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Economics Legislation Committee

ADAMS, Mr Mark, Senior Executive Leader, Australian Securities and Investment Commission

PRICE, Mr John, Commissioner, Australian Securities and Investment Commission


CHAIR: I now welcome officials from the Australian Securities and Investment Commission. Hello, Mr Adams and Mr Price—long time no see!

I remind officials that the Senate has resolved that an officer of a department of the Commonwealth or of a state or territory shall not be asked to give opinions on matters of policy, and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted.

Thank you both for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so.

Mr Price : Thank you for the opportunity to appear before this committee today. We welcome questions by the committee about our experience with our regulatory sandbox which may be relevant to your inquiry. At the outset, I think we should highlight that as a regulator that we do see enormous potential opportunities presented by fin-technology.

Our view is that fin-tech has the potential to do a number of things. Firstly, fin-tech can empower customers to deal directly, more seamlessly and more flexibly with product and service providers. Secondly, fin-tech can empower businesses to deliver a better value proposition and customer experience to their customer base. Finally, technology can reduce the cost and improve the efficiency of product and service delivery.

The promise of fin-tech to increase choice and reduce costs, to the benefit of consumers, is a key reason we are looking to facilitate this part of the financial sector. But we are also quite mindful of risks that can flow from these new technologies. Our overarching aim is to maintain sensible and appropriate frameworks that harvest the benefits of innovation while fostering consumer trust and confidence in financial services.

When it comes to regulating fin-tech, we are faced with the constant challenge of striking a balance between our commitment to encouraging innovation and all the opportunities created by fin-tech, without compromising on the proper regulation of financial products and services. One specific example of how ASIC has tried to balance our objectives is through ASIC's regulatory sandbox. The sandbox, launched in December 2016, provides a lighter touch regulatory environment, to allow fin-tech businesses additional flexibility when they are still at the stage of testing their ideas. Our world-first class waiver allows eligible fin-tech start-ups to test certain services for up to 12 months without a financial services or credit licence. In developing this, we've taken a whitelist approach. That means that there is no ASIC review of each proposed product or service and we are not involved in selecting applicants and negotiating individual testing terms for people who use the class waiver. Nor is there active monitoring and supervision of them throughout the trial.

I should highlight for the committee that this approach is in addition to the regulatory sandbox approach that's used in other jurisdictions, where customised or individual dispensations can be available to particular applicants. I also want to highlight for the committee that the customers of fin-tech businesses using ASIC's class waiver still have fundamental protections under the law, such as dispute resolution and professional indemnity insurance. As an added protection to consumers, ASIC's sandbox limits the types of services, the time period and the number of consumers and the amounts able to be invested by sandbox businesses through our class waiver. To go beyond those limitations, we encourage fin-tech businesses to approach us on a case-by-case basis, where we are always happy to consider individual dispensations.

The ASIC class waiver, of course, is just one of a number of areas where the Australian regulatory regime is already very flexible and helps make Australia a very desirable destination to establish these new, fast-growing businesses. The bill being considered by this committee is another step on that journey. We now welcome the questions of this committee about our experience with our regulatory sandbox that may be relevant to your inquiry or indeed any other issues you may wish to raise.

CHAIR: Thank you, Mr Price. I want to ask first of all what you know of the overseas regulators' experiences in this space.

Mr Price : We know quite a deal. Mr Adams, who I'll pass to in a second, catches up with major regulators throughout the world on a quarterly or periodic basis at least, to understand what they're doing. By 'major jurisdictions', I'm talking about the US, the UK, Singapore, parts of Europe—a whole range of jurisdictions. Mr Adams, do you want to elaborate on that?

Mr Adams : I will add a few things. No one regime is the same, as you can imagine, and so often an issue is powers. Depending on the regulatory regime, most of them do not have the powers that ASIC has to do that class waiver. That is a major factor. In Britain, for instance, that requires them to engage on an individual basis. It is similar in Singapore. That is one major factor.

