Monday, 10 February 2020
Treasury Laws Amendment (2018 Measures No. 2) Bill 2019; In Committee
I have some general questions for the minister. We've also circulated an amendment in the chamber and I'll come to that later, depending on whether other senators have questions. Minister, a version of the sandbox has been in place for some time through other means. As I understand it, there are only three entities using the sandbox and 15 in the pipeline. It's been unfavourably compared to the UK, where they've had 146 applications; Singapore, with 30 applications; and Malaysia, with seven applications in the first six months. Hong Kong had nine entities using their sandbox for 11 trials. I am working on the assumption that, in part, the rationale for the approach proposed in the legislation is that the government doesn't think that the present rate of utilisation of the sandbox is acceptable. I want to understand what the government would consider success. In 12 months time what should we expect from the changes that are being proposed this evening?
Thank you, Senator McAllister. Yes, you're right, the sandbox has been around since 2016 and it has been underutilised. Seven eligible businesses have been able to make use of ASIC's regulatory sandbox since September 2016. Even more have, in fact, approached ASIC, but many have been unable to make use of the existing licensing exemptions. That's why, of course, the government is moving this bill, which will allow for the making of regulations that broaden the scope of eligibility.
The feedback that we had from participants was that it was too restrictive. I think Senator Ciccone said that we want to see fintechs get ahead of the pack, but the problem is that without the bill, unamended, getting ahead of the pack is very difficult. It's like doing it with one hand tied behind your back. It's hard to say exactly how many firms we would want to see use the sandbox, but we want to make it flexible enough that it helps a vibrant industry grow and flourish. I don't think it would be unreasonable to expect the same take-up of the sandbox as they saw in the UK and, potentially, Singapore.
Is the minister aware of any firms that are waiting, ready to go and interested in utilising the sandbox? If you are able to talk about those firms, what are their characteristics and the kinds of regulatory intervention that they'll require? An example or two of that kind would be helpful.
Without naming the firms themselves, one of the points of the regulatory sandbox changes that we're proposing is that it expands the number and the type of products that can use the sandbox. For instance, deposit products and payment products—if ADI-issued—general insurance, liquid investments and consumer credit contents with certain features were available in the old ASIC sandbox. In the enhanced ASIC sandbox you'll certainly find those deposit products, and you would also find non-cash payment products that are ADI-issued; general insurance products, although excluding consumer credit insurance; life insurance; superannuation products; interest in simple managed investment schemes; Commonwealth debentures; stocks and bonds; listed securities, including shares and bonds; and also crowd-sourced equity securities. That said, not all products will be available to be used in the sandbox; certainly not things that involve derivatives, marginal lending products and credit contracts. Payday lenders won't be involved either.
Minister, you listed a range of product types. The legislation before us provides for regulation-making to enable, I assume, product types to be brought into the sandbox. Can you advise how you see those regulations being structured. Would they be structured around the kind of list that you just provided?
You have a copy of the draft regulations that have been proposed, so you would see that those products are the ones that have been mentioned. The aim of the game here is to make it as flexible as possible in a very fast-moving and innovative environment.
Minister, my understanding is that what we're dealing with here is making it easier for companies who want to use a sandbox to raise finance—correct? This is about raising money for these companies, making it easier for them?
No, it does not. In fact, the consumer protections that will remain in place include: disclosure requirements, best interest duties for financial advisers, responsible lending obligations, internal and external dispute resolution mechanisms, and adequate compensation arrangements. Before providing services, businesses need to notify clients that they're operating without a licence or authorisation from ASIC and those normal protections will apply.
No, that's nothing to do with it, Senator. I think you've missed the point of the sandbox itself. It's simply to test new business models.
Nonetheless, Minister, the list that you provided then is not exhaustive. The regulation-making powers are quite broad, so other categories of product could be brought into the sandbox?
Yes, you're right. That's why we're keeping it in regulation, so it can be flexible, so it can be changed, because, as I said, it is a very fast-moving space. And even since we originally put this legislation together a couple of years ago, times have moved on. One of the things that came up in the Senate committee when we originally had this legislation was the need for a review. I think that was an amendment suggested by Labor. That's something the government has taken on in order to make sure there is an appropriate monitoring of the bill as it stands.
You'll have observed that in many of the submissions made on the bill and in many of the contributions in the chamber, there is an understandable anxiety about any proposition that loosens regulatory requirements. It's not as though we've had a particularly good experience with the finance sector in recent years, and the capacity for exploitation has become really obvious. And that's not just in the banking sector; that's also in insurance, in non-bank lending and in a range of other product categories. I assume that, in addition to advice from ASIC, you've received advice from Treasury. What advice have you received about the risks that are attendant upon a sandbox approach? How do you seek to have those managed?
