House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon Michael Sukkar)

Chapter 1 FinTech Sandbox Regulatory Licensing Exceptions

Outline of chapter

1.1 Schedule 1 to this Bill amends the Corporations Act 2001 (the 'Corporations Act') and National Consumer Credit Protection Act 2009 (the 'Credit Act') to extend the regulation-making powers to enable an exemption from obtaining an Australian Financial Services Licence (AFSL) and/or an Australian Credit Licence (ACL) under certain conditions for the purposes of testing financial and credit products and services.

Context of amendments

1.2 The Australian Securities and Investments Commission (ASIC) has provided for a regulatory sandbox framework ('ASIC regulatory sandbox') since December 2016. This lets new and innovative FinTech products and services to be tested in Australia without obtaining a licence from ASIC. The ASIC regulatory sandbox is comprised of ASIC's FinTech licensing exemptions provided under ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175 and ASIC Credit (Concept Validation Licensing Exemption) Instrument 2016/1176.

1.3 Schedule 1 to this Bill implements the Government's reform to enhance the regulatory sandbox as announced in the 2017-18 Budget. The enhanced regulatory sandbox allows more businesses to test a wider range of new financial and credit products and services without a licence from ASIC, for a longer time.

1.4 The enhanced regulatory sandbox is intended to:

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further promote Australia's FinTech capability by supporting start-ups and innovative businesses to develop, test and launch financial and credit products and services under certain conditions; and

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strike a better balance in encouraging innovation that delivers choice for consumers and minimising risks to consumers and the integrity of the financial system.

1.5 The enhanced regulatory sandbox recognises that innovation is not limited to new offerings previously unseen in the market, but may encompass improvements to specific elements of a product or service, drawing on practices from other industries, or combining elements together in new ways to deliver benefits for consumers.

1.6 The enhanced regulatory sandbox is intended to allow businesses to confirm their concept through initial market testing prior to seeking the appropriate licence from ASIC. It will let businesses test matters such as the interest of the intended consumer segment, delivery approach, clarity of marketing and communications, pricing structures or the reliability of technology. Testing in the enhanced regulatory sandbox is expected to assist businesses ascertain the requirements for licensing and reduce the burden for the business in subsequently seeking a licence from ASIC.

Summary of new law

1.7 This Schedule extends the regulation-making powers in the Corporations Act and Credit Act to allow regulations to provide conditional exemptions from the AFSL and ACL requirements for the purposes of testing financial and credit products and services.

1.8 As a result of the amendments, eligible entities can test certain services in relation to certain products without an AFSL or ACL under conditions set out in the regulations. If an entity fails to meet any of the prescribed conditions, ASIC may cancel the entity's exemption or apply to the court for an order requiring the entity to comply in a particular way.

Comparison of key features of new law and current law

Detailed explanation of new law

1.9 Schedule 1 of this Bill amends the Corporations Act and Credit Act to allow regulations provide for conditional exemptions from the AFSL and ACL requirements. These regulation-making powers provide the framework for a 'regulatory sandbox' to allow businesses to test certain financial and credit products and services without meeting the full regulatory licencing requirements if certain conditions are met.

Amendments to the Corporations Act

1.10 Section 926B of the Corporations Act currently allows for regulations to provide exemptions from the AFSL requirements. However, section 926B does not specifically allow for the exemptions to apply subject to certain conditions.

1.11 Part 1 of Schedule 1 of this Bill extends the regulation-making power in section 926B of the Corporations Act to allow regulations to provide conditional exemptions from the AFSL requirements for the purpose of testing certain financial products and services. [Schedule 1, item 2, subsection 926B(3) of the Corporations Act]

1.12 It is appropriate for the conditional exemption from the AFSL requirements to be in the regulations so that the Government can make timely changes in response to the changing market. As the market changes and develops, it is important to have the flexibility to make changes to the types of eligible products and services to ensure the exemption operates appropriately. It may also be necessary to adjust the conditions under which they can be tested to maintain an appropriate balance between facilitating innovation and providing investor protections.

1.13 Extending the regulation-making powers and prescribing the conditions in the regulations will let the regulatory sandbox evolve with the market to ensure that it stays fit for purpose, allowing for the innovation and growth of the FinTech sector over time, while providing consumer protections for investors. This flexible approach sets Australia's regulatory sandbox apart from its international equivalents. As the regulations are subject to disallowance, there will be appropriate Parliamentary scrutiny of the eligible products and services and conditions for businesses testing in the regulatory sandbox.

1.14 Entities that access a conditional exemption provided for in the regulations must comply with all the relevant conditions that are prescribed. ASIC may apply to the court to get an order requiring an entity to comply with conditions in a particular way. [Schedule 1, item 2, subsection 926B(4) of the Corporations Act]

1.15 The amendment empowers ASIC to make decisions regarding how the exemption starts and ceases to apply to a person or a class of persons. This is necessary so that ASIC can respond to minimise risks and protect consumers where unintended and undesirable behaviour from firms is identified. [Schedule 1, item 2, subsection 926B(5) of the Corporations Act]

1.16 As a result of this amendment, ASIC can respond to identified non-compliance with prescribed conditions and prevent misconduct or fraudulent behaviour in the business's provision of products or services to consumers. If a provider is not compliant with any of the conditions set out in the regulations, ASIC can stop the provider from relying on the exemption or seek an order from the court that a condition should be complied with in a particular way. ASIC could prevent a provider from starting to use the exemption in appropriate circumstances (for example, if the provider had been involved in previous misconduct or repeatedly failed to adhere to legal requirements). [Schedule 1, item 2, subsection 926B(5) of the Corporations Act]

1.17 Allowing ASIC to make decisions about how the exemption starts and ceases to apply, ASIC has the flexibility to provide arrangements to transition providers effectively from the exemption to becoming licenced. [Schedule 1, item 2, subsection 926B(5) of the Corporations Act]

1.18 As the regulations would be subject to disallowance, ASIC's powers to make decisions relating to how the exemption starts or ceases to apply to a person or class of persons will be subject to appropriate Parliamentary scrutiny.

