Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Select Committee on Financial Technology and Regulatory Technology
30/01/2020

NOORMAN, Mr Jason, Chief Technology Officer, Pepperstone Group Limited

STEAD, Ms Peta, Group Head, Regulatory Affairs, Pepperstone Group Limited

SZABO, Mr Tamas, Group Chief Executive Officer, Pepperstone Group Limited

[10:41]

CHAIR: Welcome. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. Would you like to make a brief opening statement?

Mr Szabo : Yes, please. I'd like to start by thanking you for the opportunity to speak today about the important issue of supporting innovation and jobs in Australia. Australia has a great reputation as a safe and stable regulatory environment, and it has a talent pool that is diverse and creative. We have a strong history of willingness to take risks and explore new technologies. There is a highly supportive environment to allow financial and regulatory technology to flourish. It is very encouraging to see the government launch this inquiry, recognising that there needs to be better policy coordination and forward-thinking to support growth in these sectors. The industry welcomes reforms for new tax and regulatory settings to support greater investment and jobs in the sector.

In our submissions to this committee we covered a number of aspects of what it means to be a fintech in Australia, including the difficulties in recruiting and retaining IT specialists and the importance of developing a greater technology-focused talent pool. One of the areas really focused on in our review was a supportive regulatory environment for fintech firms, ensuring that the regulatory environment remains broad, balanced and stable and that it continues to protect investors but also support innovation and its innovators not just at start-up but also as they evolve.

Australia has primarily a principles based approach to financial service regulation, offering some significant advantages when it comes to the efficient and flexible operation of fintech providers. This is because Australian regulations are broad enough to capture anything novel without being overly restrictive or burdensome on smaller start-ups, with the required controls being based on the nature, scale and complete certainty of each business. In recent times, we have seen a move to a more prescriptive approach to regulating firms, moving away from the principles based approach. This has come through a shift in attitudes from regulators such as ASIC and resulted in less industry engagement. I believe a far more effective approach would be to engage with industry bodies and individual businesses more openly, rather than use its regulatory toolkit when it has concerns. The banking royal commission has had far-reaching effects on the financial services industry more broadly beyond the major banks. This has created a shift in the environment where the collaboration between industry and regulators has subsided and created a new environment mediated by lawyers and litigators, with the next headline in the press being seen as a win. The reputational damage to firms and industries using the approach is profound, also creating negative public perceptions.

It is important that balance is restored by government with initiatives such as this inquiry, where a careful and considered pro-business attitude is restored in conjunction with a view to protecting investors. This will enable Australia to become a force in technology and innovation, creating a more certain and supportive regulatory environment, which is a prerequisite to allow investment to flow into the fintech sector. To compete with financial hubs such as the UK and Singapore, Australia needs to arguably do more, given the higher corporate tax that we have here. Again, I thank you for your time and am happy to answer any questions that you might have.

Senator MARIELLE SMITH: Thank you for attending today and thank you for the work you put into your submission and your introduction just then. I am really interested in this issue around support for start-ups versus more established firms and also the question around access to capital and the difference between that for start-ups and more established firms. Can you give me your views on what you think is required in terms of support or engagement from government to support firms beyond that start-up phase and any other points of differentiation that you wanted to draw out for our evidence around the different challenges that that section of your industry is facing?

Mr Szabo : We are an established start-up, so we have gone through the process of being a small start-up to an established firm now. I think we have some learnings that we would like to share about that, which I think would be quite useful. A lot of firms scale up very quickly. It can be quite difficult to get every aspect of your business correct during that phase, because you are hiring new staff and you are trying to understand the way everything works. There needs to be support for fintechs in that process, because it is a learning exercise for a lot of fintechs. They have to conform to multiple regulatory requirements, which they may not fully appreciate at the very beginning, and it can be very difficult without the benefit of experience. A lot of fintech founders and leaders are techies, not lawyers, so it can be somewhat of a challenge. A lot of new technologies do not fit into existing laws. It takes the legal system time to catch up with some of the new things that firms are doing. Getting advice from lawyers is not always black-and-white. They give you an interpretation of what they think, and then you have to make a decision. It is not straightforward, like some of the existing businesses that are out there.

