. It is also proposing in the Agenda various tax incentives for investors, including giving investors in certain eligible early stage companies a 20 per cent non-refundable tax offset on investment capped at $200,000 per investor, per year and a 10-year capital gains tax exemption for investments held for three years. Investors in 'Early Stage Venture Capital Limited Partnerships' will get a 10 per cent non-refundable tax offset on capital invested and an increase to the maximum size of funds to $200 million. It also proposes changes to allow better use of company losses as early stage business change.

Picking up the pieces

While the Government is keen to encourage more risk-taking, risk also means inevitable failure for some. It says it wants a better balance between 'encouraging entrepreneurship and protecting creditors', with changes to shift the balance in favour of risk taking, such as reducing the bankruptcy default period from three years to one year, and creating a safe harbour for directors from insolvent trading if they appoint a restructuring adviser. Again, this will benefit those involved in emerging companies in the FinTech space and may encourage them to take more risks or to bounce back when things go wrong.

Looking ahead

Whether all of this will result in an 'ideas boom' that will rival the 'mining boom' is anyone's guess. But I must confess that I for one am finding the optimism slightly infectious, and I am fairly sure that is not just the Christmas drinks talking. Very happy holidays to all.

Accelerate – keeping you up to date on innovation

Our Allens Accelerate team has published an article summarising the key NISA measures. Over the coming weeks, as more detail is released, the Accelerate team will provide additional analysis of the key measures and how they might affect your business. You can subscribe if you wish to receive these updates.

Other articles in this edition of Unravelled

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Product rationalisation – again
The FSI report recommended that the Government facilitate rationalisation of legacy products in the life insurance and managed investment scheme industries. The need for ways to close legacy products has been kicking around for at least a decade and, in 2007, Treasury released a very thorough options paper covering product rationalisation in the managed funds sector. Treasury said that sector was represented by life insurance, managed investment schemes and superannuation. Read more>>

The beginning of the end of the unit trust's monopoly? A look at common contractual funds
The Board of Taxation's report on tax arrangements applying to collective investment vehicles considers that offshore investors are dissuaded from investing in Australian funds because they do not understand unit trusts, and that access to a broader range of collective investment vehicles would help Australian fund managers to compete for capital with their offshore counterparts. The Board of Taxation advocates extending tax neutrality to three additional collective investment vehicles. In the final of our series investigating these vehicles, we look at common contractual funds, which may be unfamiliar to many in the Australian market.. Read more>>

FSI outcomes – what will happen and when?
Are you interested in the financial system and how it is regulated? The Federal Government's response to the Financial System Inquiry was recently handed down but it can be hard to work out where, exactly, things are heading. We have put together a table that sets out what is likely to happen and when. Read more>>

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