This update explores the latest regulatory and legislative developments across the fintech sector. In Australia, the proposed enhanced regulatory sandbox framework has been introduced into Parliament and the Report of the Review into Open Banking has been released. The Australian Competition and Consumer Commission (ACCC) has also announced that the financial services sector will be a key priority for 2018.
Overseas, regulatory bodies in the UK have released collaborative reports on the supervision of algorithmic trading, while global regulators have begun to release more concrete guidance in relation to the classification of tokens in the initial coin offering (ICO) landscape.
While not discussed in this update, the Notifiable Data Breaches Scheme also came into effect this month, which introduced a mandatory obligation to report ‘eligible data breaches’. Please see here for more information.
Please be in touch should you wish to discuss any of the below.
Fintech Fact: According to the ABC, the ACCC received over 1200 complaints related to cryptocurrency in 2017.
The Treasury Laws Amendment (2018 Measures No. 2) Bill 2018 (Cth) (Bill) has been introduced into Parliament and received its second reading speech on 8 February 2018. The Bill, if passed, proposes to enhance the regulatory sandbox (Schedule 1) and amend venture capital and early stage investor tax concession provisions (Schedule 2).
The enhanced regulatory sandbox will allow more new businesses to test a wider range of financial and credit products and services without the appropriate financial services or credit licence from ASIC, and for a longer period of time compared to the current sandbox. The sandbox is being enhanced to ensure that it evolves in parallel with the market and to adequately support innovative fintech businesses while maintaining consumer protection for investors.
Schedule 2 partly implements the Treasurer’s announced measures to expand tax incentives for early stage investors and new arrangements for venture capital limited partnerships as part of the National Innovation and Science Agenda. The proposed changes amend the venture capital and early stage investor provisions relating to capital gains tax transactions, managed investment trusts and the early stage investor tax offset to ensure that the provisions operate as intended. Venture capital is crucial to fintech businesses, particularly at the seed, start up and early-expansion stages of commercialisation that would otherwise have difficulty in attracting investment.
The ACCC Chairman, Rod Sims, has announced the launch of the ACCC’s Enforcement and Compliance priorities for 2018. Covering areas such as access to data and consumer guarantee rights, the priorities determine where the ACCC directs its attention to provide the greatest benefit for competition and consumers
Of particular note to fintech businesses is the focus on competition issues in the financial services sector and issues concerning the use of digital platforms, algorithms and consumer data. As announced in the Budget 2017-18, the ACCC’s Financial Services Unit has been further resourced to proactively identify and investigate competition issues in the sector and conduct market studies.
In addition, the ACCC is expected to release its Issues Paper for its inquiry into digital platforms with a preliminary report due at the end of 2018. The 18-month inquiry is expected to focus on emerging markets and examines the impact of search engines, social media, and other internet aggregators in relation to competition. The inquiry will have particular regard for media content creators, advertisers and consumers, but this is also the first inquiry to investigate the competition and consumer implications of customer data being sold by digital platforms more broadly. The ACCC will be able to compel information from relevant companies under the Competition and Consumer Act 2010 (Cth).
The Treasury has released the Report of the Review into Open Banking (Report), making recommendations on the most appropriate model for implementing Open Banking in Australia. The Report contemplates a layered regulatory approach (see previous article for further analysis) to ensure that the system is customer-focused, promotes competition, encourages innovation and is efficient and fair.
Open Banking is likely to significantly impact the financial services sector by affecting how consumers interact with the existing banking system. Granting third-party access to data types such as customer-provided data, transaction data and product data is likely to improve access to the market by incumbent fintech businesses while simultaneously improving the customer experience when accessing financial products.
Notably, the Report suggests that non-authorised deposit institutions such as fintechs or non-bank credit providers who are recipients of banking data also be obliged to provide equivalent data in response to a consumer direction. Equivalent data could include data received under the Open Banking regime, customer-provided data, and data related to the lending of money on credit.
The Report suggests a 12-month period between the final Government decision regarding Open Banking and the Commencement Date. For the second half, it is expected that the Open Banking participants including the major banks and early-adopting fintech firms will be actively testing the technology behind the data transfers.
The Report makes 50 recommendations in total. Submissions are due on 23 March 2018.
The UK’s Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have issued publications on firms using algorithmic trading and operating in wholesale markets. The FCA outlined its five key areas of focus while the PRA publication is a consultation on “expectations for the prudential aspects of risk management and governance of algorithmic trading” at PRA-regulated firms. Read more.
There have been significant international developments in relation to cryptocurrencies from regulators and legislators, particularly across Europe and Eastern Europe. With the release of more explicit guidelines for token offerors in Switzerland, Lithuania and Russia, ICOs are becoming increasingly legitimised as regulators begin to classify and assess the nature of the tokens being offered. We discuss the developments in detail here.