At a glance
- An effective fintech strategy can’t be limited to a single tool or process.
- It requires a targeting of areas with potential for developing fintech and regtech.
- A proactive approach is also important, as well as involving all relevant stakeholders in the process.
By Zilla Efrat
CPA Australia’s February 2020 submission (PDF) to the Select Committee on Financial Technology and Regulatory Technology contained 17 recommendations that are targeted at an efficient fintech and regtech strategy for Australia.
The recommendations were partly based on research commissioned by CPA Australia, conducted by Scientia Professor Ross Buckley and Dr Anton Didenko from the Faculty of Law at the University of New South Wales (UNSW).
According to the research, the lesson to be learned from leading fintech jurisdictions is that “an efficient fintech development strategy cannot be reduced to a single tool or process; it is a comprehensive package ensuring cross-fertilisation of its parts”.
The most encouraging and crucial research findings are that Australia can substantially improve its fintech positioning in the world, according to Jonathan Ng, policy adviser at CPA Australia.
“Lessons could be learned from other fintech-leading jurisdictions such as Hong Kong, Singapore, the UK, Switzerland and the European Union,” Ng says.
“It’s also important to implement policies that target different areas that could help develop fintech. These include increasing access to capital, improving immigration and talent policies, introducing flexible and adaptable regulatory frameworks, enhancing international fintech/regtech collaboration, and maintaining a flexible tax framework.”
The UNSW study points out that “for jurisdictions that are serious about developing their fintech and regtech sectors, it is naive to set up a single initiative, such as a regulatory sandbox, expecting tangible long- term benefits to stem from it alone”.
Dr Jana Schmitz, policy research analyst at CPA Australia, emphasises the importance of a holistic and proactive approach towards promoting fintech and regtech, and involving all relevant stakeholders, including government offices and regulatory authorities.
“Individual measures – for example, regulatory sandboxes – have very limited potential without complementary tools, such as regulatory consultations, financial support and facilitating regulation,” she says.
The ASIC sandbox
Schmitz explains that the UNSW study compared the effectiveness and usefulness of the Australian Securities and Investments Commission’s (ASIC) regulatory sandbox with that of its peers in Switzerland, Hong Kong and Singapore.
ASIC’s regulatory sandbox allows eligible fintech companies to test certain products or services for up to 12 months without an Australian Financial Services (AFS) licence or credit licence.
After analysing how regulators overseas structure their regulatory sandboxes, the UNSW academics found several issues with Australia’s regulatory sandbox regime.
The first of these is its so-called fintech licensing exemption.
Admission to the Hong Kong and Singapore regulatory sandboxes, for example, is vetted and approved by the regulator. In contrast, ASIC’s fintech sandbox regime does not have a vetting process for participants.
According to Ng, this substantially reduces the scope of knowledge exchange between the participant and ASIC.
In addition, once a fintech firm has started using the exemption, ASIC has the power to terminate its access to the sandbox where, in the regulator’s view, the relevant activities “are not innovative and/or do not use technology when providing financial services or credit”.
The researchers say this means fintech firms using ASIC’s fintech licensing exemption risk having their sandbox privileges withdrawn at any time due to failure to comply with parameters, “namely, insufficient innovativeness or inadequate use of technology that are – surprisingly – not even listed among the eligibility criteria”.
What others are doing
Most regulatory sandboxes, including in Hong Kong and Singapore, follow an authorisation model, under which prospective participants are granted admission subject to regulator approval following a thorough selection process.
Switzerland, in contrast, employs what the researchers call a non-authorisation model: eligible participants are not required to gain permission to enter the sandbox or test innovative products or services. The aim, the research says, is “to facilitate innovation directly: instead of authorising specific time- limited projects, it lowers the barriers for accepting deposits from third parties”.
“More specifically, the Swiss sandbox waives the requirement to obtain a banking licence for innovators who accept public deposits up to CHF1 million (about A$1.6 million as of mid-May 2020 regardless of the number of depositors), provided that such deposits are not invested and do not bear interest, and depositors are informed of the underlying risks.”
The researchers say all the jurisdictions covered in the study have revised their initial sandbox designs, some more radically than others. For example, the Monetary Authority of Singapore has recently launched its Sandbox Express project. It shortens the approval process for entry by relying on standard disclosures and predetermined rules.