The second aspect is their remit and objectives. The Financial Conduct Authority has a range of objectives which include competition, whilst a variety of other regulators don't. They are some of the fundamentals. Within Europe as well there are limited opportunities to apply a sandbox, because European law applies across all the jurisdictions, so many of the regulators there have taken a view that they don't have the ability to do anything flexibly, depending on their jurisdiction. Jurisdictions in USA make use of no-action positions if they can, so the Consumer Financial Protection Bureau has designed a policy—because they don't otherwise have powers—around no action. Factually, out of those jurisdictions, UK is the one that gets a lot of attention. Through their cohort process they've given individual licensing—because they don't have the ability to grant those exemptions—for over 50 entities where over about 100 have been rejected through their processes. Most of the other jurisdictions, as far as I'm aware, are still in small numbers. That includes Singapore, Hong Kong, Ontario, where the numbers are still 10 or fewer, depending on their engagement on an individual basis. That's a quick snapshot. I'm happy to take more questions on that.

CHAIR: So four have participated in the sandbox since its inception. That sounds like an extraordinarily low number, but you are saying that in fact it's not unusual by world standards?

Mr Price : Yes. I think it's important to understand these figures in context. There are five entities that have relied on ASIC's regulatory sandbox to date, but the regulatory regime in Australia is relatively flexible, so we have a range of ways to provide exemptions from the law. We have a separate series of exemptions, for example, that apply to what we call non-cash payment facilities, which are in essence stored value cards. In Australia you have quite a development of an industry around stored value cards where, because of the existing exemptions in place, there is really no need to come through ASIC's sandbox. Another example is around marketplace lenders, peer-to-peer lenders. While the majority of those in Australia already have a licence, we provided dispensations to make it possible for them to do their business. I suppose the basic point I'm trying to make is that the regulatory sandbox is certainly important for testing ideas, but there is quite a deal of flexibility in the Australian regulatory environment as a whole, and we try and make use of all our tools to make sure we are using the best tool to facilitate these new business models.

CHAIR: Because of the nature of this industry, it must be very fast moving, and I assume you find there is a need of flexibility in approach to whatever it is you are using, whether it be a sandbox or other licensing regimes, for this particular space. How have you seen the progression in those overseas agencies? Have they made significant changes to their approaches as well?

Mr Price : I think it's fair to say that regulators around the world are doing the best they can to stay up to date with what is a very fast paced industry. Here in Australia we try and stay close to what those developments are, and to that end ASIC set up an innovation hub, which includes an advisory council or advisory committee, our Digital Finance Advisory Committee, to stay on top of developments in the industry. The other important difference that my colleague alluded to between Australia and other jurisdictions is that we have quite wide powers at ASIC—not unlimited powers, but quite wide powers—to provide exemptions from the law or change the way the law operates in particular circumstances. Those powers don't just apply to fin-techs; they apply to all business in Australia. And they're not recent powers. I have worked at the regulator since the late 1990s, and those powers have always existed during the time I have been at ASIC. So we have quite well-established frameworks about how to think about requests to provide dispensations from the law. Essentially we go through a cost-benefit analysis. We look at the commercial benefit of granting a particular request and we weigh that against the regulatory detriment that might otherwise flow from us doing so. So those processes are in place and they are very important.

Mr Adams : The only thing I would add on the international aspect is that there are regulators who have to reach a view as to whether they have a remit to engage more fully with the fin-tech sector. Some choose not to. But, of those that do, basically, they start with a process of establishing networks. Then one of the questions they ask themselves is about the degree to which they are prepared to provide informal assistance, and that's one of the things that ASIC does. We have now met with over 220 entities in providing informal assistance to fin-tech entities since we established the hub in 2015. A number of regulators do that to varying degrees. Then the question is about the degree that you design dispensation, which can occur either via individual relief or class waiver relief, like ourselves, or through processes for individual licensing or individual relief in other jurisdictions. So they tend to have that sort of spectrum of activity. Some do less, but it's in that spectrum.

CHAIR: Have you found that because this is such a competitive field now, both internationally and also domestically, the expansive powers of ASIC have allowed the industry to grow significantly or attracted new entrants already. I know that the objective of this legislation is, obviously, to increase competition and to decrease regulation for fin-techs, but do you think that there is a correlation between expansive powers that you have and the number of entries that we're seeing in Australia at the moment?

