Removing hurdles: The regulatory barriers to Fintech in Australia


  • Access to, responsiveness, and engagement from, regulators - of critical importance to Fintech start-ups.
  • Regulatory arbitrage and global mobility for start-ups presents both an opportunity and a risk for Sydney’s Fintech ecosystem.
  • Fintech start-ups generally welcome robust regulation as a means of promoting consumer confidence and growth. However, they are frustrated with out of date laws and a regulatory approach which is not keeping up with new business models.
  • Mixed views prevail around the ability of service providers to provide cost-effective and targeted services to suit early-stage Fintech start-ups.

The Fintech sector has significant potential both for Sydney and Australia as a whole. However, in order to realise this potential a number of remaining regulatory barriers need to be addressed. These were the key findings in research undertaken by Henry Davis York in collaboration with the NSW Financial Services Knowledge Hub. 

The joint report based on this research contains insights and outcomes from the study and includes quotes from various Fintech businesses on current regulatory settings and what needs to change. In this article, we summarise the main findings and recommendations from our research.

What is Sydney’s role in Fintech? 

Sydney is Australia’s pre-eminent financial services centre. The city has strong representation from the key financial services sub-sectors such as asset management, wealth management, investment and project finance. Sydney is also a hub for Australia’s ICT sector and rapidly growing Fintech (Financial Services Technology) industry.

The Fintech sector, as part of the broader financial services industry, has the potential to provide a valuable and significant contribution to the future of the Australian economy and ensure that the country is a leader in knowledge based industries in the Asia-Pacific region. 

The HDY/Financial Services Knowledge Hub report was commissioned by the Committee for Sydney in its role as coordinator of the Financial Services Knowledge Hub. It sets out findings and recommendations resulting from a series of interviews and discussions with Fintech start-ups and incubators/accelerators. 

The research undertaken by HDY sought to assess current regulatory settings and their impact on the Fintech start-up community with the purpose of identifying what, if any, regulatory impediments are impacting Fintech start-ups. 

In addition, the study sought to acknowledge where the current approach to regulation is benefitting the start-up community. A key element of this research was to explore whether the current approach to regulation is impacting Sydney’s competitiveness globally. This report represents the insights, perspectives and opinions compiled as a result of numerous interviews and discussions. 

The research for this report was undertaken between January and May 2016. After an initial phase of desktop research to identify a cross-section of interviewees and issues, 1-on-1 interviews were conducted with more than 20 Fintech start-ups, incubators/accelerators and senior executives in the Fintech start-up community. Interviewees included firms in robo-advice, peer-to peer lending, cloud-based solutions, cryptocurrency, crowdfunding, digital trading research and wearable devices. The interviews were complemented by numerous other discussions with financial services institutions, professionals and other industry representatives. 

The study was led by Jon Ireland, partner at HDY, with the support of the Firm’s Financial Services team and the Board members of the Financial Services Knowledge Hub.

Interview highlights

Access to, responsiveness and engagement from regulators

There was mixed experience among respondents with the levels of current understanding among regulators in relation to the many different Fintech business models. However, several respondents praised ASIC’s Innovation Hub, which they have found to be responsive and providing constructive guidance on applicable regulation.

One respondent explained that the Innovation Hub had provided a breakthrough for them in terms of enabling them to get comfortable on the appropriate regulatory treatment for their business model.

“We obtained some initial guidance on the regulatory treatment for our business model with compliance assistance obtained through our accelerator programme. That was tested initially with ASIC but then subsequently after meeting with the Innovation Hub representatives we were able to obtain feedback and reasoning to support our decision to move forward.”

Respondents observed the role of Fintechs in increasing competition to the benefit of consumers. Fintech firms are suggesting the interests of financial regulators and policy-makers (including Treasury, ASIC, ACCC and RBA) should be aligned with the development of solutions that offer choice for consumers and a level playing field in the market.

Regulatory arbitrage and global mobility: an opportunity and a risk

International developments are being watched closely by Fintech start-ups and there was a perception among some respondents that Australian regulations have not previously adapted as quickly as those overseas. This has resulted in a concern that Australia may be left behind other established Fintech hubs such as London, Silicon Valley, and New York, as well as emerging centres such as Tel Aviv.

“Australia needs to ensure it follows international best practice in regulation. There is a risk of parochialism in this market and we need to ensure we are being adaptive to a regional play but at the same time supporting the local market.”

International competitiveness is seen as a political issue, with part of the debate being in relation to regulatory settings. Many of the firms interviewed have international links. Some have already exploited lower barriers to entry or more welcoming and navigable policy settings in other countries in order to launch their business.

Laws that rely too heavily on document-centric and outdated rules have been criticised. While ASIC has provided some relief in this context to allow greater numbers of financial services disclosure documents to be delivered electronically, there remains broader uncertainty around how Fintech-related financial services should be accommodated. For example, it has been queried whether it continues to be appropriate to rely on managed investment scheme laws to regulate peer-to-peer lenders.

In markets like Singapore, the regulator is actively involved in running Fintech events and competitions, and in some cases providing financial incentives for start-ups to relocate to Singapore. Others like the UK and EU are mandating an open data framework on its banks through APIs and other government agencies are actively engaged in supporting digital identity and cloud technologies.

Meanwhile, for some respondents already established in overseas locations, regulation and tax settings related to hiring and retaining talent are both active considerations which have the potential to impact on where they may set up or grow their business in the future.

