Australian corporate regulator ASIC’s commissioner, John Price, has called out “innovation” as a concept about which it is easy to wax lyrical, but “difficult to apply in practice”.
Mr Price made the comments at the recent Senate Economics Legislation Committee meeting into the regulatory sandbox for fintechs when asked: “Is an innovation benchmark appropriate?”
With just five fintech companies making the grade for the first version of the sandbox, and consumer advocacy group Choice arguing the sandbox needed a higher “innovation” bar to entry, his answer suggests this is a bigger question than the regulatory body can begin to answer.
Mr Price was “not surprised” with the low take-up of the sandbox, citing alternative avenues to licensing already being used. ASIC faces clear challenges in regulating to both foster innovation and protect consumers. Yet this is vital to the future of Australia’s continued economic success as fintechs must comply with regulation before launch. Likewise defining innovation beyond its buzzword connotations is crucial to ongoing development and progress across a broad range of industries.
Fintech Australia and Choice both argued for more oversight on applications to ASIC’s sandbox to allow access for innovative business models or innovative approaches to existing business models that create a benefit to consumers. But the problem of supporting innovation is broader than this. The federal and state governments have been extremely supportive of emerging start-up companies in Australia.
So while we have a clear top-down prioritisation from the country’s leadership that Australian businesses need to innovate, what is not clear is how the government agencies are implementing this. Along with poor sandbox take-up, anecdotally many start-ups are having issues with accessing the research and development tax incentive — which was meant to be a boon for the industry. This is partially due to an influx of inappropriate applications for R&D tax incentives, combined with poor advice proliferating within the sector, but it is becoming clear this is also due to AusIndustry’s apparent definition of “innovation” in a technology context.
Over the past 12 months AusIndustry has taken a very rigid approach to allowing software development activities to be treated as eligible activities for the R&D tax incentive. While this is in response to a number of ineligible claims being made for software development, it also reflects an “interpretation shift” to a narrower definition of innovation that excludes many Australian start-ups.
If AusIndustry’s view is innovation can only happen in a Petri dish, what does that do for non-science start-ups trying to create something new? Innovation is very different in a commercial setting than in a laboratory, but it is no less important.
Innovation in a technological environment can be radical and disruptive, such as the way in which data is now used to offer risk-based pricing on loans to consumers and SMEs, often with material financial benefit to the loan recipient, while incumbents have done nothing. But in many cases, improvement is incremental. There has yet to be a huge global disruption in finances — for example no fintech has disrupted money successfully (yet).
There is a seemingly broad support base for encouraging fintech and disrupting the big four banks, but while ASIC is generally supportive, it is under-resourced for the task at hand of regulating for technology’s effect on financial services. At the same time, other bodies like AusIndustry appear to lack understanding of the real commercial risk and true nature of the technological innovation.
What this means for start-ups, particularly fintechs, is that the barrier to entry and then successfully scaling up remains high. Until this definitional issue of “innovation” is resolved, Australian fintechs will continue to be caught between a strong government vision for innovation and poor delivery of actual support.
Stuart Stoyan is the CEO and founder of marketplace lender MoneyPlace and chairman of FinTech Australia
This opinion piece originally appeared in The Australian