One of the things that I wanted to mention is public notices and statements made by government during the early or mid phases of businesses. There needs to be some pragmatism because, if someone or a firm has inadvertently done something because of their lack of experience, it should not be a headline in the press that says, 'They have done a bad thing.' The view I have at that point is: 'This is something that we have identified and there should be better collaboration'—because it is largely not deliberate; it is an accident, it is inadvertent. Having said that, if there are firms doing the wrong thing and it is very clear, then I absolutely do not have an issue there. That is not what I am talking about. I am talking about almost accidental breaches or things that are not completely within their power, particularly when things are growing.

Senator MARIELLE SMITH: You just touched on something which piqued my interest. One of the conversations we have been having with various witnesses and which has come up in various submissions is access to skills for your industry and sector and whether there is a sufficient skill base locally to meet the demand for jobs and whether our workforce has the appropriate education to be able to do these jobs. I am interested firstly in your perspective on that and access to skilled staff but also those wraparound services that a business needs to thrive. Legal services is one of them. Are the legal skills and legal services adaptive enough and understanding enough of the kind of innovative work that your sector is doing? Are there other services or skills which wrap around what you do and enable you to grow which are not catching up or need some development?

Mr Szabo : There is quite a lot there. If I do not answer your question, please ask it again, but I will try to address some of the points that you mentioned. In terms of skills, that is a really important thing for fintech. I am sure it is a part of a lot of the submissions. No fintech in Australia is immune from the potential lack of skills in Australia. One thing I thought I would mention which I think is really important is that technology creates jobs. It does not do the opposite.

Pepperstone is a working example. Tech has created 120 jobs at Pepperstone in Australia. We've got 200 globally. More broadly, our industry has over a thousand jobs, and globally it's far greater than that. That's something I thought would be really important to say, because there may be a debate about that, and I'm very firm that there shouldn't be.

In terms of skills, yes, there is a real shortage of developers in Australia; that is very clear. The short-term solution to that is, potentially, opening up the visa restrictions that are in place. We hire developers that come to Australia. It's quite costly and quite difficult to do that. I'm not a visa expert. I can't give you too much detail around that, but I know that it's difficult. We're a global firm. We have staff all over the world and we generally will employ staff where we think it's most efficient and we have the right skills. Quite frankly, we would love to employ more staff in Australia, because it's closer to our head office, but it's difficult.

What can the government do about this? One of the things that can be done—a relatively obvious point—is having more of a tech focus in educational services, particularly in universities. One thing that's quite important to point out, from our experience, is that there needs to be a greater vocational focus as well. A lot of the very best developers, from our perspective, have dropped out of university; a lot of them are self-taught. They don't necessarily conform with the way some of our schools and universities measure the most successful, most talented people. I think that's a really important focus that the government should look upon. I don't think any government has necessarily got this right. There's a real opportunity for Australia to develop skills in tech and not just do the traditional: you've got to have your high distinction and this, that and the other. There are some really, really smart people who haven't done very well. They just can't conform. I think I've answered part of your question there.

Senator MARIELLE SMITH: Part of it. The other question was around beyond those development skills which you need directly within your business to do your job—every business relies on other professions as well for issues of compliance, legal services and maybe insurance services. Are you finding that our economy, more broadly, has the skills to support your sector?

Mr Szabo : Regtech in particular?

Senator MARIELLE SMITH: Yes.

