Building fintech castles in ASIC’s regulatory sandbox the play we need

This piece originally appeared in The Australian on June 14, 2016. View the original here.

When peer-to-peer lender MoneyPlace built its founding team no one anticipated that it would take 18 months to gain regulatory approval. That’s a long time in limbo for any business but for a start-up a delay of this length can be crippling.

MoneyPlace was fortunate to have patient investors and founders who knew from the start that gaining a licence was going to be hard, albeit not 18 months hard, and is now in market and growing rapidly.

But MoneyPlace is an exception. Many Australian fintech start-ups have had to pull the plug or pivot their business model while waiting to get regulatory approval. It’s not an ideal outcome for many entrepreneurs who have the right idea, have devised a viable solution but can’t extricate themselves from regulatory wrangles.

Strong regulation is critical in the fintech space but can also be counter-productive if it becomes a barrier to innovation. Fortunately, the Australian Securities & Investments Commission has recognised the problem and its attempt to breathe life into the federal government’s proposed regulatory sandbox could be a game changer for fintech start-ups.
Under the much-anticipated proposal, Australian fintech outfits will be able to demonstrate their business model works during a six-month sandbox period without needing a financial services licence. Many in the start-up community are hoping the corporate regulator will extend the sandbox period provided the start-up has applied for a licence.

ASIC’s consultation paper outlines the proposed governing rules on which feedback is being sought. As a guide, the fintech start-ups “playing” in the sandbox will be less complex products of a short duration including robo-advice and deposit products, but not products that are over longer time frames like superannuation or insurance.

They will not be able to provide services to more than 100 retail clients, each with a maximum exposure limit of $10,000 and the total exposure of all clients (wholesale and retail) will have to be less than $5 million.

Start-ups in the sandbox will also need to maintain consumer protection, such as dispute resolution and compensation arrangements and disclosure obligations, have adequate compensation arrangements and will need to obtain “sponsorship” from an ASIC-approved organisation.

This last point about sponsorships is likely to draw fire from many in the fintech community. ASIC’s proposal that start-ups be sponsored could potentially create an unnecessary layer of new “gatekeepers” seeking to profit from the sandbox.

The industry needs to ensure that ASIC does not create a situation where fintechs must go to “paid for” services to access support. Similarly, there is a risk if the gatekeepers are VCs, hubs or incubators with existing members. This could create a potential situation where the incubators “pick winners” and will only sponsor businesses they have invested in.

While ASIC’s intention on sponsorship is to provide a layer of oversight and additional checks, there needs to be an avenue for up and coming fintechs to access the sandbox without having to pay a fee for the service. Ideally sponsors will be not-for-profit organisations, alleviating potential conflicts.

ASIC said established financial services businesses would not be able to access the sandbox. This is a good thing as the sandbox is intended for start-ups. At least one big four bank has privately expressed an interest in participating in the sandbox. This would be a ridiculous outcome, as existing businesses already have the means and resources to gain the appropriate regulatory approval.

ASIC will also benefit from the proposed arrangements. This provides an earlier line of sight for ASIC of incoming innovations. It would also allow ASIC to focus the bulk of its resources on start-ups that have already undergone a certain degree of validation as applications for full licences could now occur after start-ups have completed the sandbox phase.

The concept of a regulatory sandbox was a core policy proposal submitted to the government in February by Fintech Australia as part of its aim to make Australia the Asia Pacific leader in the space. There are predictions the world’s first trillion dollar start-up will be a fintech. This sandbox will help realise Australia’s aspirations to grow into a global fintech hub.

Stuart Stoyan is founder and CEO of marketplace lender MoneyPlace. He is a member of the federal government’s Fintech Advisory Group and also a board member of Fintech Australia.