FinTech sandbox needs urgent review

The federal government’s financial regulatory sandbox is “underutilised and not fit for purpose”, warranting an urgent review of the regime that has been in place for less than four years, according to FinTech Australia.

The industry body has also called for an explicit FinTech carve out in the $15 billion National Reconstruction Fund (NRF) to complement any reforms to the Enhanced Regulatory Sandbox (ERS).

The pre-Budget submission, released on Monday, flags six areas of reform to support innovation and attract additional investment as the sector faces a year-on-year decline in startup investment of 53 per cent, according to a report by venture capital firms.

The review of the ERS regime has been recommended to “address the current limitations and consider new cohorts which could benefit from this model”.

The industry body argues that “sandboxes have the potential to support business formation and allow FinTech innovators to test their products without the expenses and compliance obligations associated with financial services licensing”.

“Fintech Australia believes the ERS regime can be expanded, improved and better promoted,” it said in the submission released on Monday.

The ERS was implemented in September 2020 to enable the testing of innovative financial services and credit activities without licences. In January 2020, then-Assistant Minister for Financial Technology Jane Hume told InnovationAus.com that the ERS would have improved uptake compared to its more limited predecessor.

But according to members of FinTech Australia uptake remains low as the ERS regime “is too restricted to offer a flexible testing ground”.

A lengthy Australian Securities and Investments Commission (ASIC) licensing process, typically taking more than 180 days, also means “it is not viable to delay a licence application by pursuing the ERS”.

While FinTech Australia is calling for “an urgent review is required to make it more accessible in an increasingly complex regulatory environment for FinTechs”, it has also proposed several specific improvements to the scheme.

This could include extending the 24-month cap on testing new technology in the sandbox, while expanding the “funds held and customers permitted” for a technology being tested in the sandbox.

The government should also consider moving to an authorisation sandbox model — requiring businesses receive ASIC approval before sandbox testing can begin — which would provide greater clarity than the existing model. The industry body also argues this would reduce the regulatory burden on firms and promote a faster time to market “while still ensuring that consumer protection measures are in place”.

FinTech Australia chief executive Dehan D’Almeida said the group would “continue to work with the federal government on various regulatory issues such as the CDR and ERS” and reiterated that a lack of investment in the sector means there are “far fewer young businesses and new innovative ideas coming through the pipeline”.

Referencing the 2023 EY FinTech Australia Census, the submission notes that “two in five (41 per cent) Australian FinTechs are not meeting their capital raising expectations and are increasingly reliant on founder funding (57 per cent)”.

To help alleviate funding constraints faced by FinTechs, the NRF should explicitly include ‘FinTech’ as an industry earmarked for funding under the $1 billion sub-fund targeting ‘enabling capabilities’.

The submission said FinTech was listed as an example of an enabling technology during initial consultation but has not been included in the final investment mandate.

Reviews and reforms of several other investment policies should also be undertaken to drive new funding opportunities amid “tightening funding environment and choppy macroeconomic conditions”.

“This includes recalibrating and expanding the Early Stage Venture Capital Limited Partnership (ESVCLP) and Early Stage Innovation Company (ESIC) schemes, reviewing regulation on crowdfunding — an industry that has significantly grown and evolved since it was introduced in 2017,” Mr D’Almeida said.

“We would also caution against proposals which will limit investment and damage investor confidence, such as ASIC’s suggestion to increase the sophisticated and wholesale investor test thresholds.”

The group is also calling for Austrade’s $9.6 million FinTech Trade and Investment Program to be continued beyond its expected end date later this year.

Ultimately, Mr D’Almeida says the group has had “an incredibly productive relationship with the federal government, and both it and its agencies have made significant headway on navigating regulation affecting FinTechs”, which he looks forward to continuing.

Do you know more? Contact James Riley via Email.