Mr Szabo : Regtech is an interesting one. We do outsource some of our regtech in Australia. It can be quite difficult; I think that's important to point out to this committee, and I don't think it is necessarily obvious to a lot of people. There are things that we outsource. We do outsource, as a business, because it just isn't practical for us to build it in-house, but going with start-ups is actually quite difficult. The reason for that is that, when you're talking about regulatory technology and regulatory reporting, if you make any mistakes, any errors, in this regard the fines and the sanctions from the regulator are huge—tens of millions of dollars. So for us to outsource really important regulatory reporting, be it trade reporting or anti-money-laundering reporting, to a start-up is not something we would necessarily want to do in a hurry. If they make an error, the regulators make it very clear that it's our fault, not theirs. We can't say: 'They messed up. Sorry.' It's our fault, and we're the ones who have to bear the brunt of the potential fines, the public sanctions and everything else that comes with that.

So we have tried, but we've sort of backtracked somewhat from that, because it's a bit scary. That's not the right word to use, but it's difficult. So we use larger providers, or we build it in-house, because we trust our own developers. If we do it ourselves we're in charge of our own destiny. But, if we outsource things, it's difficult to do it, sometimes, to the start-ups in the community. That's an important thing to understand.

Ms Stead : One part of your question is about lawyers and external advisers—it's actually a very important point when it comes to fintech, because you're working in a field that is constantly evolving and changing. We've already said that the legislation is fantastic because it's broad enough to allow that evolution.

CHAIR: This is the global talent scheme?

Ms Stead : Yes. You were saying, 'Do we have the lawyers and the other expertise to keep up with it?' and the answer is kind of no. Lawyers are fantastic at the law, but they won't understand the product. And you'll have people that will really understand the product, but they won't understand the law. To have the combination of both is very rare—or probably impossible! It's not a skill that can easily be learned. The legislation is such that a legal firm and maybe a regulator could have two completely different opinions on the same piece of legislation. So, yes, there is a shortage of that. It's important that there's a lot of transparency and discussion and consideration of that issue, too.

Senator MARIELLE SMITH: I imagine the smaller the firm the more acute these issues are, because they necessarily have to outsource more—they're not able to build those skill sets and specialties internally.

Ms Stead : Correct. And the advice is more expensive because they have to pay for the lawyer or the compliance expert to come up to speed with their product as well.

Senator MARIELLE SMITH: I'm interested in this issue around financial licensing and some of the challenges that regtechs face in licensing through ASIC and how our processes in Australia compare to the processes of gaining such authority in the UK. So I was hoping you could step us through what you may be able to contribute on that. Is there anything else you wanted to draw our attention to, in terms of the way this sector operates in Australia as opposed to the United Kingdom, where you think there might be some good lessons for us?

Mr Szabo : Sure. I'll answer the second question first. I might hand over to you, Peta, for the first question. Peta is probably better qualified to answer the question around regulating firms. We've got licenses in multiple jurisdictions around the world, and our engagement with the regulators is quite different. I think there are lessons to be learnt, but it's not always that it's better elsewhere; it's more about what works and what doesn't work elsewhere. An example of this would be: the UK FCA implemented some restrictions around the types of products that we offer—moving away from the principles based approach that I think is necessarily a better approach—and there is evidence to suggest that some of the changes they've made haven't worked particularly well. When you restrict a product that is available online, clients have a tendency to search for that product elsewhere. There has been a large move of clients to various different jurisdictions offshore where the products are readily available. There are a number of problems with that. One is: obviously it affects local taxes and jobs. Our industry employs over a thousand staff in Australia, as I mentioned, but also pays roughly half a billion dollars in tax revenue. So that's an important component for Australia. If products are restricted to the degree where, if clients can get them elsewhere quite easily, they will do that, then it will cost the economy and jobs. It's a really important thing to point out, and it is quite ironic, that you're pushing the customers to regulators that are offshore, to jurisdictions where it might not be as well-regulated as Australia. I'm not suggesting that it should be a free-for-all, but there needs to be a careful balance put in place. You can restrict something here; it just appears over there, and there are no protections. There's no protection of client money. There's no protection of anything. There's no complaints body. There's nothing. It puts Australian investors in harm's way. I don't think that balance is being recognised by certain regulators around the world. And it's pretty obvious to us what's going on. We've been engaging with regulators to try and explain that situation.

CHAIR: Senator Scarr.