Mr Price : I think the more important thing that's been helpful in establishing Australia as a fin-tech destination is our Innovation Hub. That provides access to senior level people at ASIC, including at my level and at Mark's level, to discuss business models and roadblocks. It involves close monitoring of our regulatory activities that apply to fin-tech businesses. It involves creating task forces and tailored guidance on particular areas of interest, such as blockchain, cryptocurrencies, digital advice or marketplace lending. It involves getting a digital finance advisory committee together so we can make sure that we're using our finite resources in the most effective way. The sandbox is part of that overall package, but, to me, it's the actual Innovation Hub itself and all the various things that we've done that I think has really made a difference for us in attracting fin-techs.

Mr Adams : Through that process we've established networks with the other regulators, and that's been an important trade-off for industry, so when a fin-tech knocks on our door we could say, 'That may be more of an issue for AUSTRAC. We have the contact. Do you wish to contact them?' We are playing a little bit of that role in terms of introductions across the jurisdictions. On efficiencies, when I look at Australia, we have now granted, I think, over 40 or so licenses to what we call innovative businesses, since we established the Innovation Hub. The ones who come through our assistance processes have a marked material efficiency in the process of doing that. That number of 40 is also important to recognise because, when I think of some of those other jurisdictions such as the UK, with the exception of the ones in their sandbox their numbers are similar. For the size of their market, my understanding is they're closer to 40 new authorisations in a similar time span. So for our market there are 40 authorisations, 220 receiving informal assistance and, as Stuart said earlier, 600 within the sector. They're the sorts of dimensions of the sector involved today.

Mr Price : The only other point I'd make is specifically about your question around sandboxes. FinTech Australia did conduct a census last year and that indicated that nine per cent of Australian fin-techs were intending to either use or investigate using ASIC's sandbox in the forthcoming year.

CHAIR: You obviously heard the two previous witnesses and have read their submissions. In some areas they're in vehement agreement, but in others they are contradicting each other. Do you feel that ASIC is currently able to adequately protect consumers from potentially harmful fin-tech products?

Mr Price : It's probably quite important to focus here on the class-waiver licensing exemption. As I said, we have powers and we do deal with businesses on an individual basis, just as all the other jurisdictions do. But let me focus now on our class-waiver licensing exemption. In developing that, it's fair to say that we thought about what categories of products would pose a lower consumer risk. That informed some of our thinking around the limitations that were there. Obviously, there is that question: what's the appropriate risk appetite? It is clearly one that different minds will have different views on, but that's, sort of, how we came to our particular conclusion in relation to our exemption.

CHAIR: What about this concept of consumer benefit where, in order to enter the sandbox, you need to be able to demonstrate that your fin-tech can provide a consumer benefit?

Mr Price : Those sorts of concepts, while easy to state, may be very difficult to apply in practice. I'd have a similar comment in relation to what's innovative and what's not innovative. There are people who would argue that blockchain technology is not particularly innovative; it is just a distributed nature of a database. The database is like any other but it is distributed on many computers. Again, these are areas where reasonable minds might differ and that's one of the reasons why some of these policy issues are so challenging.

CHAIR: To add a level of objectivity to it, you do not necessarily think the consumer benefit benchmark or an innovation benchmark are appropriate?

Mr Price : I would raise the question: what do we mean by 'consumer benefit'? How is that measured? Over what time period? Is it for all consumers or some consumers? Is it for particular classes of consumers?

CHAIR: What is consumer definition?

Mr Price : What specifically are we talking about? Are we talking about hypothetical detriment or actual detriment over a certain period? How is that detriment measured? You can always create rules around those things. But the question is: do those rules lock you into a position that is actually not that helpful or will lead to unintended consequences?

Senator KETTER: I take it there was some stakeholder engagement that preceded the bill being brought forward.

Mr Price : There was a consultation. Treasury released the draft bill for consultation; that's correct.

Senator KETTER: I am interested, what were the main issues that were raised with the government as part of that consultation process?

Mr Price : ASIC raised a couple of questions. I think all the submissions are up on the website now so they are publicly available. We simply made the point that it is important to consider the scope of the proposed enhanced regulatory sandbox. At the moment, ASIC's sandbox only applies to fin-tech start-ups; it does not apply to anyone who has a licence. That is a significant limitation. There is a question about whether that is appropriate. Alternatively, if you open it up, you ask yourself the question: am I creating two tiers? Are you having licensees over here and the sandbox over here and lots of people can use it and does that create any sort of regulatory arbitrage? That was one issue that was raised. Another issue was about the potential scale of the use of the proposed enhanced regulatory sandbox.

