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Economics Legislation Committee
06/03/2018

STOYAN, Mr Stuart, Chair, FinTech Australia

[15:40]

CHAIR: Welcome. Would you like to make an opening statement?

Mr Stoyan : Firstly, thank you for the opportunity to be able to address the committee. This is an issue that is clearly very important to the fin-tech industry as it represents the very first stage of fin-techs into operation, and clearly this is an important issue not just for fin-techs but for all stakeholders. FinTech Australia represents the fin-tech industry, and we began as an association in February 2016. We have a little over 220 members currently. Our aim is to make Australia one of the world's leading markets for fin-tech innovation, and we seek to achieve the same by collaborating with stakeholders to create the best possible regulatory environment and by fostering an ecosystem of supportive partners and networks so that fin-tech companies can thrive and grow in Australia.

With over 600 fin-techs in Australia—and that was recently identified by a KPMG report last year—who have generated and currently have over 10,000 fin-tech related jobs, we're making some good progress, but we recognise that we still have a way to go. Australian consumers are also embracing fin-tech, and the EY FinTech Adoption Index ranked Australia as fifth globally, with 37 per cent of digitally active consumers in Australia participating and engaging with fin-tech. So, there has been some good progress.

There's broad consensus that our industry is critical to creating a more competitive financial services environment in Australia as well. If you look at the Productivity Commission report looking at competition, there were specific call-outs and mentions of Australia's fin-tech industry, specifically stating that although a very small part of the system, fin-techs represent a movement that could fundamentally change the nature of competition in the banking system. Insightful use of data may allow for new challenger banks, enhanced customer experience and efficiency enhancements through the commoditisation of banking products in new financial services. Therefore, Australia's fin-tech regulatory sandbox should be a key plank of underpinning fin-tech innovation by allowing small and new fin-tech firms with new ideas to test these ideas with the oversight of regulators.

Fin-tech is different to other types of technology, and that's largely because of the regulations required of financial services. This is not to say that fin-techs don't need to comply with the relevant regulation. Rather, it's to say that it presents a very high regulatory barrier to entry, and this actually stifles innovation and means that a company is unable to prove up its technology and business model and therefore raise capital for investors. So, as opposed to being able to run a business stand alone and demonstrate that the business works, you need to first comply with the regulatory burden.

A sandbox will alleviate this, because it will enable that start-up in a sort of low-fi way to be able to operate within the sandbox and demonstrate—prove up its tech, prove up its business model and, importantly, demonstrate to investors—that it has a viable business opportunity.

In 2017 the EY FinTech Australia Census identified that 78 per cent of fin-techs believed that an expanded and more flexible regulatory sandbox environment is required. This is consistently being seen as a key inhibitor of growth for Australia's fin-tech industry. Two other key policy reform areas include making the research and development tax incentive more accessible to start-ups, and that was 87 per cent of respondents, and open data, which is 85 per cent. The Farrell review handed up around open banking has some great steps towards helping address that policy concern.

This is also a personal issue for me and for MoneyPlace, my company. So MoneyPlace is a personal loan provider through a marketplace lending model. We spent the better part of 18 months gaining regulatory approval—this was pre-sandbox from ASIC. During this time we spent a considerable amount of resources—initial investments and investments that founders contributed themselves—as well as time, energy and efforts in getting licensing. That could've been better spent refining our technology, our business model, and also providing a fairer, better personal loan to our borrowers.

Since launch, we've on average saved borrowers $5,400 on a personal loan versus the equivalent personal loan from one of the major banks. If the regulatory sandbox existed at that time, we would've been able to provide that benefit to more Australians sooner—and we were one of the first lenders of our type to enter the market. MoneyPlace is not alone in this experience. Other fin-techs, such as Clover and RateSetter, as two examples that have spoken about this, have experienced significant delays in gaining regulatory approval. Many other fin-techs avoid this issue altogether by, effectively, renting a licence, and this often leads to suboptimal outcomes for all parties, where they're sitting on the back end of somebody else's licence.