Senator SCARR: Thank you very much, and, again, congratulations on your submission. In particular, I congratulate you on your candour in terms of raising your concerns. From my perspective, that's exactly what I've been looking for from people making submissions to make them as useful as possible. In relation to your candour, if I can just focus on some of the issues raised in your submission that caused me some concern, I will quote from page 2 of your first submission:

It is now at the stage where we may no longer be able to commercially compete with similar offerings provided by entities outside of Australia's regulatory remit.

From my perspective as a senator, that raises a red flag: here is a successful Australian company that is concerned about the regulatory framework in our country and may be pushed offshore because of those concerns. Can you elaborate a bit more? What is your thinking, as a business, on that? And what do we need to do in order to address those concerns?

Mr Szabo : I'm really glad you raised that question. It's a real live issue for us at the moment. There's a power that ASIC has been given which is a product intervention power. They've got the ability to, essentially, intervene in a product—change the product, ban the product or make fundamental changes to a product—if they see that that's appropriate. The types of products that it could capture are vast. Our industry has been around for 17 years; we've been around for less than that. They've chosen to intervene. And if you look at other products that are in the press and are being talked about, you've got 'buy now, pay later', you've got credit products, you've got consumer and business lending, and even online share-trading could be the regulator's eyes. And if you look at the original financial systems inquiry and the actual guidelines it gave for using this power, which is I think really important to just remember—

CHAIR: Is that the Murray financial systems inquiry?

Mr Szabo : Yes. I've got some notes about this:

… it should not significantly affect innovation—

which I think is very pertinent to this inquiry.

The power is expected to be used infrequently and as a last resort …

ASIC have made public statements about how it intends to use the power more frequently a number of times over the past few months, which is a concern.

This power is not intended to alleviate consumers from bearing responsibility for their financial decisions

…   …   …

ASIC engagement with potentially affected firms would allow these firms to change their practices before any use of the power, thereby limiting public reputational damage.

Senator SCARR: That's all a quote from the Murray report, is that correct?

Mr Szabo : I'm not making this up; that's from that inquiry, absolutely. And again, using the live example: there was very little attempt to engage with our industry prior to them using this power, which we felt was strange given that we were very willing to talk to them. We tried on multiple occasions and it didn't happen. I guess, finally, the issue that I think we've got to face around this is that there is no ability to appeal any sort of decision that ASIC makes around this power other than a full judicial review—which is an enormous undertaking, very costly, and reputationally would be very damaging to a business.

So I don't really think ASIC have met these hurdles, to be honest. And I think other industries might not be aware of this power and how it could be used. The way I think that ASIC should be behaving and acting is essentially—there are problems in most industries; there always are. If you go and speak to someone in the industry or in that firm, everyone knows which firms are doing the bad thing. It doesn't take particularly long to figure out who's doing what, because the industry has got that sort of level of intelligence. So, rather than single out an industry as being bad or whatever, they should single out the actors that aren't behaving themselves. I don't think that's happening in the way that it used to, and it creates real negative perceptions about industries and it affects the future direction of a business, clients might switch off to the products or whatever else. I think that's happening in a number of industries at the moment, where there's bad perceptions out there, ASIC doesn't have a remit to look at tax revenue, jobs—it's not part of their portfolio—so they're making quite important decisions, I think, without the full appreciation of a lot of other things that are going on in the economy sometimes.

Senator SCARR: And your concern in that area and, presumably it's perhaps replicated in other, similar businesses, is leading you to consider how you as a business respond to that regulatory posture, and what options are open to you, including, potentially, movement offshore or moving products offshore. Is that correct?

Mr Szabo : Correct, yes. It's unfortunate; it's not what we want to do. I don't think it's what anyone wants to do. But the unfortunate situation is that there are a number of competing firms offering these products offshore. We've done a lot of research—we got Deloitte Access Economics to independently do a lot of research on our client base and our competitors' client bases—and there's a very clear demand for the product in the way it currently exists. Even with some restrictions in place, we'd be happy to be operating within those restrictions. But there's been no engagement with the regulator to actually come up with an outcome that we think would work for not only us but also the consumer. We're not here to—

CHAIR: When you say the regulator, are you talking about ASIC?