When ASIC developed its model, we didn't see it as being subject to wide scale use, in part because it was only available to start-ups. For that reason, under the model we developed, we don't actually supervise and monitor businesses in the sandbox. If you are going to open that up to a much broader range of people, there is an important point about whether or not ASIC's role needs to change. And if ASICs role does need to change, we will certainly need to look at upskilling our capability and will have to think about resources as well.

The final issue we raised was just around the scope of the legislation itself. These were more detailed type questions; for example, should businesses be allowed to use different parts of the sandbox on multiple occasions? How does superannuation fit into the picture given it is a long-term type investment? If investment is permitted in respect of international financial products, are there any limitations around that? As I say, my understanding is that all the submissions in relation to this are publicly available.

Senator KETTER: Where I was going with that was to find out which of the issues that were raised as part of that consultation process have been addressed through the bill and which other issues have not yet been addressed?

Mr Price : ASIC's comments were made in respect of the draft bill that was released and regulations. I'm not aware we have seen any further drafting at this stage.

Senator KETTER: You mentioned resourcing. You talked about the potential for seeking additional resources down the track subsequent to the passage of this legislation. Can you tell us more about that? Has anything firm been offered to you?

Mr Price : That would very much depend on the final form of the legislation and the expectation around ASIC's role so it is sort of a hypothetical at the moment, if you see what I mean.

Senator KETTER: We've had some information from Choice about how the Australian model compares with the jurisdictions overseas. I take it from your earlier comments you do not necessarily agree with the proposition that the UK sandbox has been more successful that the Australian version.

Mr Price : I think they're just different. The UK model, as I understand it, isn't an exemption, so you actually get a tailored licence. You're able to do exactly the same thing in Australia now. The difference is that in Australia we offer an additional class waiver exemption, so that means you don't need to get a licence to test your business idea for a period of time. As I say, because there are some significant consumer protection issues around that idea, we carefully considered what things should be in the sandbox and what things should be out of the sandbox. But, to be honest, that's a matter for judgement and a matter for risk tolerance, and reasonable minds can differ on those issues.

Senator KETTER: I think you said there were 146 applications in the UK—or was it around 150?

Mr Price : Yes, 150, I think.

Mr Adams : Yes. They had three cohorts. I only know the facts from their first two, but I think there were about 150 applications and about 50 were accepted.

Senator KETTER: Compared with how many applications in Australia?

Mr Adams : Here it's not really an application; you need to notify us. As Mr Price has said, we have now had five making use of the sandbox, and up until now we've had about 20 entities expressing interest in it. In some of those instances, we're actually able to say, 'Well, you don't need to rely on our sandbox; you can conduct that business already under existing exemptions under the law.' One of the virtues of the sandbox is that it encourages people to inquire, which can be helpful for them.

Senator KETTER: What are the risks to consumers who engage with the products in the sandbox?

Mr Price : There may be risks of, I suppose, services that are provided in a way that doesn't meet standards of competence that you would generally see within the industry. There may be some risks that services are provided in the sandbox, which is a testing environment, and there's an expectation that it might be a longer term relationship, but in the end the person testing the business idea decides not to proceed. They're just a couple of examples. But I think what is very positive is that, both in ASIC's existing sandbox exemption and in the bill that's been put out for comment, there are a variety of important investor protection mechanisms around those things. Some of the key ones, to my mind, are, firstly, that there are various conduct and disclosure obligations that are retained and, secondly and quite importantly, that there is a professional indemnity insurance requirement. I see that as quite important. Also very important is membership of an external dispute resolution body so, if there is a dispute, there's a quick and easy mechanism by which consumers can seek recourse.

Senator KETTER: I don't know if you heard the concerns of Ms Turner from Choice about the professional indemnity insurance and the shortcomings of that.

Mr Price : I think concerns around professional indemnity insurance have been raised in the Australian regulatory context for a long period of time, but they're not issues that are specific to the sandbox, to be honest.