You're right, Senator McAllister, it is about finding the right balance between allowing innovation to flourish and at the same time putting in the appropriate consumer protections. To reduce the risk of consumer harm during unlicensed testing, businesses will need to comply with certain disclosure and consumer protection requirements. As I mentioned earlier, before providing the services, businesses will need to notify clients that they're operating without a licence or authorisation from ASIC. Of course the normal protections will apply that I mentioned before—disclosure requirements, best interests duties for advisers, responsible lending, internal and external dispute resolutions, and adequate compensation.
In addition, many of the underlying products that are offered through the regulatory sandbox will still be backed by a licensed business. For example, businesses can only provide financial advice to retail clients in relation to superannuation products in a regulated superannuation fund. In addition to that, there will be further safeguards that will be in place to limit the financial exposure for retail clients. Businesses will only be able to offer specified products and services to retail clients, and will generally only be able to invest up to specified exposure limits. This recognises that retail clients are less able to withstand financial setbacks. ASIC, of course, can take action if businesses aren't meeting those requirements, and the regulations are, of course, still disallowable.
In the course of their submission, one of the civil society groups made the point that the product intervention power represents a possible avenue of intervention for ASIC should one of these products be performing in a way that was not expected at the time it was admitted into the sandbox. Do you consider that the PIP would be a component of the safeguards, or are there adequate safeguards built into the regime in terms of the capacity for ASIC to intervene should a product not be functioning as anticipated?
I think the PIP is a corollary to the ASIC sandbox, but it isn't necessarily an integral part of the sandbox, and those consumer protections and safeguards that I have already mentioned would form the framework for consumer protections within this particular bill.
Just for clarity: the EM sets out how schedule 1 allows for an exemption to be withdrawn should the product not be meeting certain conditions set at the outset. Can you explain the other circumstances where an unanticipated harm emerges in relation to a particular product or category of products, and the capacity for ASIC to deal with that problem?
The bill does give ASIC the power to revoke a firm's ability to use the sandbox, and we expect that this power will allow ASIC either to provide notification to a business that they can no longer rely on the exemption or to apply to the Federal Court for an order that the business comply with a particular requirement where a business fails to meet the requirements or ASIC considers they haven't acted fairly, honestly or efficiently. So breaches of some of the requirements will mean that a provider automatically ceases to be exempt from the licensing exemption, and these include requirements related to eligible activities, investment thresholds and consumer notifications. Of course, that product intervention power and the design and distribution obligations that are currently before the parliament will also apply to these enhanced sandbox activities as a corollary.
I have worked very collaboratively with the minister, and I thank her for that. It has not been a problem, but we did have a few minor issues. I'd just like to make it quite clear that ASIC confirm that they will publish the following data on the ASIC website: the names of the businesses currently in the sandbox, the cumulative total of businesses admitted to the sandbox, the number of businesses disallowed from entering the sandbox during their 30-day waiting period, the number of businesses removed from the sandbox due to misconduct, and the number of businesses in the sandbox issued with a compliance order. ASIC also confirms that the numerical data listed will be published on a quarterly basis. I seek leave to table a document.
I table the document.
The EM indicates that any regulations or subordinate legislation made under this legislation would specifically provide for AAT review for ASIC decisions relating to exemptions from the ACL requirements. It's at the top of page 10 in the explanatory memorandum. I'm interested in understanding how the public can be assured that what is essentially a political commitment being made in the EM will continue to be a feature of the regime as implemented.
The EM reads:
Under paragraph 327(1)(i) of the Credit Act, decisions made by ASIC are only subject to AAT review if the regulations specifically provide for this. As such, to ensure consistency across the application of the Corporations and Credit Acts to the regulatory sandbox, the Government intents that the regulations would specifically provide for AAT review for ASIC decisions relating to exemptions from the ACL requirements.
That appears to set out a legal reason why it needs to be specified in the regs. My question to you is: how can we be assured that this, which is a statement of government intent, will actually be a feature of the regime as implemented?
My understanding is that it can't start until the regs have been allowed. The regs have been available to you for six months and they actually are in the regulations—I think that is a feature of the regulations.
Yes, I understand that, but, as we explored earlier, the draft regulations that you've provided are not complete. The legislation provides for other regulations to be drafted at some subsequent point. My question is: how is this feature, described in the EM as being important for maintaining consistency across the application of the corporations and credit acts, to be assured?
My understanding is that this is standard practice and that the regulations do allow for this. Obviously, it will take 15 days to get the regulations in place once the bill is passed.
Minister, I'm not concerned about the timing or the immediate implementation. I am concerned about just understanding the framework that's being set up for the long term. This is a piece of legislation that presently allows for regulations to be made. The EM seems to indicate that an AAT review would only be available if it were specified in the regulation. It also indicates that it's the government's current policy intent to ensure that would happen for this round of regulation-making and also perhaps for a future round. My question to you is: how can you assure the public that that will be so? It's asserted that it's an important thing and it's asserted that it's a government commitment in the EM, but can people be assured that it is in fact the government's intention that all regulations made under this act would allow for AAT review?
