In its 2017-18 Budget, the Australian government expressed commitment to establishing Australia as a leading global financial technology (FinTech) hub and announced a number of measures to support innovation and growth in the FinTech industry.
The measures include the reduction of barriers for innovative new entrants into the banking sector by the Government and Australian Prudential Regulation Authority (APRA). This will be done by addressing obstacles such as limitation on closely-held ownership in the Financial Sector (Shareholdings) Act 1998 (FSSA), the prohibition on the use of the word ‘bank’ by certain authorised deposit-taking institutions (ADIs) and burdensome bank licensing processes.
According to Budget documents, the government will look to relax the legislative 15% ownership cap for innovative new entrants, either through existing ministerial discretion or legislative change. (According to the FSSA, an unacceptable shareholding situation exists in relation to a particular financial sector company and in relation to a particular person if the person holds a stake in the company of more than 15%).
The government will also remove the current prohibition on the use of the term ‘bank’ by ADIs with less than $50 million in capital. There are reputational advantages for startups if they can call themselves a ‘bank’. This will allow smaller ADIs to benefit from the reputational advantages of being called a ‘bank’. Over time, these changes are expected to improve competition by encouraging new entrants.
The government also expressed its support of a phased approach to licensing banks and welcomed APRA’s review of prudential licensing arrangements and consideration of such approaches.
Policy changes will make it easier for new digital currency businesses to operate in Australia. From 1 July 2017 onwards, purchases of digital currency will no longer be subject to the GST, allowing digital currencies to be treated just like money for GST purposes. Currently, consumers who use digital currencies bear the burden of double taxation, effectively paying GST twice: once on the purchase of the digital currency and a second time on its use in exchange for other goods and services subject to the GST.
The government is going to make it easier for startups and innovative small businesses to raise capital. Draft legislation has been released to extend crowd-sourced equity funding (CSEF) to proprietary companies with the 2017‑18 Budget. This will open up CSEF for a wider range of businesses, include FinTech companies, providing them additional sources of capital. CSEF allows a large number of individuals to make small financial investments in a company, in exchange for an equity stake in the company. (The Government legislated a CSEF framework for public companies in March 2017, which will commence in late September.).
Proprietary companies using CSEF will be able to have an unlimited number of CSEF shareholders. Shareholders will be protected by the higher governance and reporting obligations that CSEF proprietary companies must meet, such as having a minimum of two directors, financial reporting in accordance with accounting standards, audit requirements, restrictions on related party transactions, and minimum shareholder rights to participate in exit events.
Enhanced regulatory sandbox
The Australian Investments and Securities Commission (ASIC) introduced a FinTech regulatory sandbox in December 2016 (The Monetary Authority of Singapore also introduced a sandbox last year). It allows eligible businesses to test certain financial and credit services for up to 12 months without needing to apply for a licence.
The Government plans to legislate an enhanced regulatory sandbox with a 24 month testing timeframe. The 24 month testing timeframe is expected to improves businesses’ ability to evaluate the commercial viability of new concepts .
Businesses will be able to test a wider range of new financial products and services without a licence, while robust consumer protections and disclosure requirements will be in place to protect customers. These include responsible lending obligations, best interest duty, and the need for adequate compensation and dispute resolution arrangements.
