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Economics Legislation Committee

TURNER, Ms Erin, Director, Campaigns and Communications, CHOICE

Committee met at 15:25

CHAIR ( Senator Hume ): I declare open this hearing of the Senate Economics Legislation Committee for an inquiry into the Treasury Laws Amendment (2018 Measures No. 2) Bill 2018. The Senate referred this inquiry to the committee on 15 February 2018 for report on 15 March, 2018. The committee has received two submissions which are available on the committee's website. This is a public hearing and a Hansard transcript of the proceedings is being made, although the committee may determine or agree to a request to have evidence heard in camera.

I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may also be made at any other time.

I ask photographers and cameramen to follow the established media guidelines and instructions of the committee secretariat. Media representatives should not harass or distract witnesses. The filming and photography of senators' and witnesses' laptops, personal papers and mobile phones is strictly prohibited. I now welcome our first representative, from CHOICE, Ms Turner. Thank you very much for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so.

Ms Turner : Firstly, thank you for the opportunity to appear on this bill. It is an issue that CHOICE has been working on for a few years now, and we really appreciate the opportunity to comment on it. I'd like to draw the committee's attention both to the legislation and the draft regulations today. Together, they form the federal government's enhanced regulatory sandbox for fin-techs.

I think the legislation itself is quite straightforward. It establishes the ability to create regulations that will allow exemptions for financial services licenses and credit licenses, and it gives ASIC some limited ability to intervene in the sandbox to either ban someone from participating or apply to a court to require compliance with regulations. The detail of the sandbox really sits in the regulations. We haven't seen a final version of the regulations, but the draft version of the regulations caused a lot of concern amongst consumer groups. Essentially, the draft regulations continue the principle established in the ASIC sandbox, one that allowed fin-techs to notify ASIC that they would be using a licensing exemption. This is different to the model used in Hong Kong, the United Kingdom and Singapore, where fin-techs apply and they're assessed to get a licensing exemption. We see this assessment as particularly crucial. In these other countries, regulators are assessing whether fin-techs are actually offering an innovative service—are they genuinely doing something new? They're assessing whether they're ready to test and, most crucially from the perspective of CHOICE, they're assessing whether the new product or service will genuinely benefit consumers—are the right consumer protections in place and is it, overall, good for the audience?

Now, none of these assessments are going to take place under the current ASIC sandbox model or the enhanced regulatory sandbox model that this legislation and associated regulations would establish. Our view is that this isn't good enough. Essentially, a business that is not innovative—it could be operating completely offline using old-world business model—and a business that is offering a product or service that is actively harmful for consumers could use the Australian sandbox. Ultimately, CHOICE believes in the power of innovation. We want the fin-tech sector to succeed. We want to see better services, better products and better pricing in the financial services sector. But the way to achieve this goal, we believe, is through sensible protections. As the committee knows from years of inquiries into the financial services sector, not every business in this space has the interests of consumers at heart. We don't want to create a situation where risky and harmful ventures can use a licensing loophole. Broadly, we just think the laws, regulations and licensing requirements that are in place today have been carefully calibrated to make sure that the scandals and the harm caused by past incidents to consumers won't happen again.

Exemptions to licensing can be appropriate, but they do need to be carefully assessed. It's why our primary recommendation is that ASIC should be required to assess fin-techs before they enter the sandbox. The assessment should be quite simple. We believe the two key requirements are: are the fin-techs wanting to test something that is genuinely innovative, and is the service or product good for consumers? we have offered an alternative in our submission if this isn't pursued, and we believe it could be pursued either by amending the legislation or pending regulations. The other alternative is more costly. You could empower ASIC to intervene if things go wrong in the sandbox. This would require both more resources and additional powers for ASIC. Obviously, we prefer this as a second-best option because, most likely, you would see harm occur before ASIC intervenes. We would rather a situation where harm is avoided. If you pursue this option, it would require, first of all, more resources for ASIC but considering more nuanced powers for ASIC.

There are going to be instances where ASIC won't need to ban a fin-tech from operating in a sandbox, but may need to issue, say, directions to modify something—for example, marketing material that targets vulnerable consumers or something like an income-protection insurance product that targets people that aren't working at the moment. Those kinds of amendments could easily be made rather than an all-in or all-out regulation. That's where we're landing. We want to see more services and we want to see fin-techs succeed, but we want to make sure that the sandbox only has players in there that are genuinely beneficial for consumers and that, ultimately, the reputation of fin-techs are protected. The last thing we want to see is an erosion of trust in the fin-tech sector like we've seen across the rest of the financial services sector.

CHAIR: Thank you, Ms Turner. Honestly, the objective of this legislation is—the existing regulatory sandbox is overly onerous and it's in need of reform to retain competitiveness. The fin-tech licensing exemption has been in place for 12 months. I'm wondering whether you can point specifically to any, for want of a better expression, bad innovations that have arisen because of those licensing exemptions?

Ms Turner : I can't, and I think that's because the sandbox is still relatively new in Australia compared to other models. What we're talking about is the potential for future harm or even just the potential for innovations that aren't beneficial for consumers. There are a lot of services out there that are claiming to be innovative that I think aren't either innovative, necessarily, or good. We've drawn a few examples in our submission. Payday lenders are now innovating in the way that they're assessing people quite quickly, sometimes in a matter of minutes, to offer a very quick, little loan—a very harmful, quick, little loan. The other example is in the superannuation space. We've seen innovative new offers which are really just selling high-cost superannuation products. The innovation seems to be in the marketing. They are targeting people quite aggressively in certain segments online and through social media. They're very good at that, but I wouldn't say that the product or service itself is good for consumers.

