![Scott Morrison and Malcolm Turnbull in discussions with the fintech industry in Canberra last month.](/web/20160417013447im_/http://www.smh.com.au/content/dam/images/g/n/3/e/f/3/image.related.articleLeadwide.620x349.gni8pd.png/1457941467873.jpg)
Scott Morrison and Malcolm Turnbull in discussions with the fintech industry in Canberra last month. Photo: Alex Ellinghausen
Australia's top financial regulators have been told by Treasurer Scott Morrison to prepare for a new system to regulate financial technology start-ups that will allow entrepreneurs to spend more time building business ideas and less time navigating complex financial services regulations.
The federal government is expected to release next week policy changes to support the growth of fintech companies threatening to disrupt banking incumbents. This will include a "regulatory sandbox" scheme, which will allow fintech startups to test their products and systems in a controlled environment.
Under the proposal, early stage start-ups would be able to avoid extensive regulatory licence applications, which can eat up seed capital before they determine whether an idea has prospects of success.
At The Australian Financial Review Business Summit presented by BHP Billiton, on Tuesday, Mr Morrison may point to fintech as a driver of microeconomic reform that can boost productivity and competition in financial services and could also help boost Australian service exports to Asia.
Mr Morrison convened a meeting to discuss fintech regulation last Friday at the Reserve Bank of Australia's offices in Sydney. The briefing was attended by RBA governor Glenn Stevens, Australian Prudential Regulation Authority chairman Wayne Byres, Australian Securities and Investments Commission commissioner John Price, secretary of the Treasury John Fraser, and Austrac chief executive Paul Jevtovic.
ASIC has been a vocal supporter of innovation and has created an "innovation hub" to assist fintech companies navigate regulatory processes. But ASIC's effectiveness is limited by the way in which the corporate law and its regulations have been drafted.
The meeting on Friday was in part a recognition that the Corporations Act hinders the government's vision of Australia become an "agile" and "innovative" economy. This is because explicit authority for financial services activity is typically required, with regulators providing exemptions for operations deemed to be outside the laws. This is a time-consuming and costly legal process compared with the United States or China, where laws typically stipulate what business activity is not tolerated and generally permit activity outside those areas.
On Monday last week, Mr Morrison met with the members of his new fintech advisory group, who told him that many fintech start-ups had limited capital and were spending too much time and resources complying with regulation.
The "regulatory sandbox" was proposed by the new fintech industry association, Fintech Australia, in a submission provided to Treasury last month.
Once in the sandbox, start-ups will be able to test systems and products with real users; their numbers and transaction sizes would be limited. Participants would provide undertakings to ASIC and would have to comply with various rules on marketing, privacy, anti-money laundering compliance, disclosure, and management of conflicts of interest, but would not have to gain relevant ASIC licences until the company grew to a particular size, according to the model for the sandbox proposed by the industry.
"It is submitted that this model provides a balance between maintaining consumer protections and existing regulatory policy and providing innovative fintech start-ups with the agility required to move quickly through the proof-of-concept stage," Fintech Australia said last month.
"If the initial phase of the regulatory sandbox is successful, consideration could then be given to extending it, with safeguards as appropriate, to pre-launch and pilot phases of fintech start-up businesses."
It is understood the big banks are planning to argue that they, too, be given access to the sandbox to reflect they also are engaged in product innovation.
At the meeting on Friday, the regulators told the Treasurer they were working closely with the fintech industry; this has included ASIC and Austrac embedding staff in the Sydney fintech hub Stone & Chalk.