“The UK has experimented with the idea of a so-called cross-sector sandbox involving regulators outside the financial area, and we can already see regulatory sandboxes emerging wholly outside the financial sector – for example, the UK Information Commissioner’s Office sandbox established in 2019. “Against this background, it becomes clear that Australia must innovate if it hopes to remain regionally – let alone globally – competitive in the fintech and regtech space,” the researchers say.
Barriers to innovation
In its submission, CPA Australia notes that despite several funding options, funding difficulties remain a major challenge for Australian fintech start-ups, especially when it comes to seed and early stage funding.
Yet, jurisdictions such as Hong Kong and Singapore possess an abundance of government funding schemes.In Hong Kong, for example, the Innovation and Technology Venture Fund co-invests with private venture capital funds in local start- ups at a matching ratio of about 1 to 2, with a maximum aggregate government investment for each start-up of up to HK$30 million (about A$5.9 million as of mid-May 2020).
In contrast, Australia’s largest matching fund, the Accelerating Commercialisation grant, offers up to A$1 million of matched funding for Australian entrepreneurs, researchers, inventors, start-ups and small and medium-sized enterprises.
With this in mind, CPA Australia recommends in its submission that the government consider ways of expanding the scope and size of its co-investment strategies, including matching funds for seed financing and early stage ventures targeted at addressing the early stage funding gap.
CPA Australia also notes that the small number of fintech innovation labs in Australia may be detrimental to building up a critical mass of fintech activities.
In comparison, Hong Kong and Singapore have attracted several international and industry-led innovation labs.
For example, at the end of 2019, there were 36 innovation labs located in Singapore, offering a wide range of accelerator and incubator programs.
Aside from having several business-led fintech innovation labs such as Deloitte Asia Pacific Blockchain Lab and Accenture FinTech Innovation Lab, Hong Kong also has some international innovation labs, including The Floor from Israel and Nordic Innovation House from the Nordic countries.
In light of this, CPA Australia would like to see the government step up its efforts to incentivise the industry to establish fintech innovation labs in Australia, including in regional areas.
Ng says emerging fintech and regtech, such as blockchain, artificial intelligence and machine learning, could affect CPA Australia members and how they operate.
As a result, CPA Australia recommends having guidance and/or a code of conduct to facilitate more certainty in emerging technologies for its members and their business and to ensure higher compliance.
Schmitz adds that CPA Australia’s recommendations for improving the skills of the workforce through education, training and immigration could also assist members.
“Accounting firms would benefit from juniors’ skill sets that comprise ET [emerging tech] and accounting knowledge.”
She says that improving access to capital for fintech and regtech businesses, especially those businesses that are in the early stage of development, will also improve CPA Australia members’ access to emerging technology-enabled accounting and auditing services.
Schmitz is concerned that a revision of the already complex sandbox regime could be confusing for unsophisticated parties, specifically start-ups.
“Regulatory clarity, as well as consistency in the use of relevant terminology – especially in relation to the composition of Australia’s regulatory sandbox – will be appreciated by the end users. More importantly, regulators need to be very clear and upfront about the extent of their involvement in the regulatory sandbox to ensure that regulatory vision and capacity are properly aligned with the expectations of Australians interacting with firms that choose to play in the sandbox.”
CPA Australia's position
CPA Australia’s 17 recommendations to the Senate Select Committee on Financial Technology and Regulatory Technology focus on a broad range of initiatives, including:
- the government consider expanding the scope and size of its co-investment strategies such as matching funds for seed-financing and early stage ventures to address the early stage funding gap, and catch up with OECD peers in seed and early stage venture capital investment as a percentage of gross domestic product
- Australian universities be encouraged to offer cross-disciplinary fintech degree programs
- regulators develop guidance on how existing regulation (especially privacy regulations) will be applied to emerging technologies
- codes of conduct be developed and established by regulators in collaboration with major technology firms and start-ups, providing products and services that involve emerging technologies the government organise or sponsor large-scale fintech events annually, and that these include fintech-specific hackathons
- the role of the FinTech Advisory Group be expanded, and its funding be increased to allow it to undertake its own research on fintech policy, so that it can better advise
- the government the government fund research into how the combination of emerging technologies can benefit each other
- the government consider establishing a dedicated fintech team or office within Treasury to manage and liaise with the industry, international and local businesses and investors, and formulate policies to establish Australia as a leading fintech hub
- there be a policy discussion on whether the disclosure requirements imposed on firms using the fintech licensing exemption are sufficient to avoid creating the impression that ASIC has endorsed the fintech company.