Fin-tech sandboxes are increasingly being used by regulators around the world, particularly in Singapore, Hong Kong and the UK, as the previous speaker noted, to drive fin-tech industry growth and attract investment. Our fin-tech sandbox needs to represent world's best practice when it comes to fin-tech-friendly regulation. As originally introduced by ASIC in December 2016, the sandbox included a class waiver to allow eligible fin-tech businesses the near-automatic right to test certain services for up to 12 months without an Australian financial services or credit licence. The class waiver sat alongside other tools in the sandbox, particularly the ability of ASIC to give fin-techs and other financial services companies relief from certain licensing conditions on a case-by-case basis. However, I think it's fair to say that, from a FinTech Australia perspective, the sandbox outcome to date has been disappointing. We understand that just four fin-techs have relied on the exemption to date, and we argue that it's the construct of the original sandbox that was excessively rigid in its approach. The earlier question to the prior speaker gets to some of the outcomes for the sandbox to date and why there has been a lack of outcomes in the challenges. It's not necessarily that the sandbox in Australia is more or less competitive compared to our international peers; it's just that it's been ineffective. This is why we've been seeking an expanded sandbox and also a flexible environment where ASIC and fin-techs can discuss an appropriate testing mechanism based on the innovative new product that the fin-tech is able to bring to the table.

We believe the legislation is a step towards providing this new, more flexible environment and, at the same time, introduces new safeguards to help protect consumers which don't exist in the current sandbox. However, our view is that the regulation exhibited by the government last year was still prescriptive and, in some areas, quite restrictive. There are a few areas here—and I'm happy, in the interests of time, to come back and reference those later on, if that's helpful.

CHAIR: That would be a good idea, yes.

Mr Stoyan : The Productivity Commission has recently said the sandbox is extremely restrictive, and suggested it should be expanded to fin-techs that take household deposits and issue financial products. Specifically it said, 'It could further encourage innovative new entrants into the retail banking system as well as the provision of other financial services'.

We've undertaken extensive consultation with ASIC, Treasury, relevant consumer groups and stakeholders about how we can further strengthen protections for consumers alongside an expanded sandbox. This included working with Treasury and ASIC to find ways to ensure that only genuinely innovative new businesses can enter the sandbox under regulations and ensuring the safety and integrity of the sandbox is maintained. We understand that these considerations have been taken forward by Treasury and ASIC, and are being contemplated now in the execution and delivery of the regulations. However, this has been a key concern that we share with consumer groups and, based on our discussions with Treasury in recent weeks, we think this is being considered. The key, however, to a successful sandbox is going to be ensuring that ASIC is appropriately funded and resourced, and we'd urge the committee to consider the impact upon ASIC when contemplating the proposal.

In conclusion, FinTech Australia has been working, and will continue to work, with our policymakers to ensure our regulatory sandbox is the best in the world while, at the same time, ensuring ongoing, robust protections for retail and wholesale customers, and investors. We would urge this committee to support the bill.

CHAIR: Thank you, Mr Stoyan. I'm interested to know why this should be so complicated, considering that we already have—I don't want to say best practice, but we already have international examples going on in, as you said, Singapore, Hong Kong and the UK. Why do you think that this is so difficult to replicate in Australia?

Mr Stoyan : I think that's an excellent question. I think it largely gets to the way that the initial sandbox—sandbox 1.0, if we can refer to it as such—was ineffective in terms of the constraints that were placed across it. Limiting the operation and the oversight that ASIC would have on the sandbox meant that it was very prescriptive, and a number of exclusions were put in place which meant it was just ineffective. Therefore, most fin-techs in the fin-tech community hadn't really contemplated seriously using the sandbox. So while we talk about it being best practice, I think that we're still a way away from it being best practice.

CHAIR: There are 200 fin-techs under the umbrella of your organisation and 600 nationally, I think you said, yet only four have used the sandbox in the last 12 months. Do you have a sense of how many would use the sandbox should this legislation be passed?

