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Fintech Update: December 2017
In the final update for 2017, we examine recent legislative and regulatory developments across the fintech landscape. In Australia, significant developments including the Australian Government passing new laws which will bring cryptocurrency exchanges within the scope of anti-money laundering and counter-terrorism financing (AML/CTF) legislation, the Governor of the Reserve Bank of Australia (RBA) providing clarity on whether it will introduce an electronic Australian dollar and the Australian Securities and Investments Commission (ASIC) consulting on its regulatory sandbox, as well as reporting on marketplace lending and cyber resilience. Overseas, the primary developments have been in relation to Initial Coin Offers (ICOs) with regulators in the US, Europe and across Asia taking enforcement action and releasing statements.
- Treasury consults on CSF regulations in relation to proprietary companies
- RBA Governor discusses electronic Australian dollar
- ASIC reports on cyber resilience of firms in Australia’s financial markets
- ASIC proposes leaving regulatory sandbox unchanged
- AML/CTF laws and regulation applied to cryptocurrency exchanges
- ASIC releases second marketplace lending survey
- ASIC broadens fintech cooperation with Canadian regulators
- International regulatory developments for ICOs
Fintech Fact: According to the Reserve Bank of Australia, the use of cash payments has nearly halved since 2007 as consumers increasingly use contactless ‘tap and go’ cards.
Following the introduction of a bill earlier this year to extend access to crowd-sourced equity funding (CSF) to proprietary companies, the Treasury has opened consultation on an exposure draft of the Corporations Amendment (Crowd-sourced Funding) Regulations 2018. The draft regulations outline additional requirements for proprietary companies to access the CSF regime:
- Only eligible proprietary companies with one or more CSF shareholders will be exempt from the takeover rules in the Corporations Act 2001 (Cth) (Act).
- The draft regulations reduce the minimum offer period for eligible CSF companies to 14 days and allow for variations to the terms and consideration offered to increase commercial flexibility. They also simplify the content and structure requirements of CSF offer documents for both public and proprietary companies and include the ability to present some required information in a summary format if there is overlap between sections and being able to present the offer document online.
- For proprietary companies, the draft regulations outline additional requirements such as shareholder approval for related party transactions, financial statement audits once the CSF offer has raised over A$3 million and the provision of annual financial statements online.
- For both public and proprietary companies, the Regulations provide that CSF intermediaries must check director and intended director identities, such checks to be conducted via authenticated electronic records.
Consultation on the draft regulations closes on 2 February 2018.
At the 2017 Australian Payment Summit, the Governor of the RBA, Philip Lowe, delivered a speech addressing whether the RBA intends to issue a digital form of the Australian dollar. Terming it an eAUD, the Governor asserted that the RBA had no immediate plans to issue an eAUD, but indicated that the RBA would continue research into the area. Notably, the Governor highlighted ongoing examination of the use of a central-bank issued digital dollar in relation to settlement arrangements. Key insights included:
- There has been a significant shift towards electronic payments which will continue to be driven partly by the increased use of mobile payment apps. However, banknotes will not be replaced entirely and are likely to remain the payment instrument of choice for many people.
- It is likely that the shift towards electronic payments will be promulgated by the banking system. The substantial investment by Australian financial institutions in the New Payments Platform (NPP) was seen as evidence that the banking system will continue to provide the infrastructure for electronic payments. However, this trend is not a given and requires financial institutions to offer customers low-cost solutions with expanding functionality over time. The rise of new technology used for payments, such as cryptocurrencies, may challenge the role of traditional financial institutions.
- An electronic form of banknotes could exist in conjunction with the electronic payment systems operated by the banks, however the case for this has not yet been proven. If an eAUD was to become a commonly used payment method, it should be issued by the RBA and distributed by financial institutions, rather than being issued by the private sector. With the NPP coming into effect, there would be little additional benefit from issuing electronic banknotes and there was not yet a public policy case for such a change.
- There was no case for the RBA to encourage the shift to electronic payments by offering every Australian an exchange settlement account. If the RBA did go down this route, it would find itself in direct competition with the private banking sector in both deposits and payment services.
The possibility was left open to the RBA issuing a new form of digital money through a variation on the exchange settlement account. This could be implemented on distributed ledger technology and be used within specific settlement systems.
ASIC has recently released Report 555 Cyber resilience of firms in Australia’s financial markets. The report outlines the findings from the self-assessment survey of over 100 Australian financial firms in the past two years. Read more here.
