Denham Sadler
November 16, 2017

Consumers blast new sandbox rules

Policy

Consumers blast new sandbox rules

Scott Morrison: Says the sandbox has robust consumer protections

Australian consumer groups are “extremely concerned” with proposed changes to the regulatory sandbox, while the country’s leading FinTech body is urging the government to take the concept even further.

The regulatory sandbox, which overseen by the financial regulator ASIC, allows FinTech startups to test new products with real customers for a set amount of time without obtaining the necessary financial licenses.

It was launched late last year, but only three FinTechs took advantage of the sandbox frameworks

The federal government has now announced a broad expansion of the scheme to enable a wider range of FinTechs to use the exemptions for two years. Treasury has sought comments from the community on the draft changes, and consumer groups have raised a series of concerns.

In a joint submission, Choice, Consumer Action Law Centre and Financial Rights Legal Centre said they were “extremely concerned” about the regulatory sandbox and said it could place the FinTech industry’s reputation “at risk”.

“While we support the intent of encouraging competition to create new services for consumers, we are extremely concerned about the risks that this approach involves,” the submission said.

“Rather than watering down consumer protections, the financial industry needs much higher standards to prevent the scandals that have drained consumer savings and investments.”

The consumer groups’ concern stems from the possibility of “unscrupulous” companies or advisers exploiting the sandbox to sell harmful products to Australians.

“We believe it is likely that the sandbox regulatory exemption will be used by some unscrupulous parties to sell products that are harmful to consumers,” it said.

“The legislation would allow, for example, unlicensed financial advice on superannuation products, insurance and long-term investments.

“These services are too complex and too important to the long-term well-being of consumers to be offered without the adequate protections that the sandbox removes.”

Advocacy group FinTech Australia said it agreed that ensuring consumers are protected is fundamental to the sandbox debate.

“We agree that there needs to be a strong focus on ensuring legitimate FinTech and InsurTech innovations that benefit consumers are being tested in the sandbox. This is necessary to protect the long-term utility and integrity of the sandbox, and the FinTech industry as a whole,” a spokesperson for the group said.

“We want to work with the Australian government 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.”

Treasurer Scott Morrison also defended the regulatory sandbox scheme, saying that FinTechs will be subject to “robust consumer protections and disclosure requirements,” including responsible lending obligations, best interests duty and adequate compensation and dispute resolution arrangements.

“The Turnbull government has been positioning Australia to become a world leader in FinTech. The enhanced regulatory sandbox will help businesses overcome some of the initial regulatory burden and costs of licensing that may otherwise hinder innovative offerings,” Mr Morrison said.

The changes announced by the government last month would allow a broader range of FinTechs to enter the sandbox, including those providing holistic financial advice in relation to super, life insurance and domestic and international securities. It lengthened the license exemption from one year to two.

While in the regulatory sandbox, a FinTech can test a product on up to 100 retail clients and 100 consumers, with an aggregate exposure of up to $5 million.

Similar sandbox schemes in the UK, Singapore and Hong Kong require a FinTech to apply for the exemptions and be vetted by the regulator. But in Australia ASIC will not be assessing each individual FinTech entering the sandbox.

ASIC will only intervene if a service already in the sandbox fails to meet the license conditions. The consumer groups argue that this leaves the scheme open to being exploited.

“The model chosen for Australia increases the risk that businesses that aren’t willing or able to comply with the law will begin to sell services to consumers,” the submission said.

"We need to ensure that innovation leads to services that genuinely meets the needs of Australian consumers rather than simply selling a toxic product in a more effective way."

The groups argue that ASIC should be given improved powers to proactively examine the startups before they enter the sandbox, or to act if they find a participant that is offering “harmful” products or services.

“Given that there will be no proactive examination of sandbox services, this protection is too limiting and inadequate. ASIC needs better powers to act quickly and in a targeted way should an experimental sandbox service be causing consumer harm,” it said.

“Our first preference to address these risks would be for ASIC to assess applicants before they’re granted a regulatory exemption or entry into the sandbox, similar to the approach used in the UK, Singapore and Hong Kong. As an alternative, the Treasury should give ASIC the power to act if they find sandbox participants are offering harmful products or services.”

FinTech Australia said it is willing to work with the government to ensure only legitimate and useful products are tested in the regulatory sandbox.

“Given that Australia’s FinTech industry is strongly focused on providing improved services and outcomes for consumers, we are happy to take part in discussions about how to strengthen protections for consumers alongside the expanded sandbox limits,” a FinTech Australia spokesperson said.

“This includes working with Treasury and ASIC to find ways to ensure only new businesses, or businesses providing services in a new, improved and more efficient manner, can enter the sandbox.”

In its own submission, FinTech Australia will argue that the government’s changes to the regulatory sandbox don’t go far enough, and that it is still “prescriptive” and “quite restrictive”.

The organisation will argue that the customer limit of 100 is “not adequate” for companies to properly test their products, and that this should be increased. FinTech Australia is also lobbying for the price caps on certain services to be increased too.

“The $10,000 limit for investment products and $40,000 limit for superannuation are extremely restrictive for these product types, and may well make the sandbox of little appeal to both FinTech companies and investors,” the spokesperson said.

The organisation also said that the government's changes still lock out home contents, home and buildings and travel insurance products, along with most InsurTech businesses, and that the scope of the scheme should be further broadened to include these FinTechs.

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