Following the fintech focus in the Federal Budget released in early May 2017 (see our update here), regulators have provided guidance on a range of issues relevant to the sector. These include:
- domestically, ASIC publishing reports on regtech trends and marketplace lending, a Senate report discussing the scope for digital innovation in relation to the Superannuation Guarantee system, APRA considering data collection in the life insurance industry and the ACCC using disruptive technology to out-smart scammers;
- in other jurisdictions, the EU conducted a blockchain forum and the CFTC launched initiatives to better engage with fintech companies in the US; and
- globally, the Committee on the Global Financial System and the Financial Stability Board published a joint report on credit activity in the fintech sector.
While not discussed in this update, Data61, a government research agency, recently released two reports discussing design and use cases for smart contracts, blockchain and other distributed ledgers in Australia. These reports discuss both the benefits and risks that accompany these innovative technologies. The reports address matters that may play a significant role in influencing future policy in these areas and should be considered when designing smart contracts and distributed ledgers in Australia.
In this issue you will find:
Fintech fact: China has the largest credit market in the world facilitated by the fintech sector (USD 99.7 billion in 2015), the largest markets are those in the United States (USD 34.3 billion) and the United Kingdom (USD 4.1 billion).
The Australian Securities and Investments Commission (ASIC) has recently released:
- Report 523 titled ASIC’s Innovation Hub and our approach to regulatory technology, which summarises key policy initiatives in ASIC’s Innovation Hub, as well as ASIC’s recent initiatives to facilitate regtech and proposed future engagement with the regtech industry; and
- Report 526 titled Survey of marketplace lending providers, reporting results of recent discussions between ASIC and operators of peer-to-peer lending platforms.
This report summarises a variety of regulatory developments previously announced in relation to the Innovation Hub. Importantly, it notes that the entire framework relating to the regulatory sandbox will be reviewed in 2017-18, when ASIC will seek further feedback from industry and stakeholders. This will present a useful opportunity to offer views to ASIC on how the flexibility offered by the regulatory sandbox, including the class order licensing exemption, can be maximised.
The report also sets out ASIC’s position in relation to the regtech industry, following the introduction of regtech to the Innovation Hub in 2016 and the hosting of a regtech roundtable earlier this year. The report includes a summary of topics discussed at the regtech roundtable, including key risks identified by participants. The report discusses the enormous potential of regtech to help organisations build a culture of compliance, identify learning opportunities, and save time and money relating to regulatory matters.
In the report, ASIC outlines the following proposals to facilitate the development and implementation of regtech solutions:
- establishment of a regtech liaison group: creating a new advisory group drawn from industry, technology firms, academics, consultancies, regulators and consumer bodies to meet every four months, in which ASIC will take on the role of enabler, convener and catalyst.
- technology trials: committing to regtech trials in ASIC’s supervisory and enforcement work. ASIC will look to update the market and share knowledge on new regtech applications to encourage wider use of technologies that promote good consumer and market integrity outcomes.
- hosting a problem-solving event: following separate, successful problem-solving events hosted by regulators in the UK and Ontario, ASIC has committed to hosting its own problem-solving event (or hackathon) to generate approaches to dealing with common regulatory problems and identifying potential solutions to be implemented in the sector.
ASIC welcomes feedback on its future approach to regtech, particularly on the proposed initiatives outlined above. The deadline for feedback is 4 July 2017.
ASIC has released the results of its first survey of nine marketplace lending providers. The survey respondents included five registered managed investment schemes and four unregistered schemes, with all participants operating via an online platform and holding an Australian financial services licence. Key findings include:
- marketplace lending business models and activity levels are diverse as respondents are in the early stages of their business;
- during the 2016 financial year, surveyed marketplaces wrote $156 million in loans to consumers and SMEs with funding for the loans sourced from retail and wholesale investors, including trustees of self-managed super funds;
- most revenue was generated from loan origination rather than ongoing fees. Default levels and the number of complaints received by providers were generally very low;
- marketplace lenders must manage conflicts of interest between:
- the need to originate loans to generate revenue and acting in the best interests of the members of the managed investment schemes they operate; and
- the duties owed towards borrowers and the duties owed to investors.
