Chapter 2
Views on the bill
2.1
While most of the stakeholder feedback centred on the reforms to the
FinTech regulatory sandbox (Schedule 1), some views were expressed on the minor
amendments to the venture capital tax concessions (Schedule 2).
Views on the enhanced FinTech regulatory sandbox (Schedule 1)
2.2
All the stakeholders who participated in the inquiry were supportive of
the general intent of the enhanced regulatory sandbox for FinTech innovation,
given that the existing sandbox was seen to be limited. For example, Mr Stuart
Stoyan, Chair of FinTech Australia, noted that the existing regulatory sandbox
was ineffective in terms of the conditions placed on potential users of the
regime:
Limiting the operation and the oversight that ASIC would have
on the sandbox meant that it was very prescriptive, and a number of exclusions
were put in place which meant it was just ineffective. Therefore, most fintechs
in the fintech community hadn't really contemplated seriously using the
sandbox.[1]
2.3
However, Mr Stoyan, when reflecting on the proposed enhanced regulatory
sandbox, concluded that:
We believe the legislation is a step towards providing this
new, more flexible environment, and, at the same time, introduces new
safeguards to help protect consumers which don't exist in the current sandbox.[2]
2.4
Similarly, the Australian Private Equity and Venture Capital Association
Limited (AVCAL) supported:
...efforts to create a policy environment conducive to the
development of a thriving FinTech ecosystem in Australia.
...
Accordingly, AVCAL supports initiatives such as the
development of an enhanced regulatory sandbox. Such steps are critical, not
only to ensure the financial services industry continues to make a major
contribution to our economy, but also that in an increasingly global
marketplace for ideas and capital Australia is able to compete effectively.[3]
2.5
Ms Erin Turner, representing CHOICE, provided qualified support for the
bill:
We think the intent of the legislation...is great.
It's just about making sure that loopholes can't be used to harm consumers.[4]
2.6
A variety of stakeholders, including consumer groups and FinTech
Australia, considered that there should be greater consumer protections in the
enhanced regulatory sandbox. CHOICE, the Consumer Action Law Centre (CALC) and
the Financial Rights Legal Centre (FRLC) noted that:
We need to ensure that innovation leads to services that
genuinely meet the needs of Australian consumers rather than simply selling a
toxic product in a more effective way.[5]
2.7
CHOICE, CALC and FRLC advocated for ASIC to assess whether services are
innovative and good for consumers before a regulator exemption is granted:
Our first preference...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.[6]
2.8
But this view was not shared universally. AVCAL supported the proposed
approach to not require users of the sandbox to seek ASIC approval:
This is a well-considered approach, rather than requiring
firms to proactively seek ASIC approval...It will also be an improvement on the
current law which does not specifically provide for conditional
exemptions from the AFSL or ACL licensing conditions, thereby creating
regulatory and legal uncertainty.[7]
(emphasis in original)
2.9
Indeed, both Treasury and ASIC discussed the issue of setting objective
criteria for 'innovative' and 'consumer benefit'. When questioned about how
consumer benefit could be demonstrated, Mr John Price, ASIC Commissioner,
commented that:
These 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.[8]
2.10
Mr Price discussed issues surrounding the definition of concepts such as
'consumer detriment':
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?[9]
2.11
Similarly, Treasury also considered these issues in relation to coming
up with an appropriate definition of 'innovation'. Ms Shellie Davis, Senior
Adviser from Treasury, indicated that:
Those issues are being very actively considered in terms of
providing advice to government on the final design arrangements.[10]
2.12
In addition to concerns about consumer protection and innovation, Mr
Stoyan noted that FinTech Australia had raised a variety of concerns in
relation to the proposed regulations as part of the Treasury consultation
process, including:
- transaction limits for most products are too low and would
exclude many potential clients from using services offered in the sandbox;
- the retail client limit of 100 will mean that low-value,
high-transaction volume products and business models cannot test effectively in
the sandbox;
- the $85 000 sum insured limit for retail general insurance
is not necessarily workable and should be replaced by a cap based on gross
premium; and
- duly authorised product providers would be excluded, thereby
limiting the majority of Australian insuretech businesses from entering the market.[11]
2.13
Despite the final regulations not being released with the introduction
of the bill, stakeholders indicated their confidence that the regulations would
address their concerns. For example, Mr Stoyan concluded that:
We believe that the new regulations and legislation proposed,