Mr Szabo : I'm talking about ASIC, yes.

CHAIR: I just wanted to clarify that.

Mr Szabo : I don't think an industry, particularly the larger-players condone consumer harm. We don't want investors doing things they shouldn't be doing—that's unequivocal. We're not here saying that these are the sorts of things that will happen, but there's probably an extremely healthy medium that everyone could get to if there was a greater level of engagement. Having said that, our last meeting with ASIC was actually quite positive. There was a level of engagement that we hadn't seen in quite some time, so I do hold some hope, but I don't know if that's necessarily going to continue. The problem is that, if the restrictions are put in place as they intend, there's a lot of tax, jobs and everything at risk in Australia, and it's not as if they will disappear; they will just end up somewhere else—in tax havens.

Senator WALSH: A lot of your submission and some of the discussion that we've had so far today is very much focused on regulation. You're seeking a more principles based approach to regulation versus a more prescriptive punitive approach.

Mr Szabo : That's correct.

Senator WALSH: Is that example that you just gave of ASIC's product intervention power your biggest concern in that space? What's your major example of that problem?

Mr Szabo : That is by far the biggest example I've got of an extremely prescriptive approach to regulation, which we think, following the original financial services inquiry, we could have got—there isn't an outcome yet, but, arguably, it would have probably led to a better outcome than we probably think will happen. Other than that, I think the general gist of our submission is it's just a lack of engagement and a lack of wanting to discuss issues. It's a bit of a closed door, to be honest, and it didn't used to be like that. So things have changed, and I don't think they have changed for the better.

Senator WALSH: What would that process of engagement look like to you if it worked? Would it be unilateral in the sense of your business or would it be a more industry based approach?

Mr Szabo : We feel that an industry based approach is extremely positive because then it's not each industry going and individually pushing their own agenda, which is usually extremely unhelpful, and the regulator would just go, 'This is all too hard,' and I would sympathise with the regulator in that regard. So the regulator should be putting a lot of emphasis on industry to collaborate to get an outcome that works for consumers and the regulator. I read in the press just yesterday an extremely positive piece about the lending industry collaborating really effectively on late fees and things like that, and I thought, 'Finally; this is exactly how things should be working.' It shouldn't be the regulator coming out with rules and restrictions. I don't want to criticise them too much, but it's difficult to get it right unless you're engaging with industry. You'll get it wrong. A lot of products out there are new and innovative, and I'm not going to assume that the regulator understands everything in detail when they've got a big portfolio of financial service industries to regulate. Engaging really helps them understand the product better and helps with, ultimately, the better outcome. So, in response to your question on industry engagement, I think it is an extremely welcomed approach for industry bodies.

Senator WALSH: How have the royal commission and the increased requirements that flow from that affected you, if at all, and how do you balance that with the need for improvements to be made?

Mr Szabo : There's a whole host of different new regulations that are coming into Australia. I might actually defer to Peta, who is probably a bit more across it.

Ms Stead : I think that the royal commission was very helpful, and it provided a lot of ideas. A lot of those ideas are being implemented at the same time. A lot of firms are now in the position where they're implementing multiple levels of reform and consulting on multiple levels of reform. The compulsory notice power is being used a lot more broadly and a lot more severely, in terms of shorter time frames and lots of information being requested. So, for smaller firms, again, you're going to have to get external advice on them; you might not have the internal resources to be able to do it.

There's a lot of demand on your time to answer the questions of ASIC, there's a lot of demand on your time to try to provide useful submissions to consultations and there's a lot of time in actually implementing the new reforms. At the same time, your PI insurance goes up because all of the insurance companies are concerned. You're getting multiple questions from your suppliers because as soon as there's any statement in the press that impacts your business all of your suppliers will write to you and request answers about how it's going to impact you. So you have to deal with that at the same time. Some suppliers might not even want to deal with you if you've been mentioned or your industry has been mentioned. You might then have to find new suppliers. I think it's the combination of everything all at once that's the biggest point.

