Enhanced Regulatory Sandbox - Fintech 2.0 or Fintech 1.1?
Monday, 15 January 2018 | By Terence Wong
Australian Fintech businesses would be aware of ASIC's existing Fintech Regulatory Sandbox. In this blog, we refer to this as the “Existing Sandbox” - see a previous blog we wrote defining ASIC's Existing Sandbox. The Existing Sandbox was designed for certain Fintech startup businesses to avoid AFS licensing requirements for one year subject to retail client caps, notification requirements and client exposure limits.
However, the Existing Sandbox has not proved to be greatly popular. In part, this may be because it does not allow for the issuing of financial products, only general and personal advice in relation to a highly restricted list of financial products (for example, bank deposits, home and contents insurance, listed shares and government bonds) and dealing (other than issuing and varying).
On 24 October 2017, the Treasury released exposure draft regulations for an "Enhanced Regulatory Sandbox".
The Enhanced Sandbox (in its exposure draft form) will come with a number of enhancements over the Existing Sandbox:
The Enhanced Sandbox regulations are still in their exposure draft stage with no draft guidance yet from ASIC as to its procedures for accepting exemption notifications. Consultation closed on 1 December 2017.
- An eligible business may issue a non-cash payment (“NCP”) facility and provide crowd funding services to wholesale and retail clients subject to exposure limits and notification requirements, but no other financial products may be issued under the Enhanced Sandbox.
- The list of eligible financial products for retail clients will add life insurance, general insurance, superannuation and equity crowd funding interests.
- There is no longer an eligible financial product list for wholesale clients – only margin lending facilities and derivatives are outside of the Enhanced Sandbox for wholesale clients.
- The licensing exemption will run for 24 months (subject to ceasing for a number of reasons including a breach of licence conditions), compared to one year under the Existing Sandbox (where applicants must seek a further one year extension from ASIC on a case-by-case basis).
- Credit providers under a credit contract will fall within the Enhanced Sandbox. The Existing Sandbox only covers the provision of a credit service (that is, credit assistance and acting as an intermediary between the borrower and the credit provider).
- Short-term credit contracts, small amount credit contracts and reverse mortgages with any security over residential property are excluded from the Existing Sandbox. For the Enhanced Sandbox, only small amount credit contracts and reverse mortgages with any security over household property are excluded. A minimum of $2,000 credit requirement is added for the Enhanced Sandbox as well as a maximum term of 4 years. The annual cost rate limit of 24 per cent in the Existing Sandbox will not apply to the Enhanced Sandbox.
- There appears to be no specific requirement for innovative use of technology in the Enhanced Sandbox. (This requirement is part of the Existing Sandbox.) ASIC will have a list of reasons where it may cancel an exemption under the Enhanced Sandbox for a particular business (for example, not being of “good fame or character” or not being “fit and proper”, or failing to provide financial services or credit activities fairly, efficiently or honestly) but this list does not expressly include not being innovative and/or not using technology. However the Draft Explanatory Statement does refer to assisting the development of "innovative offerings" and "innovative services" on page 1.
- Being a licence holder, a representative of a licence holder or a related body corporate of a licence holder will no longer automatically exclude a business from using the Regulatory Sandbox – as long as the business is not licensed to provide the particular financial service/credit activity sought under the Regulatory Sandbox licensing exemption.
- A business and its related bodies corporate cannot reuse an exemption for a particular financial product and only one member of a group of related bodies corporate can use an exemption at any one time.
- Under the Existing Sandbox, a business could apply to ASIC to lift its client limit from 100 to 200 retail clients/consumers on a case-by-case basis. This mechanism is not expressly included in the Enhanced Sandbox regulations, but it might be the case that ASIC extends its provision of case-by-case relief to lift the retail client cap to the Enhanced Sandbox as well.
This article does not consider the application of Purchased Payment Facility regulation to NCP facility providers seeking to commence operations under the Enhanced Regulatory Sandbox. Please call us if you would like a confidential initial conversation.
This article was first published in the November 2017 edition of T-REX.
Authors: Terence Wong (Lawyer) and David Court (Partner)