with a rider assuming the ongoing discussions we've had with Treasury over the
last couple of months have come into effect, will not only encourage greater
participation but lead to better outcomes, because you see more FinTechs
wanting to innovate in the sandbox. We're a strong proponent of the belief that
it's much better to do this in the sandbox than outside the sandbox, because
that potentially leaves the opportunity for businesses to conduct themselves in
an entirely unregulated way.[12]
2.14
That said, AVCAL warned that the regulatory conditions will be central
to how many firms potentially use the enhanced sandbox:
...the success of the proposed regulatory sandbox will depend
on the relevant conditions being legally and commercially viable for market
participants. If the conditions are too onerous, the sandbox is unlikely to be
used (as appears to be the case with the existing model), thereby denying
innovative FinTech firms the valuable opportunity to market test their products
and services in a systematic, controlled manner.[13]
2.15
As an alternative to an assessment process to enter the sandbox, CHOICE,
CALC and FRLC advocated for proposed Product Intervention Powers (PIPs) to be
extended to the enhanced regulatory sandbox so that ASIC can intervene
proactively if they find sandbox participants offering harmful products or
services:
A sandbox-specific PIP should allow ASIC to act quickly if
harmful products or services are sold. This should allow ASIC to impose
additional disclosure obligations, mandate warning statements, require
amendments to advertising, or in extreme cases restrict or ban the distribution
of any product or service in the sandbox.[14]
2.16
While not directly addressing the proposal for extending PIPs to the
regulatory sandbox, Mr Price outlined the investor protections and mechanisms
in the existing sandbox which would be extended to the enhanced sandbox:
...there are a variety of important investor protection
mechanisms...there are various conduct and disclosure obligations that are
retained and...there is a professional indemnity insurance requirement...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.[15]
2.17
Ms Greenall-Ota, Principal Adviser from Treasury, further indicated that
the consumer protections were adequate and appropriate:
We are satisfied the protections in place that are required
to be maintained—the internal dispute resolution procedures, membership with external
dispute resolution and adequate compensation arrangements, which include
professional indemnity insurance with a run-off period of additional months—in
addition to the ongoing protections that are also included to be within the
sandbox, including best-interest duties, client money obligations and
responsible lending obligations, are adequate protections to address the
products that have been considered to be within the scope of the sandbox.[16]
Stakeholder views on the venture capital tax concession amendments
(Schedule 2)
2.18
AVCAL was the only stakeholder that commented on the amendments to the
venture capital tax concessions:
AVCAL strongly supports the Government's proposed technical
amendments to clarify certain aspects of the tax rules relating to ESVCLP and
VCLP investment. We are pleased that a number of the issues that AVCAL has
raised with Treasury over the course of 2017 have been appropriately addressed
in the bill.[17]
2.19
That said, AVCAL raised concerns that some aspects of the venture
capital tax concession regime were still not consistent with the policy intent
of the legislation:
For example, the current drafting of the bill appears to
affirm that the ESIC [early stage innovation company] tax offset amount that
can be claimed through a partnership or trust is capped at $200,000
annually—for example, if a trust has ten members with an equal share, only
$20,000 could be flowed-through to each of them per year. However, this does
not appear consistent with our understanding of the policy intent—i.e. that the
monetary cap should apply at an individual taxpayer level, and that there
should be the same effect whether investment takes place directly or
indirectly.[18]
2.20
As such, while not withstanding their support for the bill, AVCAL
indicated that further amendments could be made to reduce uncertainty for the
private equity and venture capital industry.[19]
Committee view
2.21
The committee notes that Schedule 1 sets the framework for the enhanced
regulatory sandbox for financial innovation. The details of how the enhanced
regulatory sandbox is implemented will be largely contained in the associated
regulations which have yet to be finalised. However, as these regulations will
be a disallowable instrument, the committee notes that the Parliament will have
an opportunity to review them when they are finalised.
2.22
In relation to the minor amendments in Schedule 2, the committee is
satisfied that these amendments are required to ensure the tax concessions for
venture capital and early stage investors are operating as originally intended.
Recommendation 1
2.23
The committee recommends that the bill should be passed.
Senator Jane Hume
Chair
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