ASIC has released its recent review of its regulatory sandbox. The sandbox was established in December 2016 to encourage investment in the fintech sector by providing flexibility in the regulatory framework through a number of licensing exemptions. The consultation paper proposes to retain the fintech licensing exemption, with no changes to the sandbox’s current structure.
ASIC’s fintech licensing exemption allows eligible fintech businesses to test certain specified services without needing to hold an Australian financial services licence or credit licence. Eligible businesses may take advantage of the exemption for up to twelve months with up to one hundred retail clients, as long as certain consumer protection conditions are met and a notification is made to ASIC of the intention to conduct business. The regulator stated that the rationale for making no changes to the exemption is to maintain a consistent framework until such time as Parliament implements its proposed legislation for an enhanced regulatory sandbox exemption. This new exemption would likely supersede the fintech licensing exemption.
Although various members of the fintech sector have criticised the sandbox for a lack of uptake, ASIC said that four fintech businesses have accessed the licensing exemption. One business is testing its financial services in providing advice and dealing in listed securities, two businesses are testing advisory and dealing services in deposit products, and one business is acting as an intermediary and providing credit assistance. Over a dozen fintech businesses have contacted ASIC in relation to using the fintech licensing exemption.
Consultation on ASIC's proposal to leave the regulatory sandbox unchanged closes 27 February 2018.
The Australian Parliament has recently passed the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017, discussed earlier here. The amendments will bring digital currency exchange providers under the remit of the Australian Transaction Reports and Analysis Centre (AUSTRAC), which will require exchanges to register with the agency and be placed on the new Digital Currency Exchange Register. If a person provides a registrable digital currency exchange service without registering with AUSTRAC, this will be an offence carrying a penalty of up to two years imprisonment or a fine of up to $105,000, or both.
Registered exchanges will be required to implement Know-Your-Customer (KYC) processes in order to verify the identity of their customers. AUSTRAC will expect exchanges to monitor and report suspicious and large transactions, as well as keep certain records relating to customer identification and transactions for seven years.
In Parliament, the Attorney-General said, “most businesses in the digital currency exchange sector welcome the introduction of AML/CTF regulation, as they are already mindful of the risks posed by the service they provide.” These amendments will likely commence in early June 2018 unless another date is fixed.
ASIC has released its second survey on the marketplace lending industry, which indicates steady growth in both borrowing and lending activity in the market since the last report. Marketplace lending allows investment in loans to consumers and SMEs, which can provide an alternative source of funds to traditional channels. Marketplace lending does not have a stand-alone regulatory regime in Australia, rather the regulations depend on how the business is structured and the types of financial services and products being offered.
ASIC undertook the survey to determine emerging trends and changes in the level of risk within the industry, as new technology platforms facilitate significant growth in marketplace lending. The report is based on survey responses from the providers of twelve marketplace lending platforms, representing a limited cross-section of the industry. Key findings from the report are outlined below:
- there are three new marketplace lending platforms in the industry;
- with $300 million in loans written to consumers and SMEs, there was a doubling of activity in relation to the number of borrowers and total amount borrowed since 2015-16;
- the average reported default rate across the respondents was 2.2%;
- there are an additional 4,187 retail investors since 2016, representing $12 million of extra investment in the industry; and
- loan origination fees remained the primary source of revenue for marketplace lending providers.
The report highlights instances of non-compliance with laws and regulations in relation to advertising and promotional material and disclosure documents for marketplace lending products. As the activity levels in marketplace lending continue to grow, ASIC intends to undertake further surveys in order to determine the stability of this industry.
ASIC has announced a Cooperation Agreement with a number of Canadian regulators on fintech cooperation. An agreement had previously been entered into with the Ontario Securities Commission (OSC), however this new agreement expands the existing information sharing framework to other provincial securities regulators. The agreement will also allow for the referral of innovative fintech businesses to and from Canada.
The provincial regulators that are signatories to the agreement include those in Quebec, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick and Nova Scotia. These regulators are responsible for the regulation of securities within their respective provinces and territories. They have joined to form the Canadian Securities Administrators (CSA), a council that coordinates and harmonises regulation for the Canadian capital markets. Notably, Quebec’s AMF has accepted a token sale into its regulatory sandbox with consideration on extending the relief after two years. With the Canadian approach to ICOs broadly reflective of ASIC’s views, this agreement could provide ASIC with valuable insight as its own regulatory sandbox is reviewed.
There have been significant developments across Asia and in the United States in relation to cryptocurrencies and ICOs. Read more here.