ASIC intends to conduct this survey periodically to identify changes in the level of activity of lenders, potential risk indicators and to consider whether marketplace lending providers are managing these risks adequately.
The Senate Economics Reference Committee has published a report on the Superannuation Guarantee (SG) system. In Australia, if an employee is over 18 and earns over $450 per month, the employer is obliged make SG contributions. The amount of SG that an employer is required to pay is currently 9.5 per cent (set in July 2014) of the employee's salary or wages less bonuses, overtime and termination payments related to unused annual leave.
The Committee’s Report made recommendations that included digitising the current system to “fully utilise” technological capabilities. The intention is to enable a greater focus on proactive methods and increase efforts to detect and remedy non-compliance. Broadly, the digitisation recommendations include:
- recommendation 3: the legislation be amended to remove the $450 monthly floor on SG eligibility, with the Committee basing its view on technological advances rendering this floor irrelevant;
- recommendation 5: legislation be amended to require the SG to be paid at least monthly and preferably in alignment with regular pay cycles to improve compliance and the detection of non-compliance. More digitally sophisticated reporting systems, as well as e-transfers, opens the door to more efficient forms of SG payment which is in the interests of both employers and employees;
- recommendation 31: the government expand the Single Touch Payroll (STP) to all businesses. Under STP, introduced in 2014, certain business management software is used to report tax and superannuation information in a format to be digitally transmitted to the Australian Tax Office (ATO). By applying STP to all employees and contractors on a payroll, SG data visibility is increased. This will facilitate the ATO implementing more proactive and preventative measures to monitor SG compliance;
- recommendation 32: the Fair Work Regulations 2009 (Cth) be amended to require payslips include: the amount of earnings that the SG is calculated on; any voluntary superannuation contributions due; compulsory SG due; and all amounts of superannuation paid into an employee's superannuation fund. This will allow employees to track their SG and is attributable to continued improvements in electronic record management, as well as data transfer options.
These recommendations, which legislative and regulatory changes may deliver, illustrate potential opportunities available to fintech businesses in superannuation. If these recommendations are implemented, they may go some way to improving financial literacy and financial planning for employees by introducing real-time monitoring of SG contributions for the first time. This could also deliver a significant cultural shift around how Australians monitor and engage with their superannuation, reflecting the diffuse benefits which fintech solutions can deliver.
The Australian Prudential Regulation Authority (APRA) has acted on a key recommendation from ASIC’s Report 498 Life insurance claims: an industry review by issuing a discussion paper outlining its proposal to obtain “better quality, more consistent and more transparent data” in relation to life insurance claims.
There are currently gaps in life insurance claims data reporting in the following areas: the number of claims received (including how claims are dealt with), disputed claims and timeframes for responding to claims. The life insurance claims data collection is a joint initiative of APRA and ASIC, with data collected by APRA under their powers being made available to ASIC. Separately, ASIC will also collect data around policy replacements, lapses, clawback amounts, premium changes and policies in order to both monitor and enforce the life insurance remuneration reforms enacted earlier this year.
The discussion paper contemplates a two phase process for data collection. Those phases involve a pilot collection of data to continue into 2018 involving multiple collections and incremental refinements to the data requested (Phase 1), and, secondly, ongoing collection and publication of credible, reliable and comparable data, including publication of entity-level data (Phase 2). The discussion paper seeks feedback on the five topics below:
- the proposed overall approach to data collection and engagement with stakeholders;
- the best way for insurers to provide data for Phase 2, having regard to the objectives of this data collection;
- whether an alternative approach to data collection in Phase 2, such as an industry-led approach, should be considered;
- whether any matters should be taken into account when consulting on the scope and design of publication, including feedback from data-users on their expectations regarding the content of the publications; and
- whether the proposed data set adequately addresses the objectives of the data collection and whether there is any additional data which would assist in meeting those objectives.
While data providers will have views on the proposed method of data collection (including whether a suitable industry-led model could be developed), it is important that potential data users also make submissions to ensure that the data obtained by APRA is of material use. It may also be advantageous if a particular technology solution could be arrived at for the purpose of data reporting. The discussion paper is open for comment until 11 August 2017.