CHAIR: Do you think that it has to be beneficial to consumers, or can it just not be detrimental to consumers? There is a difference between the two.

Ms Turner : There is. As a consumer-advocacy organisation, beneficial would be the benchmark we would like to see be met, particularly if this is about innovation that's challenging the status quo.

CHAIR: Do you think that the legislation will introduce more entrants to the market and will give consumers more choice?

Ms Turner : I think, as it is, the legislation sets the boundaries for the regulation. What we're worried about is that the regulations will open things up, so we may see more innovative products and services but we'll also see more risky products and services. As I flagged, a company that is completely offline—perhaps a financial adviser that has left the industry or is looking to start up after being kicked out of somewhere more established—can use a licensing exemption, from our reading of this. I don't think that's the intent of this work. We think the intent of the legislation of regulation is great. It's just about making sure that loopholes can't be used to harm consumers.

CHAIR: If we've seen no demonstration of that loophole being used already, though, do you think to some extent we've got to 'build it so they will come'? My concern is that potentially you're jumping at shadows.

Ms Turner : I think given the history of the financial services sector we're not. We've seen scandal after scandal here. Our concerns are based on the practices and behaviours we've seen in the financial advice sector and the broking sector, in the credit sector more broadly. We certainly hope no harm comes, but we think it's quite likely.

CHAIR: So you think that in the balance—and obviously this legislation is trying to strike a balance between encouraging innovation, encouraging competition, protecting investors, reducing prices—you don't think that balance has been struck?

Ms Turner : That's it. There's a reason the UK, Hong Kong and Singapore have that assessment process. Essentially licensing conditions are there for a reason. They're there to help businesses comply with the broader law. We've pointed out an example in our submission around financial advice. Financial advice services operating in the sandbox would still need to meet, say, the best-interest duty and the basics of the law. But licence conditions add meat to that—for example, have adequate risk management systems; know that their staff know the law and are able to work within the constraints of the law; act in people's best interests. We think those things are really important. If someone needs an exemption, it's a pretty high bar to say that they don't want to comply with that.

CHAIR: Obviously the aim here is to reduce the regulatory burden and the cost for start-ups to encourage that innovation and encourage more entrants into the market, because licensing is a significant regulatory burden. You don't think that you're essentially cutting off your nose despite your face if we add a level of regulatory burden in an area where we are intentionally trying to remove that burden?

Ms Turner : We're all for removing regulations that don't make sense. I guess our point is that the licensing conditions have been well thought through, carefully calibrated in a lot of cases, and are there to protect people. If businesses do want an exemption for a short period to test something then they should be assessed, just to make sure that they're, first of all, innovative and, second of all, good for consumers.

Senator KETTER: Is there anything else in relation to the risk to consumers from these changes that you want to say, other than what you've already covered?

Ms Turner : There's a small point to note that perhaps hasn't come up through the submissions, which is that there are consumer protections proposed in the regulations, notably that fin-techs in the sandbox would have to be a member of an EDR scheme, and they'd have to hold professional indemnity insurance. That second protection we would consider inadequate. There have been a number of cases where basically indemnity insurance doesn't cover instances where consumers are harmed. This is really well demonstrated by unpaid determinations held within ombudsman schemes. I think I have the numbers from 2016, although they may have been updated since then. FOS currently has 137 unpaid determinations. With interest and adjustments for inflation, that's $16.63 million owed to consumers where a business has gone bust and people have been harmed. And I know this has been well explored by the committee in other inquiries. Now, 56 per cent of these determinations relate to financial planning and advice. I think it's quite likely that we'd see fin-techs providing advice potentially go bust. Professional indemnity insurance doesn't cover every instance of loss. It's not designed to. It particularly doesn't cover instances of fraud. We think it's quite likely that if the sandbox proceeds in its current form then these unpaid determinations could increase.

Senator KETTER: And the amendments that you suggest address that particular issue, in your view?

Ms Turner : We believe it would largely. Ultimately the best way to address this issue is for a last-resort compensation scheme.

Senator KETTER: You've made recommendations as to how the bill should be amended, so I won't ask you to—that's fairly well set out. Now, if the sandbox had an entry requirement that the product being tested was innovative and provided a consumer benefit, do you think this would prevent start-ups from using the sandbox?

Ms Turner : Possibly some start-ups, but I'd argue that it would be the right kind of prevention, not the wrong kind.

Senator KETTER: Is it a requirement for a product to be innovative and have a benefit to consumers in other jurisdictions?

Ms Turner : Yes—the United Kingdom, Hong Kong and Singapore, the other areas where we see established sandboxes.

Senator KETTER: Are you aware of whether that requirement in those other jurisdictions has impeded entrance to the sandbox?

Ms Turner : We have seen more fin-techs use sandboxes in the United Kingdom, Singapore, and Hong Kong, but I couldn't say whether that's because it's a more established regulatory system—whether it's a more established fin-tech sector in those spaces. There could be a number of factors feeding into that.

Senator KETTER: I understand that in other jurisdictions it's quite common for a review to take place after 12 months. Is a review to be conducted in relation to the Australian trial?

Ms Turner : Not that I'm aware, although ASIC may be able to provide more information there.

CHAIR: Thank you for appearing before the committee. That was much quicker than we anticipated—we're getting good at this now! Obviously practice makes perfect.