Mr Stoyan : That's a hard number to quantify because it also gets to a growing innovative industry. When FinTech Australia launched two years ago, we had 50 members; we now have 220 members. When we look at the growth in the industry and the sector, there are 600 fin-techs now. A couple of years ago when that survey was repeated, there were 150 fin-techs. So we're seeing tremendous growth in the space. What we do understand, though, is that gaining regulatory approval, typically for an ACL or an AFSL, is an incredibly cumbersome and burdensome part of the launch of a fin-tech and the launch of a start-up, and it's a diversion of very limited scarce resources towards what should be pretty easy to be able to deal with. We believe that new fin-techs that are coming with innovative ideas that are working in and around specific areas would be able to use the sandbox as a precursor or alongside their application process. I touched on this in the opening address. What's really important here is demonstrating that both the technology and the business model work, and you can't do that unless you're fully licensed. For MoneyPlace, we existed as a team for almost two years before we actually wrote a loan because we needed a team in place because we had no idea when we were going to get our licence. We expected it to be close to six to nine months and not the 18-odd months that we were going to have. What that means as a consequence was that, with the sandbox in place, you are actually able to get to market quicker. You are able to demonstrate the value that you were delivering to end customers, whether they be consumers or small businesses or investors, and meanwhile give ASIC comfort around the operations of your business, so that you're able to then obtain a full AFSL or whatever the licensing requirement is.

CHAIR: Given the testing period is only 12 months, do you really think that the concerns of the previous witness from CHOICE are valid? She is concerned that there may be detriment to the consumer and that that should be part of the test of whether you should be allowed into the sandbox. In 12 months, surely, this would become apparent and you wouldn't get the end licensing?

Mr Stoyan : I'm glad you brought that up, because I think that's a key fundamental disagreement in terms of the previous representation. The belief that companies, fin-techs or otherwise, will use the sandbox as an opportunity to gouge and take advantage of consumers is a fairly limited view, because the types of companies that are going to participate in the sandbox actually want a licence. If I'm a bad actor and I'm engaging in very poor behaviour, ASIC is going to be aware of that, even if they're aware of it after the fact, which is not ideal because there has been some consumer loss, but, even if they're aware of it after the fact, I'm unlikely to get my full AFSL. I'm unlikely to have investors back my business because of the bad actor that I have been in the first 12 months. To believe that there are going to be companies that are willing to invest significant time and effort to use a loophole around a sandbox to be able to take advantage for minimal economic gain in a very short defined period of time I think is also misguided. I believe that the representations of the previous presenter were potentially overstated or maybe misunderstood in terms of the likely detriment that will occur.

CHAIR: Obviously, the objective of this legislation is to reduce the regulatory burden and increase competition in the sector, reduce prices over time and overall. Do you think that this particular piece of legislation that is in front of us today is, if not the panacea, then certainly a good step in the right direction?

Mr Stoyan : Definitely, and I would build upon the legislation and then incorporate in that the discussions that Treasury has been having with ASIC, with us, with the consumer advocate groups and with other stakeholders to see how that builds upon not just the legislation but the contemplated regulations around this to enable a very workable sandbox and a very workable solution that will bring innovative ideas that will enable consumers to have significant savings, as well as small businesses and other consumers of financial services products, not just retail but wholesale and institutional as well.

Senator KETTER: Thank you for your opening statement. I note that you say that you're working with Treasury and ASIC to find ways to ensure only genuinely innovative new businesses can enter the sandbox under the regulations, which is one of the key recommendations from Choice. The other element of it is that there should be consumer outcomes that are beneficial. I take it you don't really have any major problem with those two requirements that Choice has asked for in terms of an assessment that those are the two features of any fin-tech going into the sandbox.

Mr Stoyan : More involvement from ASIC is definitely required. To blindly regulate on this and assume that things will happen, I think, is potentially misguided from ASIC and probably where the failure of the first sandbox has happened. Having an official review or a screen is definitely something that we would be supportive of to ensure that only appropriate companies or businesses were able to enter the sandbox, but some ongoing oversight of the sandbox is also important. We see that that can happen directly and overtly through specific oversight that ASIC would have of the sandbox, but it could also happen indirectly in that there will be an ongoing licence application happening in the background, and ASIC should have oversight of the operations there.