The Australian Competition and Consumer Commission (ACCC) has released its eighth annual Targeting Scams report, which explains key trends in scam activity and highlights the impact of scams on the broader community. It is a useful reminder of the intersection between scams, technology and commerce. Key findings include:
- scammers are more sophisticated utilising fake emails, invoices and websites as well as social engineering tactics to manipulate employees, access computer networks and masquerade as ‘trusted insiders’. Scammers have used hacking, malware and targeted phishing; and
- there was a four-fold increase in hacking scams, from $700 000 in 2015 to $2.9 million in 2016. Of this, over half the losses were attributed to businesses ($1.7 million), with the ACCC noting that micro and small businesses were particularly vulnerable.
In turn, the ACCC has found increasingly innovative ways to counter scammers. The ACCC is currently utilising financial intelligence to identify and warn high-risk targets of scams. The ACCC has also developed better scam prevention schemes in conjunction with business enablers, such as financial institutions, telecommunication providers and social media networks.
The report is a helpful reminder of the risks that accompany operating a fintech business and, particularly, responding to increasing cyber risks. In this regard, ASIC provided regulatory guidance late last year setting out its expectations for minimum standards for managing cyber risk.
On 11 May 2017, the European Parliament and European Commission hosted a “Spotlight on Blockchain” workshop, discussing the future of blockchain regulation in the region. With representatives from Parliament, financial enterprises, academia and blockchain businesses, the workshop examined platform security and use cases for the technology. Prioritising the generation of a comprehensive policy around blockchain development for the future, participants suggested the adaptation of existing regulations to new terminology as a crucial first step.
The workshop is part of the Blockchain Observatory, a European Commission initiative dedicated to understanding the role of authorities in developing and promoting adoption of distributed ledger technologies, and developing expertise on infrastructure, interoperability, governance, and regulatory and legal challenges.
The Commodity Futures Trading Commission (CFTC) has announced the formation of LabCFTC to better engage with the fintech industry. The CFTC regulates derivatives markets in the US exercising oversight of markets, market infrastructure, clearing and settlement facilities. LabCFTC has two limbs:
- Guidepoint: the creation of a dedicated email address as an informational service through which fintech companies can engage directly with the CFTC on general issues as well as specific registration and compliance requirements, enquire about the regulatory framework and receive feedback on proposed products and services (such as blockchain and machine-learning solutions);
- CFTC 2.0: an initiative designed to increase the CFTC’s understanding of the application of fintech to its own operations. Particular initiatives will include the development of fintech case studies for the CFTC to better understand markets it is regulating and the establishment of a secure testing environment in the CFTC for new products and services.
These initiatives are indicative of global trends towards regulatory outreach to the fintech sector, other examples being ASIC’s Innovation Hub and the Office of Innovation established by the Office of the Comptroller of the Currency (a bureau within the US Treasury responsible for national bank regulation).
This joint report of the Committee on the Global Financial System and the Financial Stability Board Financial Innovation Network is a study of fintech credit markets, assessing the current size, growth and nature of these markets. It considers the benefits and risks of these activities, including possible implications for financial stability. Key findings include:
- market size and growth: the largest fintech credit market is China, followed by the US and UK. Fintech credit is a small percentage of current lending but is growing quickly. For example, the report found that, between 2013 and 2015, the volume of new credit expanded by multiples of around four or more across large and small markets;
- benefits for competition and financial stability: fintech credit’s digitisation and specialised processes may lower transaction costs, provide convenience, increase access to credit and investments for consumers and the business sector, and pressure existing banks to be more competitive. If fintech credit were to grow to be an alternative source of funding, then a lower concentration of credit in the traditional banking system could be helpful in the event of idiosyncratic problems at banks;
- vulnerabilities and financial system risks: fintech credit platforms may be vulnerable to lending being influenced by swings in investor confidence (due to the agency lending model), which could be problematic during periods of adverse economic activity. Similarly, risks posed by fintech credit activity may be higher than at banks due to greater credit risk appetite, untested risk processes and relatively greater exposure to cyber risks. If growth in fintech credit activity continues at the current (relatively high) rate, banks may increase credit risk in response to increased competition which could pose systemic risk issues. Fintech credit activity also poses issues by potentially occurring in unregulated environments.
The report is generally positive about the growth in fintech credit activity but does discuss the potential challenges that accompany transition to this new form of credit activity.