Technology Sandboxes must not Undermine Key Regulatory Principles, say Officials

As regulators across the Asia-Pacific region embrace the concept of technology sandboxes they need to ensure that they do not create a "free for all" that undermines fundamental regulatory principles, industry experts have warned. Regulators in Australia, Singapore and Hong Kong have been vocal in their support of the FinTech sector in recent months as they seek to attract innovators to their regional markets. Industry participants and regulatory officials stressed, however, that this support for innovation should not be perceived as a weakening of key regulatory safeguards and principles.

Stuart Stoyan, founder of Australian peer-to-peer lender MoneyPlace, said it was important that regulators set limits on the types of startups that they allow into their proposed sandboxes. Stoyan, who sits on the FinTech Australia board, said it was critical that FinTechs do not become associated with lower standards of regulation or major financial failures.

"We as a body don't want all and any start-ups to be able to go off and play in the sandbox. There needs to be some controls and some measures around it. Part of the sponsoring arrangement that ASIC [Australian Securities and Investments Commission] has proposed gets to that. But what's important is that if there was a failure that it's contained or mitigated and that you do enable businesses that are serious businesses – albeit start-ups – to be able to have a fair go at their business model and proving that up," Stoyan said.

Benedicte Nolens, senior director for risk and strategy at the Securities and Futures Commission ("SFC") in Hong Kong, said there was a significant interest among regional regulators in supporting technological innovation. She said this also extended to "RegTech", which promises to transform the automation of a range of governance, risk and compliance activities.

"A lot of the motivation of regulators to be interested in this topic is because that is the kind of innovation that we need. It needs to be well done and there can be some limited risk in designing these new models but it's very clear that they need to be developed," Nolens said.

Balancing Innovation and Risk 

The SFC official said the development of "RegTech" startups would see an acceleration in the use of technology to address regulatory requirements. She said this was linked to the leaps being made in the area of digital identity and biometrics, which were increasingly attracting support from governments and regulators. 

Nolens said it was also critical for regulators to ensure that the support for FinTech and RegTech takes into account the problem of cyber-risk. 

"The more FinTech you have the more cyber-risk you're going to have. So these two need to go in tandem," Nolens said.

Australia is attempting to take a lead in the region with its moves to roll out a regulatory sandbox overseen by ASIC. The country's anti-money laundering agency, AUSTRAC, is also exploring the feasibility of developing a sandbox for FinTech start-ups in the field of anti-money laundering and counter-terrorist financing ("AML/CTF").

ASIC has opened a consultation on its proposals to facilitate innovation in financial services. The proposals up for discussion include conditional relief to allow new Australian businesses to test their financial services for six months without requiring an Australian Financial Services Licence ("AFSL"). 

Mark Adams, the senior executive leader who heads up ASIC's Innovation Hub, said one of the main drivers behind ASIC's proposals for licensing relief is to allow FinTechs to prove up their models more quickly. He said this meant that successful ideas would emerge more quickly and get to the stage where they can have confidence in their technology before they seek an AFSL.

Adams also said fintechs that emerge from the sandbox could be in a better position to raise capital and investment.

"Part of the rationale of the sandbox is about speed to market and being able to test out concepts. So while it's directed to assist new entities to try something out, what happens to them is another question. If they're successful they may be in a more powerful position to seek capital or investment or to negotiate being an authorised representative of an existing licensee," Adams said.

Maintaining Regulatory Standards 

The ASIC official stressed, however, that the development of a sandbox would not represent a reduction in key regulatory principles. ASIC's proposals have set limits to minimise the risk of any consumer detriment, Adams said.

Under the proposals, startups that want to access the "sandbox" would need to provide services to no more than 100 retail clients, each with a maximum exposure limit of A$10,000, and to ensure the total exposure of all clients was less than A$5 million. The start-ups would still be required to maintain consumer protections, such as dispute resolution and compensation arrangements and disclosure obligations. To qualify for the scheme they would need to secure "sponsorship" from an ASIC-approved organisation and would have to notify the regulator before they began testing any products or services.

Adams said it was important to recognise that ASIC's proposals were based on a strong commitment to ensuring the fundamentals of consumer protection and the licensing framework were upheld. He said that when fintechs referred to "failure" they were generally talking about a failed technology or business model. For ASIC, however, the focus of the sandbox proposals was to ensure that they did not lead to failures of conduct or significant losses for customers.

"That is, I suppose, why we've designed the sandbox: to try to mitigate the risks that might flow from, say, a poor business model that provides poor advice to a number of retail clients. We've got a number of conditions in [the proposals] to mitigate the exposure to consumers, so we'll see what people think about that," he said.

Gavin McCairns, deputy chief executive at AUSTRAC, said his agency was paying close attention to the rise of the fintech sector. He said technologies such as blockchain, digital currencies and new payment platforms were developing at a rate that would leave today's economic structures "virtually unrecognisable" in the next ten years. 

AUSTRAC has also embraced the concept of "smart regulation", which looks at ways to collaborate with the private sector to mitigate AML/CTF risks and threats.

"At the same time we want to decrease unnecessary burden on the private sector, particularly FinTechs and start-ups. That means the right amount of regulation," he said. "AUSTRAC strongly believes that by partnering with the financial sector to help develop technologies that will transform our economy over the coming years, we can contribute to innovation through shared knowledge and insights."

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Nathan Lynch is head regulatory analyst, Australia, for Thomson Reuters Regulatory Intelligence.