Senator WALSH: We've heard throughout this inquiry that our really strong financial regulation in Australia is a selling point as well. It's a comparative advantage for your firm, presumably, in operating globally as well. Do you just think the balance is wrong at the level of regulation and how it's being done? You talk about a proportionate approach to obligations. Is that something you can expand on?

Mr Szabo : In my opening statement I made it very clear that the Australian regulatory regime is extremely attractive for a lot of firms, so I don't want to sit here and say that that's not the case. It is. It's actually a great place to do business. Without the Australian regulation we probably wouldn't have been as successful as we are globally. That's pretty clear. I want to get that across. It's more around the balance, as you mentioned. The balance has swung quite a lot towards less engagement and a more proscriptive approach. Just read the headlines. It's a bit of a whack-a-mole situation. I don't think any industry supports that type of approach. That's ultimately the problem. It's difficult to pinpoint exactly what—it's this, that and the other—but a whole raft of regulations have come out and there's a huge amount of effort and time required to implement it all. You can't get it wrong, because then you're going to get fined, so it's tough. And it's important that it's part of this inquiry. I love the fact that this is happening—it's fantastic—but in the fundamental backdrop there are some issues. I think it needs to be more supportive of firms. I don't know if there's anything else that you want to add, Peta.

Ms Stead : It's a difficult conversation to have. The regulator needs to be informed and should be informed and should act, and consumers should be protected. The suggestions are great for protecting consumers but, at the end of the day, the licensees and companies have to implement those changes. Each part of a regulator, each consumer point, needs to be implemented, but the industry has to implement all of them, so you've got a lot of competing priorities, a lot of people wanting information. I guess it's a matter of doing it transparently and thoughtfully, with longer implementation time frames and maybe some understanding from regulators that this might be a good idea but might take a little bit longer to implement, or some sort of understanding that if they want to request information they should try to do it piecemeal, not all at once. They should know that there are information requests coming from multiple regulators or multiple areas of the same regulator at the one time. It is that fine balance; it's always been a difficult task for any regulator or government.

Senator WALSH: So—to make sure I understand you—the problem for you is more the lack of engagement, rather than any particular list of things you have to comply with, because there will always be such things. It's about how, as an industry, you're engaged to make it all work.

Ms Stead : I can give you an example of the type of legislative reform that we've had to deal with just in the last few years. We had changes to our client money requirements, with additional reporting, record keeping and reconciliation. We had trade reporting that went from end-of-day trade reporting to a-year-later life-cycle reporting. Every aspect had to be reported to a central repository. We had industry funding and all the aspects around that in terms of the costs and the reporting along the lines of that. We had updates to the internal dispute resolution requirements and, as part of that, ASIC is considering a data dictionary with multiple requirements to report back to ASIC. We had updates to the external ombudsman service, and that in itself has required more levels of engagement, more mediation calls and more things to go through than the original Financial Ombudsman Service. We have consideration of the new design and distribution obligations that come in place next year. We've had implementation. They're looking at the implementation of a compensation fund of last resort, and our particular industry has also had the product intervention thrown into the mix as well.

CHAIR: Thank you for your submission. Could I ask you, because I think it's an important theme for this review: what is your view on the role of technology? Is it a jobs-accretive factor or is technology a jobs loser?

Mr Szabo : I touched on that earlier. We're a very live example of a firm that's recruited a lot of people in Australia and we'd obviously like to continue to do that. As I mentioned before, if there were a greater supply of developers, we'd be hiring more people in Australia. It's absolutely, in my view, an accretive process. I think it's completely wrong to suggest otherwise. There are a lot of developers—firms like ours—that hire offshore to support our businesses because of the lack of demand. I think a lot of firms would prefer to employ these people in Australia. So to suggest that's not the case is ill-founded in our view, and we've got a very live example of that. Our industry employs thousands of staff globally. In Australia we have roughly over 1,000 staff within our industry. I don't have an exact number.