Senator KETTER: But things like fraud wouldn't be covered by—

Mr Price : Yes, some policies do exclude fraud, but again the devil is often in the detail. Specifically, what do we mean by fraud? Typically, insurance policies will say you can't make a claim if it's your own fraud, but if it's the fraud of someone else then there might be a possibility of a claim. It will depend on the actual insurance policy.

Senator KETTER: Finally, if the sandbox had an entry requirement that the product being tested be innovative and provide a benefit to the consumer, do you think this would prevent start-ups from entering the sandbox?

Mr Price : It may prevent some. Again, in a way it's a bit of a hypothetical in the absence of understanding how we define consumer benefit and how we define innovation. As I've previously outlined, I think that on both those concepts different minds can certainly have different views. While it's always possible to draft something specific, you then ask yourself the question about unintended consequences.

Senator KETTER: I think you might have heard FinTech Australia's view was, subject to the nature of those definitions and whether they were objective, that it wouldn't necessarily be a barrier for them, from their perspective.

Mr Price : I think that's fine. As I say, to my mind the challenge is probably in the drafting. I must say, when we set up our innovation hub, we did give quite considerable thought to whether we should try and define 'innovation'. In the end, I think discretion proved to be the better part of valour.

Mr Adams : The only thing I would add is that, for those UK examples I gave, part of the reason for the entities not being accepted was that they were assessed against the FCA's view on some of those concepts you just mentioned.

Senator KETTER: In the UK, is there a requirement for products to be both innovative and beneficial to consumers?

Mr Adams : Yes, that's my understanding. The FCA has published guidance around the application process, and criteria of that nature is part of what needs to be addressed, and is assessed by the FCA.

Senator KETTER: And that doesn't appear to have impeded the number of entrants to the sandbox there.

Mr Adams : Just to confirm factually, out of those first two cohorts, out of 150 applications, 50 were accepted. I don't know the exact reasoning for why those 100 were rejected, but it may well be some of them didn't meet the criteria.

Senator KETTER: I think you might have already answered this to some extent, but, in terms of the difference in the number of participant numbers in relation to our current sandbox arrangements and the sandbox in other jurisdictions, do you want to give us a little bit more detail? I think you've said something in relation to the UK. What about the other jurisdictions?

Mr Adams : Yes, just to confirm, my understanding is UK has the numbers I've given you—about 150 and then 50 accepted. That is for non-start-ups and start-ups, established players or broad range. Outside that, in most of the other jurisdictions that I'm aware of—Singapore, Hong Kong, Ontario, to name three; there's also Abu Dhabi and Dubai—it is my understanding that the numbers are smaller, below 10 in most instances, if not a handfuls.

Senator KETTER: Would you agree that there's an argument that, given the regulation that we have in respect of our sandbox is 'light touch'—the terminology that I think is used—there is a disappointment as to why we don't have more entrants?

Mr Price : I'm not so surprised with the numbers, to be honest. We've got five at the moment; we had a further two who were at the point of lodging notices when we had discussions with them, and we helped them work through the fact that they could rely on other exemptions, so they didn't even need to use the sandbox. We have a number of other exemptions that exist across our regulatory regime that people are able to avail themselves of. But, importantly, and this is a very important point, our sandbox only applies to fin-tech start-ups. So, if you already have a licence, or a related body of yours has a licence, you're not eligible for ASIC's regulatory sandbox. The thinking behind that is, if you're already in the licensing system, you should be able to work your way through and pretty quickly get some sort of variation to your licence. Once you start limiting the population that can use the sandbox to actual start-ups rather than people who already have a licence, our expectation was the numbers were always going to be reasonably small.

Senator KETTER: If the parliament were to pass the legislation in its current form, do you have any views as to how many fin-tech start-ups would use the new set of arrangements?

Mr Price : That's a very difficult question to answer—substantially more than we have now I think is certainly the case. But, as to the actual numbers, it's possible it might be 100, but, honestly, that's a guess.

Senator KETTER: And your concern is to whether you might have sufficient resources to deal with that?

Mr Price : Again, really the question of resources and capabilities comes back to what the final form of the legislation is and what's expected of ASIC.

Senator KETTER: All right, thank you very much.

CHAIR: Thank you very much, Mr Adams and Mr Price for joining us again today.