To the question that was asked earlier as to whether or not this needs to be beneficial or not detrimental, we'd argue not detrimental is a good outcome, and how you define beneficial also goes to that. It may be that it's a similar economic outcome for a consumer but just delivered in a much more user-friendly, favourable, time efficient manner, which will create benefits in other manners.

Senator KETTER: In the dot points you set out on page 4 of your submission, you say that this is where the current regime is quite restrictive. What are the recommendations that you've made in order to improve the operation of the sandbox?

Mr Stoyan : The concerns that we've had and the discussions that we've had with Treasury around this get more to some of the specific elements of the proposed regulation but also how they join together and work. For example, if we take the second bullet point, around a $10,000 limit for investment products and a $40,000 limit for superannuation, it's not clear what a $40,000 limit of superannuation is. Is that contributions? If it's contributions, that's workable. If that is a superannuation balance, that creates challenges because the average superannuation balance exceeds $40,000. We'd go even further on that and suggest that, if a consumer wants to use a fin-tech that is in the sandbox for their superannuation and they hit the $25,000 concessional superannuation contribution cap, over two years they're going to contribute $50,000, in theory. So we would suggest increasing that limit to $50,000 to accommodate that. Otherwise, you have a poor customer outcome where, at, say, month 20 in the process, Stuart hits $40,000 and the fin-tech then needs to say, 'Actually, because we can only take $40,000, we need you to step off our platform until we're fully licensed.

Some of the other areas include that the retail client limit of 100 won't be adequate for certain types of companies that have low-value, high-transaction volume products and business models. That would suggest that either a flexible cap that applies to different models or maybe just a larger cap that can then be applied at ASIC's discretion would be more appropriate.

On the insurance, the $85,000 sum insured cap also is not necessarily workable. We'd rather have caps around gross written premium, given that that effectively excludes home contents, home and buildings, and most commercial and travel insurance.

The last point is around agents acting for duly authorised product providers being excluded from the proposed expanded sandbox. We think this would limit the majority of Australian insuretech businesses from entering the sandbox, given they're effectively looking to act as agents in those circumstances.

Senator KETTER: Are those all the recommendations you've made?

Mr Stoyan : They are the key recommendations. We've also provided some additional recommendations directly through Treasury, but these get to some of the key recommendations in terms of where we see some limitations in the proposals as they stand.

Senator KETTER: Do you think the new arrangements will encourage more fin-tech firms to enter the sandbox?

Mr Stoyan : Definitely. We believe that the new regulations and legislation proposed, with a rider assuming the ongoing discussions we've had with Treasury over the last couple of months have come into effect, will not only encourage greater participation but lead to better outcomes, because you see more fin-techs wanting to innovate in the sandbox. We're a strong proponent of the belief that it's much better to do this in the sandbox than outside the sandbox, because that potentially leaves the opportunity for businesses to conduct themselves in an entirely unregulated way.

Senator KETTER: Has there been a 12-month review of the sandbox?

Mr Stoyan : No, there hasn't, and I think this has, effectively, taken over the 12-month review, arguably for the low participation—and ASIC may be able to address this in their participation. Given the low participation, a review of four participants probably wouldn't take a significant amount of time or effort.

Senator KETTER: In looking at what the arrangements are in other jurisdictions around the world, what do you think it is that makes best practice?

Mr Stoyan : What makes best practice is a recognition that innovation is hard to define and is not something that can be dealt with via a series of tick boxes. Where we've seen success overseas is where there is flexibility in terms of the oversight of the overall program or sandbox that has then enabled innovation to evolve but also the way the sandbox operates to evolve in and around that. If you apply a prescriptive approach to deal with unknown unknowns, you therefore limit information. If you're able to have a more enabled, resourced and active ASIC that is able to then have oversight of this, they should be able to deal with a number of these matters on the way through.

Senator KETTER: What's also a feature of the other jurisdictions which I think facilitates this flexibility of oversight is an assessment at the outset by the regulator as to genuine innovation or consumer benefits.

Mr Stoyan : Definitely. In terms of the way in, we'd definitely agree with that as well.

Senator KETTER: You wouldn't have a problem with that arrangement.

