New regulations to expand the regulatory sandbox for Fintechs have received royal assent and are set to commence 1 September 2020.
The Regulations introduce a sandbox with few restrictions than the exemptions currently available which are stated to encourage and support the design and delivery of new financial services in Australia without the regulatory burden of first obtaining a financial services or credit licence.
They remove the prohibitive 100 retail client limit but the AUD 5 million overall exposure cap remains. They also broaden the range and type of financial services than can now be offered, including the provision of credit and non-cash payment facilities.
Applications for relief must comply with the detail requirements in the Regulations.
Currently, Fintechs have been able to apply to operate under ASIC's 2016 relief instruments ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175 and the equivalent instrument for relief from applying for a credit licence.
The regulatory sandbox differs from existing ASIC relief in a number of ways, with the most notable extensions being the removal of the 100 retail client limit, an automatic 24 month exemption period, and specified financial products that fall outside the individual client limit. Non-bank issued non-cash payment facilities can now also be issued.
The equivalent regulations for credit activities expand the equivalent ASIC Instrument exemption currently in place by also removing the 100 retail client limit as well as any limit to interest rates. They also now permit the provision of credit rather than merely acting as intermediary or suggesting another provider's credit product. In other ways the Regulations are more prohibitive as they introduce an overall AUD 5 million exposure limit which is combined with the total financial services exposure under the exemption for that activity. The Regulations also now exclude loans for less than AUD 2,000 and a term that exceeds four years. The AUD 25,000 limit per credit contract remains as does the exclusion of reverse mortgages and small amount credit contracts.
In more detail
The Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2020 and National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2020 (Regulations) received Royal assent on 26 May 2020 and is stated to commence on 1 September 2020. They fulfill the commitment made in the 2017-18 Budget to introduce a less restrictive sandbox to encourage and support the design and delivery of new financial services in Australia without the regulatory burden of first obtaining a licence. Treasury's stated intention is to enable Fintech and other firms to introduce innovative services and products and to get to market faster and at a lower cost. Importantly the conditions applied will still provide consumer protection through the availability of dispute resolution and compensation arrangements.
These Regulations are made following the enactment of the Treasury Laws Amendment (2018 Measures No. 2) Act 2020 on 26 February 2020, having initially lapsed in July 2017. That Act is also stated to make minor technical tax law changes to the venture capital and early stage investor provisions to ensure they are given concessional treatment as intended.
In summary these changes include that:
- the regulations do not limit the number or retail clients;
- the exemption lasts for up to 24 months after the notification period ends, in contrast to 12 months, a 30 day waiting period applies, in contrast to 14 days, during which ASIC may refuse reliance on the exemption;
- allows issuing, varying and disposing of non-cash payment facilities (even non-ADI issued);
- permits the provision of credit rather than merely acting as intermediary or suggesting another provider's credit products;
- carve outs to the individual exposure limits for specified financial products. While the total exposure limit is the same at AUD 5 million, the regulations do not apply the AUD 10,000 per retail client limit to general and life insurance products, superannuation, and deposits and non-cash payment facilities made available by an ADI.
How the limits operate
With the removal of the prohibitive 100 retail client limit, the operation of the overall and per client exposure limits takes on greater focus, in particular for credit contracts. There is no individual cap for insurance, superannuation and bank issued deposits and facilities. The AUD 5 million cap is an aggregate of the following:
- all amounts paid or committed by clients in relation to all financial product types;
- the gross written premiums amounts on all insurance products issued under the Regulations;
- all superannuation contributions; and
- all amounts of credit provided, suggested or arranged under the exemption for credit activities.
After the limit is reached, the exemption cannot be relied on to provide either regulated activity without the relevant authorisation or licence.
- Establish and maintain internal dispute resolution and become a member of a AFCA scheme, maintaining membership for at least 12 months after exemption period;
- Where providing personal advice to retail clients, give each client a statement of advice and comply with the best-interests duty;
- Where providing credit, responsible lending provisions apply;
- Prescribed notifications to clients;
- Comply with client monies provisions;
- Provide relevant financial product disclosures; and
- Comply with make-good orders issued by ASIC.
In order to rely on the exemption for financial services or credit activities, the eligible person or business must lodge a compliant notification with ASIC detailing the requirements set out in the Regulations. A 30 day waiting period applies during which ASIC may refuse their eligibility. ASIC will determine that the exemption is not available if it considers (amongst other factors) that the person or its officers would not pass the recently introduced 'fit and proper' test.
We can assist you to take advantage of the broadened regulatory sandbox to test your products including preparation of your notification to ASIC for relief.
We have recently published our global 'Guide to Regulatory Fintech Sandboxes'. Click here to access.