CHAIR: How many people do you have in your business?

Mr Szabo : We've got 120 in Australia and we've got over 200 globally. That doesn't include an Indian dev shop that we've got, which is a necessary requirement, given that we can't find the resources in Australia.

CHAIR: I assume you have people doing very different jobs in your business.

Mr Szabo : All sorts of different jobs. Us here are an example of this. We've got devs and we've got quite a large compliance focus as well, given some of the issues that we've talked about. We absolutely stay on top of it. As much as I've talked about it today, it's something that we take extremely seriously. There are salespeople. As a very typical business, we've got multiple different aspects to our business. We very much encourage women to apply for jobs in tech and financial services. We have a very high proportion of females in our industry. It's something that I personally really believe in—I think we all do as a business—that we give everyone equal opportunity. That's really important.

CHAIR: You touched on the question of culture very heavily in your submission. The working title for this committee's work would be: an ambition that Australia would be seen as open to fintech business. Do you think we are open for business?

Mr Szabo : It's difficult to answer yes to that question, to be totally honest, given what I've said. We've got a client base in Australia that is most likely going to look for a provider offshore. To suggest that Australia is open for business in that regard is probably not a positive answer. It can absolutely be open for business if some tweaks were made to engagement and some of the things I've talked about. As I said as part of my opening statement, we love being here. We think it's a great opportunity for Australia to develop, and it can absolutely happen, but I think there needs to be some more work done to allow it to happen.

CHAIR: You're chiefly attributing that blame to the way that laws have been enforced or applied by regulators?

Mr Szabo : Correct. But also—

CHAIR: That's an important point.

Mr Szabo : Yes. A lot of laws have been put in place. They've been put in place very quickly. We've struggled to keep on top of it. It's significantly increased the cost of our operations. Going back to some of the other points, a principles based approach which is less prescriptive is a lot more pro-business, quite frankly, than being very prescriptive. Some other jurisdictions operate in that way. It's the halo effect, if you want to call it that, of the royal commission. I just don't feel that there's a positive attitude towards financial services more broadly outside of the top banks, which is where—

CHAIR: The royal commission may have contributed to that sentiment. Chiefly you are talking about the intervention power. Is that right?

Mr Szabo : Yes.

CHAIR: So your argument would be the intervention power is reducing innovation and ultimately options for consumers, would you say?

Mr Szabo : Absolutely, and, if you look at the way it was implemented, if I was a firm that had any concerns with the regulators, it could be something that they could be targeted by. As I said, ASIC have made public statements that they intend to use the power more frequently. I don't know which products they might have in mind for that but I named a few of them earlier on. They could intervene if they felt it was appropriate rather than engage with the industry to achieve a better outcome.

CHAIR: Over 130 submissions have come in to this inquiry, and one constant theme is that a precondition for investment or capital to flow into regtech or fintech businesses is regulatory certainty.

Mr Szabo : Yes.

CHAIR: Just playing back what you have said, is your argument that not the concept of the intervention power but the way that it is being proposed to be used is reducing regulatory certainty? Is that the kernel of your idea?

Mr Szabo : You are absolutely spot-on, yes. That would be my argument: that it has increased the level of uncertainty, which, arguably, increases innovation.

CHAIR: Okay, so then the flow-on point from that is: if everyone agrees an intervention power is a good idea then what is the best way for it to be executed given the objective we have, which is to give more Australians more products? What the royal commission showed was that the banks are often not doing a very good job, so we actually want there to be more options and more choice.

Mr Szabo : Correct.

CHAIR: So what is the best way to do this intervention power, in your view? Do you have a framework in mind?

