Only one startup has utilised ASIC’s regulatory sandbox since it was launched late last year, leading the government to make a series of changes to broaden the scope of the program.
The regulatory sandbox, opened in December last year, was set up to allow eligible FinTech companies to test offerings with real customers without obtaining the necessary licences.
According to an Australian Securities and Investments Commission (ASIC) report released last week, share trading app Goodments is the only company to have used the sandbox since it was launched.
“The regulatory sandbox framework is currently being presented to the FinTech sector in Australia and is being used by one entity,” the report said.
A similar sandbox program in the UK recently welcomed 31 startups as part of its latest intake.
The lack of interest in the scheme led the government to announce a series of changes to the program, as revealed in this month’s federal budget. The changes include an expansion of the timeframe from 12 months to two years, as well as broadening the scope of eligible companies.
“The government will legislate an enhanced regulatory sandbox that allows more businesses to test a wider range of new financial products and services without a licence, including providing more holistic financial advice, issuing consumer credit, offering short-term deposit or payment products, and operating an intermediary,” the budget papers said.
“This will reduce regulatory hurdles which have traditionally suffocated new businesses trying to develop innovative financial products or services, and caused Australian talent to go offshore.”
The lack of interest in the scheme may be down to its opening during the Christmas holiday period, and little promotional work from the government. It’s understood that five other startups are in “detailed discussions” with ASIC to also enter the sandbox.
FinTech Australia has consulted with the government on the sandbox issue, and warned it that not enough publicity had been done around the scheme, CEO Danielle Szetho said.
“We were the ones that said to them, ‘you need to get out and promote it because no-one knows about it’. This is what happens when you launch something just prior to Christmas,” Ms Szetho told InnovationAus.com.
“It’s in the website, but what we’ve seen work very well in Australia is when ASIC gets out and speaks to the community about what they’re doing. Without that engagement it was always going to be a bit of a hard sell,”
The program may have also been a victim of the government’s declining interest in the innovation and tech sectors, Goodments CEO and founder Tom Culver says.
“The sandbox came out of the broader innovation agenda which obviously was Turnbull’s key initiative when he came into power,” Mr Culver told InnovationAus.com.
“Unfortunately that policy has drifted away and fallen out of the public eye and off the agenda table. This is probably because not a lot of people know about it.”
Goodments is currently the only startup to enter the regulatory sandbox, with its approved 12 months beginning on May 12. Mr Culver said he has been aware of the program for six months, and was shocked to learn his company was its first participant.
“For us it seems so obvious to test a new product in a highly regulated market in a sandbox framework. Because it was so obvious I was really, really surprised that nobody else had done it. It seems such a logical step as you evolve and develop a product,” he said.
Ms Szetho also said that many companies have gone straight to ASIC’s Innovation Hub and begun work to obtain a full license rather than enter the trial sandbox.
“We’re finding that for the ones that go through the licensing hub it’s actually just as fast a process to go through that hub and find what they need to get a license as it is to try the sandbox,” she said.
While this might make the regulatory sandbox somewhat obsolete, these means ASIC is still achieving wins in the innovation sector despite the program’s initial failure, she said.
“The biggest damage potentially is the publicity of it in the global race to have participants in the sandbox. Its initial positioning was to be something that really accelerates and increased the number of early-stage businesses. On its own it hasn’t been successful, but if you look at the other stats too, it’s very compelling,” Ms Szetho said.
Startups that have attempted to apply for the exemptions have also been informed that they do not actually need a licence at all, ASIC Commissioner John Price said.
“We find a lot of people come to our innovation hub and go, ‘oh, we need a licence’ and we go ‘no, actually you don’t’. So we find a lot of people are exempt,” Mr Price said.
Unlike other similar programs, ASIC’s approach to the sandbox allows eligible companies to receive the exemption just by notifying the regulator beforehand. Once this notification process is complete, the FinTech is legally entitled to the exemption from having a license.
ASIC Commissioner John Price spoke about the idea behind this at the CeBIT conference last week.
“We shouldn’t be trying to pick winners, we should just be trying to facilitate,” Mr Price said.
To be eligible, the FinTech company must have no more than 100 retail clients, total customer exposure of no more than $5 million, adequate compensation arrangements, dispute resolution processes and disclosure and conduct requirements.
Mr Culver said one the primary motivators for him to apply to participant in the sandbox was how the program may speed up the process of eventually obtaining an ASIC license.
“Primarily it helps us in the future. By going into the sandbox we know that we can then move on to get our full license much quicker,” he said.
The regulatory sandbox aims to apply a “lighter touch” regulatory environment for FinTechs to test “innovative business models”, the report said.
“ASIC’s solution was developed after wide consultation with the FinTech sector in 2016-17 to understand the issues and barriers faced by new innovative businesses seeking to enter the financial services market in Australia,” it read.
“Entities using the FinTech licensing exemption have the opportunity to test a business model and investigate what strategy will work best for their business. At the same time, it ensures that financial consumers who access their services still have fundamental protections under the law, such as conduct and disclosure standards, dispute resolution and professional indemnity insurance.”
ASIC has committed to reviewing the entire regulatory sandbox program in 2017-18, where it will seek feedback from the industry and relevant stakeholders.