1.19 In addition, any decisions made by ASIC are subject to review by Administrative Appeals Tribunal (AAT) under section 1317B of the Corporations Act.

Amendments to the Credit Act

1.20 Section 110 of the Credit Act currently allows for regulations to provide for an exemption from the ACL requirements. However, section 110 does not specifically allow for exemptions to apply subject to conditions.

1.21 Part 2 of Schedule 1 of this Bill extends the regulation-making power in section 110 of the Credit Act to enable regulations to provide conditional exemptions from the ACL requirements for the purpose of testing certain credit services or the issuance of certain credit contracts. [Schedule 1, items 4 and 5, subsections 110(1) and 110(2) of the Credit Act]

1.22 It is appropriate for the conditional exemption from the ACL requirements to be in the regulations so that the Government can make timely changes in response to the changing market. As the market evolves and develops, it is important to have the flexibility to make changes to the types of eligible products and services to ensure the exemption operates appropriately. It may also be necessary to adjust the conditions under which they can be tested in order to maintain an appropriate balance between facilitating innovation and providing investor protections.

1.23 Extending the regulation-making powers and prescribing the conditions in the regulations will let the regulatory sandbox evolve with the market to ensure that it stays fit for purpose, allowing for the innovation and growth of the FinTech sector over time, while providing consumer protections for investors. This flexible approach sets Australia's regulatory sandbox apart from its international equivalents. As the regulations are subject to disallowance, there will be appropriate Parliamentary scrutiny of the eligible products and services and conditions for businesses testing in the regulatory sandbox.

1.24 Entities that access a conditional exemption provided for in the regulations must comply with all the relevant conditions that are prescribed. ASIC may apply to the court to get an order requiring an entity to comply with conditions in a particular way. [Schedule 1, item 5, subsection 110(3) of the Credit Act]

1.25 The amendment empowers ASIC to make decisions regarding how the exemption starts and ceases to apply to a person or a class of persons. This is necessary so that ASIC can respond to minimise risks and protect consumers where unintended and undesirable behaviour from firms is identified. [Schedule 1, item 5, subsection 110(4) of the Credit Act]

1.26 As a result of this amendment, ASIC can respond to identified non-compliance with prescribed conditions and prevent misconduct or fraudulent behaviour in how business's provision of products or services to consumers. If ASIC finds a provider is not compliant with any of the conditions set out in the regulations, ASIC can stop the provider from relying on the exemption or seek an order from the court that a condition should be complied with in a particular way. ASIC could prevent a provider from starting to use the exemption in appropriate circumstances (for example, if the provider had been involved in previous misconduct or repeatedly failed to adhere to legal requirements). [Schedule 1, item 5, subsection 110(4) of the Credit Act]

1.27 By allowing ASIC to make decisions about how the exemption starts and ceases to apply, ASIC has the flexibility to provide arrangements to best transition providers effectively from the exemption to becoming licenced. [Schedule 1, item 5, subsection 110(4) of the Credit Act]

1.28 As the regulations would be subject to disallowance, ASIC's powers to make decisions relating to how the exemption starts or ceases to apply to a person or class of persons will be subject to appropriate Parliamentary scrutiny.

1.29 Under paragraph 327(1)(i) of the Credit Act, decisions made by ASIC are only subject to AAT review if the regulations specifically provide for this. As such, to ensure consistency across the application of the Corporations and Credit Acts to the regulatory sandbox, the Government intents that the regulations would specifically provide for AAT review for ASIC decisions relating to exemptions from the ACL requirements.

Independent review of the FinTech Sandbox Regulatory Licencing Exemption

1.30 The Minister is required to arrange for an independent review of the FinTech Sandbox Regulatory Licencing Exemption in Schedule 1 to the Bill. [Subsection 4(1) of the Bill]

1.31 The review must commence as soon as possible 12 months after regulations relating to the new licencing exemption under the Corporations Act 2001 commence. The review must be completed within six months. [Subsection 4(2) of the Bill]

1.32 The person conducting the review must provide the Minister with a written report of the review and the Minister must arrange for the report to be tabled in each house of Parliament within 15 sitting days of receiving the report. [Subsections 4(3) and (4) of the Bill]

Consequential amendments

1.33 Section 911B of the Corporations Act is amended to allow an entity that is exempt from the AFSL requirements because of the new extended regulation-making power to have authorised representatives. [Schedule 1, item 1, paragraph 911B(1)(e) of the Corporations Act]

1.34 As section 110 of the Credit Act is modified to allow the regulations to provide conditional exemptions from the ACL requirements, a number of cross references have been updated. [Schedule 1, items 3, 6 and 7, paragraph 29(4)(d), subsection 160C(2) and paragraph 160C(3)(c) of the Credit Act]

Application and transitional provisions

1.35 The amendments in Schedule 1 to this Bill apply from the day after the Bill receives Royal Assent.