Balancing regulation with fintech innovation

Jack Zhang
— 1 minute read

Regulation is key to the success of the Australian financial services sector, but allowing for new companies to innovate and change the way these services are provided is vital to the future of the sector, writes Airwallex’s Jack Zhang.

ASIC, fintech regulation, Airwallex, Jack Zhang, fintech law, innovation, financial services,

The recent news that the Australian Securities and Investments Commission (ASIC) is broadening the scope of the regulatory ‘sandbox’ for fintechs has been welcomed by many in the industry, myself included.

The regulatory sandbox provides a safe space for up-and-coming fintechs to roll up their sleeves and pilot their products and services with up to 100 customers per year.

Instead of having to go through a lengthy and expensive licensing process, the sandbox enables fintechs that provide certain products, such as payments backed by banks, digital currency wallets and home contents insurance, to test their offering before embarking on the lengthy compliance and licencing process.

The sandbox concept is gaining traction in fintech hubs around the world as each region competes to attract innovative companies by providing the most fintech friendly environment. The UK Financial Conduct Authority launched its sandbox pilot with 24 startups in mid-2016.

The Monetary Authority of Singapore opened its FinTech Regulatory Sandbox for applications in November last year, while the Hong Kong Monetary Authority launched its Fintech Supervisory Sandbox in September.

Having grown Airwallex from concept through to an operating start-up across three jurisdictions in 2016, I’ve experienced first-hand the barriers the licensing process presents, especially during the early stages of a fintech’s existence.

The amount of expertise and resources that need to be dedicated to meeting the appropriate regulatory hurdles in Australia can be almost insurmountable for many young financial services businesses.

But should fintechs be able to jump the queue when it comes to compliance and financial services regulation? I don’t think so.

The fact is, strict compliance requirements are critical to protecting the community and Australia’s global reputation in finance.

Regulation is a necessary evil and the quicker fintechs embrace regulation the better.

For Aussie fintechs, there’s often two key areas of compliance to grapple with before you can operate legally.

First you need an Australian financial services (AFS) licence to conduct a financial services business in Australia. Secondly, you must comply with the Australian Transaction Reports and Analysis Centre (AUSTRAC) anti-money laundering and counter terrorism financing (AML/CTF) regime.

The challenges of achieving an AFS licence through the financial services regulator, the Australian Securities and Investments Commission (ASIC), are well documented.

For established players in the finance industry who are expanding their product offering, jumping through regulatory hoops is unlikely to impact too heavily on their bottom line, but for a fintech startup looking to get their product to market and start generating revenue, the money, manpower and time required to achieve the required licensing process can be debilitating.

Regulation is important, but so is innovation. That’s why we need to strike the right balance between encouraging and supporting innovation in the finance sector, while ensuring fintechs operate responsibly and are vigilant in mitigating the potential money laundering and terrorism financing risks posed by new products and services.

In the end, it’s the customer’s money, and fintechs need the appropriate safeguards in place to protect their customers or risk quickly eroding trust and damaging their own brand and reputation.

That’s why I believe the broadening of the regulatory sandbox is great news for the fintech sector.

Growing fintechs now have a safe testing ground for their new products – which are often their entire business.

Rather than see innovations hit a regulatory roadblock before they even get to the market, the sandbox enables them to manage risk during the testing phase, which can reduce the costs associated with license applications and enable businesses to get their products to market quicker.

While there are some consumer rights advocates who have expressed concern that consumers will bear the brunt of services arising from the regulatory sandbox, it’s important to remember that loosening regulations is not equal to bypassing them.

Any companies using the sandbox will still need to meet ASIC’s conduct and disclosure rules, and will need adequate compensation arrangements in place to prevent the risk passing to the customer.

It is through opportunities such as the sandbox that fintechs will be able to develop and hone products and services that best meet customer expectations.

Overall it’s a step which minimises the barriers to entry for small businesses and encourages collaboration, innovation and growth – a clear sign that ASIC is stepping up to their responsibility to maintain the security and credibility of Australia’s finance sector.

However, it is just one initiative that demonstrates the Australian government is acting upon its promises to prioritise the fintech industry, which is estimated to be worth around $4.2 billion by 2020.

The government has also legislated to enable eligible businesses to access crowd-sourced equity funding, pave the way for comprehensive credit reporting to help facilitate peer-to-peer lending, and addressing the issue of double taxation when it comes to the use of digital currencies.

Making it easier and less financially risky for the fintech sector to develop innovative new products is undoubtedly a move in the right direction.

We’re looking forward to more action that can streamline, but not bypass, red tape in 2017, to further support the growing crop of Australian fintechs competing on a global stage.

Jack Zhang is the chief executive officer of Airwallex.



Balancing regulation with fintech innovation
ASIC, fintech regulation, Airwallex, Jack Zhang, fintech law, innovation, financial services,
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