The opportunity to fix fintech regulation

Jon Ireland
— 1 minute read

Fixing the issues associated with financial services regulation will be a key enabler for accelerating the growth of Australia's fintech ecosystem, writes Henry Davis York's Jon Ireland.

John Ireland

Coming to terms with the regulatory issues affecting fintech will need to be part of a broader strategy built around talent, collaboration, early-stage investment and robust financial institutions. 

However, regulatory initiatives which promote technology neutrality and accommodate innovative business structures have the potential to supercharge this growing and important segment of the economy. 

The regulatory challenge is not insignificant. From large institutions adapting to the digital environment to start-ups disrupting established business models, the fintech sector is currently facing a number of regulatory hurdles. 

In this context, the government's response to the Financial System Inquiry (FSI) sounds loud support for positive change. 

However, care will need to be taken around the timing for key initiatives and not to lose sight of the need for a holistic approach to regulation.

Opportunities for fintech 

The government's response has laid out a roadmap for the following measures which stand to benefit fintech.

First, the development of a crowd-sourced equity funding market has been re-emphasised as an urgent priority for government. 

Following on from the release earlier this year of a draft framework for how crowd-sourced equity funding would work, we can now expect draft legislation to be released for consultation before the end of 2015. 

In addition, the response has signalled an initiative to consult on crowd-sourced debt financing. 

The acceleration of this initiative is exciting. It has the potential to create significant fundraising options for start-ups and small business, together with new commercial opportunities for intermediaries equipped to support those offerings.

Second, a new, permanent Innovation Collaboration committee will be established by the government. 

The committee will provide a point of entry for start-ups who often struggle to find a way of engaging with government.

Given the length of time that has now passed since this recommendation was made by the FSI, it is hoped that the committee will be established well before the target timeframe of mid-2016.

It will also remain to be seen how the committee will link with ASIC's Digital Finance Advisory Committee.

Given that the stated purpose of the committee will be to provide timely and coordinated policy and regulatory responses, a broad remit which allows engagement across multiple regulators would be beneficial.

While ASIC has been active in engaging with fintech startups, the regulatory challenges are not confined to its jurisdiction alone.

Third, building on the work undertaken by ASIC this year on digital disclosure, the government is supporting further efforts to remove impediments to innovative product disclosure.

Given the speed at which ASIC has updated its own policy around certain areas of digital delivery and presentation of disclosure documents, it is hoped that legislation to enable products and services to be marketed digitally will be in place well before the targeted timeframe of 2017.

Finally, and arguably the broadest initiative, amendments will be made to priority areas of legislation and regulation to enable technology neutrality. 

If implemented correctly, this should work across products and services to allow the adoption of the best technology to support those offerings and enable consumers to access them across the range of digital channels. 

This is potentially a significant and critical initiative, given the complex matrix of legislation and regulation which impacts on how financial services products and services are offered. 

The mapping exercise which will be needed to identify impediments will therefore require a coordinated approach with collaboration between industry and the policy makers.

Caution around tightening regulation

Amid the positive support for new business innovation is a firm acknowledgment of the need for consumer protection.

In this regard, it is encouraging to see a broad view being taken of how regulation needs to adapt.

An instance of this is the support for a graduated regulatory regime to support innovation which involves ASIC, APRA and the RBA reviewing the framework for payments system regulation and developing clear guidance.

It is also noted that while important initiatives will be undertaken to improve access to data, these will need to be measured against privacy concerns and appropriate protections.

In addition, increased levels of threat in the digital environment have prompted support for updating the 2009 Cyber Security Strategy.

However, care will need to be taken around other regulatory initiatives put forward by the FSI to ensure that opportunities for consumers are not lost in the name of consumer protection.

In particular, the introduction of a targeted and principles-based product design and distribution obligation will require significant consultation with industry to ensure that it does not stifle innovation.

Imposing design and suitability obligations on businesses which are seeking to innovate through technology runs the risk of encouraging conservative approaches and simple replication of existing product models.

In a similar sense, as acknowledged by the government's response, ASIC's product intervention power will need to be calibrated carefully so as not to encourage unnecessary conservatism.

New technologies are revolutionising product and service offerings and will continue to do so.

The FSI key initiatives now have a general roadmap by which the institutions and start-ups responsible for delivering future digital innovations can be guided.

It will be critical to ensure that traction on these initiatives is maintained and at the same time care is taken on consultation around further tightening of regulation.

In all of this, industry and those responsible for legal and regulatory settings will need to take a holistic view and be flexible to the pace and inevitability of future change.

Jon Ireland is a partner at commercial law firm Henry Davis York.


The opportunity to fix fintech regulation
John Ireland
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