Key findings Recommendations
Access to, responsiveness, and engagement from, regulators - of critical importance to Fintech start-ups. The model of engagement demonstrated by ASIC through its Innovation Hub has been praised as a successful initiative in helping Fintech start-ups navigate the financial services regulatory landscape.
Fintechs emphasise the importance of timeliness in the review of cases and issuing of licenses. Furthermore, support needs to be reinforced with additional resources and expanded, including to ensure regulatory support for business models which operate partly or wholly outside ASIC’s jurisdiction eg those falling under the remit of APRA, AUSTRAC, the Privacy Commissioner and (potentially) the RBA.
Regulatory arbitrage and global mobility for start-ups presents both an opportunity and a risk for Sydney’s Fintech ecosystem. Australia’s regulatory approach in relation to Fintech start-ups need to be ‘best practice’ and set with a clear understanding of how other countries are regulating the Fintech community. The Regulatory Sandbox and increased flexibility for assessment of responsible managers in new areas such as in equity crowdfunding, robo-advice and alternative finance will be key.
Government needs to create dedicated or adapted legal regimes for new business models which are flexible to accommodate new entrants and allow them to succeed eg crowdfunding and peer-to-peer lending. The extended timeframes for introducing new legislation in Australia (as has been seen for crowdfunding) risks us being left behind in a fast moving and globally mobile environment.
The work being done by ASIC to create co-operation agreements with the UK’s Financial Conduct Authority and Singapore’s Monetary Authority of Singapore is a positive step, and industry welcomes the creation of further co-operation agreements in key markets such 
as the US, EU and China.
Fintech start-ups generally welcome robust regulation as a means of promoting consumer confidence and growth. However, they are frustrated with out of date laws and a regulatory approach which is not keeping up with new business models. The Federal Government should support regulators in finding new and different ways (such as sandboxes) to take on balanced 
“risk-taking” in order to help foster a safe but positive environment for start-ups. ASIC’s new sandbox initiative is a step in the right direction but much more work needs to be done.
The current ASIC proposal is too narrow in terms of limiting sandbox participants to largely robo-advice providers with excessive restrictions on services and products permitted. We recommend linking the sandbox initiative to the broader legislative agenda to facilitate support for a wider range of initiatives by introduction of new laws. This could be supported with a bi-partisan approach.
Mixed views prevail around the ability of service providers to provide cost-effective and targeted services to suit early-stage Fintech start-ups. Service providers to the start-up community need to seize the opportunity to “pay it forward” by scaling services and costs to suit new business models. 
Any government support for incubators and accelerators (as announced by Jobs for NSW, and by the Federal Government under the Incubator Support Programme) should include facilitation of pro bono and discounted arrangements between service providers and start-ups.

Robust regulation is generally welcomed

The role and level of regulation in the Fintech space is a live and complex issue. A number of respondents viewed high levels of regulation as a differentiator to other less robustly regulated markets, and necessary to build consumer trust which in turn supports growth. But there is a need for balance. Several respondents noted that they were working successfully within existing regulatory settings. 

Respondents in the Fintech accelerator space commented that regulators need to be given permission to “take on some risk” when considering new models.

In this context the Federal Government’s recent budget support for a sandbox initiative and ASIC’s consultation on a model for this are key developments. However, a need for clear and workable eligibility criteria and controls were identified in developing this initiative for Australia.

“A key message to Government needs to be to allow regulators to operate by taking on some risk. Sandboxes are one way of doing this but the approach needs to take into account systemic risk and appropriate controls and oversight.”

Sandboxes were seen as having the potential to promote not only new business models but also regulatory knowledge and development. This would also assist with resolving concerns around the speed at which Fintech start-ups need to move in order to realise market opportunities. 

ASIC’s outline in the consultation paper earlier this year on a regulatory sandbox approach for Australia will hopefully initiate a positive framework for developing new innovation and delivery of financial services through the use of technology in new ways. 

However, much work will need to be done on the framework to ensure it provides appropriate levels of opportunity as well as positive consumer outcomes. In particular, the period of availability of the exemptions and how businesses will transition to obtaining a financial services licence will need to be considered.

Cost-effective and targeted services

Mixed feedback was received on access to service providers (eg audit, legal and compliance) and flexibility in pricing of their services. An example given was a perceived high cost of performing an AFS licensing audit on a comparatively small business.

“Overall, our audit experience was that it was too hard and too much ‘to the book’. 
A sledgehammer to crack a nut. In this industry, we need service providers to scale 
their services appropriately.”

Some respondents thought it was a question of commercial bargaining, others thought providers are playing catch-up to the start-up market.

Other start-ups cite the role of accelerators and co-working spaces in marshalling pro bono expertise from service providers, reinforcing the importance of hubs in building market readiness and networks for early stage firms.

“We haven’t needed to engage directly with service providers because they have come to us as corporate partners of Stone & Chalk [Fintech hub]. I know that we will probably need more detailed advice at some stage, but so far the general information sessions and office hours have saved us thousands of dollars.”  

Jon Ireland

I constantly strive for technical excellence and commercial outcomes that add real value for my clients.

Jon Ireland Partner

Jon has extensive experience in corporate and financial services law, specialising in complex transactions, funds management and investment distribution. Jon also advises on regulatory issues relating to the use of technology in financial services.

Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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