Mr Szabo : It is really following the recommendations of the financial services inquiry, which laid out the guidelines of how it was intended to be implemented. It is a power of last resort. It should be at the point where every other avenue has been exhausted, industry engagement hasn't worked or it is maybe a product—the old pub test—that nobody in their right mind would think was a good thing. I don't think that those things should be the basics of how it should be implemented; it should be used as an absolute last resort, it should be done extremely carefully and when other avenues—such as industry engagement—have been exhausted.

CHAIR: Thank you for that. On another point, you made the point in your opening statement that new ideas don't fit into existing laws. A number of submitters have made the point that, especially on things like buy-now-pay-later schemes, maybe we need a far more demand-driven regulation. How would that work in practice?

Mr Noorman : One of things we really take into consideration when we are designing our products is that we compete in the global marketplace so it is really important for us to be very fast. We need to be innovative and to create product that others haven't created. That is kind of our definition of innovation. When you bring it into the context of how we apply it technically, my job is to apply the regulation to make sure that the technology delivers the outcomes that are required. I think one of the core things that we look at is that both business models seem to move really quickly and the adaption of technology moves quickly. Where you get the intersection of both the massive business model change and the technology change happening at the same time, what we tend to find is that a lot of the existing regulation is to do with incremental changes to a business model or incremental changes to technology. We think that it needs to be adaptive because, as I think Ms Stead pointed out, the regulators may not be the experts in the technology. They may not be the experts in the business model. But, where you get the intersection of these two things changing incredibly rapidly, people are coming up with things from a start-up point of view, where they have got their novel idea and they are applying it in such a novel way—that is where all the unicorn companies exist and they grow very quickly. How do we supply a framework that allows us to change, in both business model and technology, axes at the same time, where we can have regulation where we know, as the providers and suppliers, what our obligations are? I think the privacy frameworks are very, very clear and I think that's a great example. We know what we can do. We know what we shouldn't do. We know how to implement that specifically in our technology.

CHAIR: It's still not clear to me how demand-driven regulation would work. Are you talking more about having a principles based approach? There needs to be some sort of framework, right? Maybe you can take it on notice and think about it a bit more. I think it is something that we want to probe into.

Mr Szabo : We can take it on notice and get back to you with a little more detail. It's a really interesting, complex topic. I think it needs a bit of thought in terms of—

CHAIR: We obviously need to be consistent. The industry can't say, 'We want to have complete certainty on everything,' and then have innovation. It has to be a framework which is internally consistent on both sides. Maybe you could think about that. We'd be quite open to taking more on that information on notice. Are you happy to take that on notice?

Mr Szabo : Absolutely. We will provide that information separately.

CHAIR: I have a question which kind of dovetails back to this question of policy versus regulation. For better or worse we're all elected, so we can be voted out, but the regulators are not. Their role traditionally has been to enforce the law, not to make policy, in this country. Do you think at the moment the system we have is that you could draw a line between policy beginning and ending and then regulation or enforcement starting? Is it clear that Canberra sets the policy in your industry or is it a grey area between Canberra and the regulators? Have I lost you with that question?

Mr Szabo : No, you haven't lost me at all. ASIC has taken more of an ideological approach to the way it looks at businesses. It sort of decides what it feels is right or wrong sometimes rather than enforcing the law. Again, I will go back to the product intervention power. That's a power that has given ASIC the ability to, essentially, circumvent the legal system and change the structure or ban products that fit within the legal system. If this is ever tested in court, I don't necessarily know where it will end up. It's an interesting academic legal argument: can ASIC use product intervention to circumvent the legal system? The analogy I would use is: can the stream flow faster than the river—with the river being the legal system and of course the stream being product intervention. It's an interesting point. I think that that whole point you mentioned has shifted or moved or become unclear compared to where it was before. I think that even the complaints body, AFCA, now has the right to make decisions on what it feels is fair. I think that has caused some issues within the financial services sector in particular, where they make decisions on what they think. Again, there is absolutely no appeals process for that either. There has been a bit of a shift that has been a bit of a challenge for many companies, where someone's making a decision which is maybe not enshrined in the law at all.

CHAIR: As there are no more questions, thank you very much for your time.