In an exciting and world-first development, on 15 December 2016, ASIC released a set of licensing exemptions, which permit eligible fintech businesses to test certain financial products and services for a period of 12 months without having to first obtain an Australian financial services licence (AFSL) or an Australian credit licence (ACL).
Signal for new policy on innovation for Australia
This is excellent news for Australian based fintechs and signals a new approach to the regulation of the innovation and venture technology sector in Australia. Together with other recent reforms including new tax incentives for investing in early stage innovation entities introduced on 1 July 2016 and proposed reforms to regulation of crowdfunding1, these new exemptions will undoubtedly encourage greater local and foreign capital investment in Australian innovation projects. By passing these exemptions, ASIC has demonstrated its commitment to innovation which will not only ensure that consumers can benefit from access to new and disruptive financial products, services and credit solutions, but will help build the environment for Australia's burgeoning start-up community to become leading players in developing fintech and other innovative technology solutions which will serve as a launching pad into Asia and other overseas markets.
The Specific Exemptions to encourage innovation
The exemptions are to be set out in the ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175 and ASIC Credit (Concept Validation Licensing Exemption) Instrument 2016/1176 (Exemption Instruments). While registration of the Exemption Instruments is still pending, ASIC has released a new Regulatory Guide 257 Testing fintech products and services without holding an AFS or credit licence (RG 257), which describes the relief provided under the Exemption Instruments.
ASIC states that the licensing exemption is intended to facilitate innovation in financial services and credit by allowing fintech business the opportunity to validate the concepts and viability of their services with a reduced set of regulatory obligations. However, importantly, the exemptions will still maintain fundamental consumer protections and limit the scope of eligible products and services to minimise the risk of loss to consumers.
Conditions of relief
RG 257 provides that in order to be eligible for the licensing relief, a person must:
- have no more than 100 retail clients;
- plan to test for no more than 12 months;
- have total customer exposure of no more than AU$5 million (with certain sub limits for exposure of retail clients and borrowers for particular product types);
- have adequate compensation arrangements (such as professional indemnity insurance);
- have dispute resolution processes in place, including membership with an ASIC-approved external dispute resolution scheme;
- meet disclosure and conduct requirements, including by providing the client with information that would ordinarily be contained in a Financial Services Guide, Credit Guide, quote or proposal document; and
- comply with responsible lending obligations under the National Consumer Credit Protection Act 2009 (Cth) when providing credit assistance (note, the exemption does not apply to providing credit as a credit provider).
The fintech licensing exemption is available for:
- giving general and personal financial product advice in relation to eligible financial products;
- dealing in the eligible financial products listed, other than by issuing those products; and
- providing credit services in relation to eligible credit contracts, other than as a credit provider.
The eligible financial products are:
- listed or quoted Australian securities;
- simple managed investment schemes (maximum AU$10,000 exposure);
- deposit products (maximum AU$10,000 balance);
- some kinds of general insurance products, being home contents insurance products and personal and domestic insurance products (maximum AU$50,000 insured); and
- payment products issued by ADIs (maximum AU$10,000 balance).
An eligible credit contract is one that:
- has an maximum amount of credit of no more than AU$25,000;
- has a maximum annual cost rate of 24%;
- is not subject to tailored responsible lending obligations (that is, a reverse mortgage or a small amount credit contract);
- is not secured by residential property; and
- is not a consumer lease.
Relying on the relief
Those who meet the conditions and eligibility criteria set out in the Exemption Instruments are entitled to rely on the fintech licensing relief for a period of 12 months while product testing is being carried out. However, before doing so, a fintech must first notify ASIC that it is relying on the exemption and provide ASIC with certain information.
After the expiry of 12 months the fintech will only be permitted to continue carrying on business if:
- they have been granted an AFSL or ACL;
- they have entered into an arrangement to provide services on behalf of an AFSL holder or ACL holder; or
- ASIC provides them individual relief extending their testing period.
Operating at the intersection of innovation, strategy, finance and law, Dentons Australia has assisted numerous early stage innovation entities and fintechs with issues relating to corporate structure and governance, venture capital and fundraising, protection of intellectual property and navigating the complexities financial services and credit laws.
If you are a fintech, an early stage technology innovator or an investor and wish to take advantage of these new rules, please get in contact with one of our specialist practitioners to discuss your options.
1 The Corporations Amendment (Crowdsourced Funding) Bill 2016 was re-introduced to parliament last week.
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