Mr Stoyan : No, as long as the definition of 'innovation' is objective and it's not something that enables a panellist or whatever it may be that ends up making this type of assessment to sit there and say: 'Oh, would I value this product? Do I value this product, yes or no?' It needs to be an objective definition of whether or not this is innovative.

CHAIR: Do you not think that an objective definition of 'consumer benefit' is also important? Do you think a prevention of a consumer detriment would be a better definition than a consumer benefit? That too is very subjective.

Mr Stoyan : Most certainly. We would definitely agree that avoiding consumer detriment is a much better lens with which to view this than to say there must be a consumer benefit. If we then get into the definition of what a benefit is, we must deal with that, but then there's also the quantum of benefit and whether or not that's a material benefit. It also allows for the start-up itself. Version 1 may get to market and meet some needs, but, as that start-up then understands what those consumer needs are, it will then be able to improve upon that. It's through the sandbox that we should get a better outcome for the customer.

Senator KETTER: To boil it all down: under the current arrangements we have a system that's easy to get into—the sandbox—but then there are a lot of restrictions around what you can actually do and the range of products that you can develop once you're in the sandbox. That seems to be the issue. Is that right?

Mr Stoyan : I'd say the issue with the sandbox today is that it's easy to get into for a very limited number of closely defined fin-techs that can operate under certain circumstances. We would recommend a broadening of that definition and an opening of the doors to enable more companies to participate in the sandbox but with very clear oversight of those companies and their operations while they're in the sandbox.

Senator KETTER: This might be a hard question for you to answer, but of the 600 or so, I think, fin-tech companies, how many would you say are eligible to go into the sandbox?

Mr Stoyan : We can come back and provide a more specific answer on that. But I would say that of the 600 fin-tech companies that are operating they would have already determined a way to be able to operate and provide a financial services product or service under the existing regime. What I would be looking at would be more new entrants who would then be contemplating that. The question then would be: of those 600 companies, how many of them experienced delays in getting a licence when they could have entered the sandbox?

We know from our fin-tech census that the average time to get a licence has been circa nine to 10 months for fin-techs that have required a licence. That's different, depending upon what type of licence, and it's an overall average, but that's a significant amount of time for a company that, essentially, is a couple of founders who have come together. They're not taking a salary and they've put their life savings into a business. It's a very big ask of our innovators, to say, 'Are you willing to put everything on hold for a potential licence outcome that could take the better part of the year?' MoneyPlace is an example and a couple of the companies we spoke about before. In our experience it was 18 months, not nine or 10 months. So, obviously, that's an average.

Senator KETTER: The consumer groups believe that the products being developed in the sandbox are not entirely innovative. They argue that overseas arrangements that actually test whether the product is innovative should be used in Australia. From what I gather, you wouldn't have a problem with that, provided it were an objective test?

Mr Stoyan : Yes.

Senator KETTER: You don't think that type of process would deter a fin-tech from using the sandbox?

Mr Stoyan : I don't think so. We believe that the question around innovation should get to it being really clear that there is an innovative business that's using the sandbox. Where I would deepen and broaden that definition, based on the observations of the previous speaker, is that what we're talking about here are innovative business models. So to use the example that was cited, a payday lender using the internet or the payday lender using a decision system that quickens the decision-making process is not necessarily innovative. What we're talking about here are innovative business models or innovative approaches to existing business models that actually create some sort of beneficial outcome. Either it's efficiency or an end-customer benefit—things like that.

To look at the example of the potential for a payday lender to come in and unscrupulously provide payday loans within the sandbox in an unregulated manner: firstly, that won't be able to happen because we've got a $2,000 minimum floor for the product. That excludes these small-amount credit contracts. Secondly, if you have that sort of innovative lens you would want to see that there is some objective definition around what innovation is. I'd like to think that the objective of innovation would go beyond more than just that you're online or you're using the internet.

CHAIR: Thank you, Mr Stoyan, that was very interesting. We'll let you go.

Mr Stoyan : You're very welcome.

CHAIR: And good luck with MoneyPlace.

Mr Stoyan : Thank you very much.