It is in the draft regulations, under section 10.3, that applications may be made to the Administrative Appeals Tribunal for review—the decisions made by ASIC under subsection 1—and it is also disallowable.
I have a question on the process. In terms of obtaining an Australian financial services licence, an AFSL, or an Australian credit licence, an ACL, for something like a fintech product—and we've listed lots of examples—what is actually the most difficult aspect of the concept validation for these companies that they want exemptions to be granted for two years? What's the key reason for that?
My understanding is that it's largely the cost of the advice that goes into obtaining these licences that is prohibitive, and, unless the company can be sure that they have a viable business model, it is a barrier to increasing competition in financial services.
Thanks, Minister. That was my understanding as well. You did mention in your summary speech that you want to encourage a culture of risk taking in this particular industry, but, of course, risk taking has a downside, especially for those who are investors. Reading directly from the Parliamentary Library Bills Digest:
In order to facilitate the development of new Fintech products, ASIC's 'regulatory sandbox' allows new products to be tested in the Australian market for 12 months without requiring financial advisers or dealers of the product to first obtain an Australian Financial Services Licence (AFSL) or Australian Credit Licence (ACL).
The licensing exemption is limited to those providing financial advice on the relevant products…
Essentially, by providing that exemption for the service provider they're able to sell these products to obtain finance—presumably equity—at an early stage if we're dealing with venture capital, high-risk kinds of projects, but with what information? If they don't go through the validation process to get their licence so that they have established they are 'viable', to use your words, where do advisers get their information on the risk aspects of these companies before they flog them to potentially unsuspecting investors?
There are no changes to disclosure laws and there are consumer protections in place. Moreover, this 24-month time frame that is associated with the sandbox is intended to provide sufficient time for businesses to test their products or services and also continue to operate while their licence is being considered. The government expects the businesses will plan ahead, and if their business model is viable they'll submit their applications with adequate time before the end of that testing period.
During that period, will they be seeking any kind of financing? It could be equity financing. It would be unusual that they might get debt financing at an early stage of a highly risky concept, but will they be seeking any kind of financing for advisers or for brokers?
Well, either. Their products and their businesses are obviously going to be related. You said that the reason for the 24 months was to give them time for their businesses to operate, but businesses need capital to operate. So during this period will they be seeking any kind of financing—theoretically speaking—to make their businesses viable?
I imagine that if they felt they had stumbled onto a very viable, successful business model and there was a lot of consumer demand that they would certainly go out and seek finance from broader industry. But probably by that stage, if they were successful, they would have broken the boundaries of the ASIC sandbox anyway, so they wouldn't qualify to be in the sandbox anymore.
I'm not sure about that. Firstly you said that the whole point of this was to reduce regulation to give them access, and you're saying that if suddenly they come up with a viable business model while they're in the sandbox they're no longer going to be in it. As I mentioned in my second reading contribution, I have no problem with fledgling, high-risk companies seeking capital from those who understand risk and how to diversify their risk. But at what point are retail investors going to get dragged into providing capital while these companies are going through a sandbox stage and don't have to disclose the kind of 'viable'—to use your words—information to show they're viable? That's what they're getting an exemption for.
To quote from the Bills Digest:
… financial advisers or dealers of the product to first obtain an Australian Financial Services Licence—
will be exempt. It says:
It is not available to issuers of the product—
but to those who are going to be advising on these products and their services.
A start-up company, whether it be in fintech or in any other industry, is going to seek capital at some stage in its growth cycle. It won't necessarily be from retail investors. It might be from hostile investors. It might be from a bank. It could be from anyone. Fintechs are no different. That's an irrelevant part to this bill anyway. If I was seeking to finance a start-up business, whatever industry it was in, I would be asking them to test their business model. If I was wanting to invest in a fintech and I saw that its business model was being tested within a sheltered environment, like a sandbox, I might not provide that funding. Then again, I might be a risk-taking, wholesale investor as well.
Minister, if the loss as an exemption is limited to those providing financial advice on the relevant products, who are these financial advisers and what role and purpose do they serve? I'm now completely lost.
I'm completely lost too, Senator Whish-Wilson. They are not necessarily just providing financial advice; they are product manufacturers that are being tested in ASIC, in the sandbox.
I can understand product manufacturers in terms of insurance, superannuation, credit products and those kinds of things, but they're still being flogged by financial advisers while they're in the sandbox; correct? That's why the exemption is there in the first place. It could even be that their business is being sold wholesale—lock, stock and barrel—to Facebook or whoever it happens to be. At the end of the day, the exemption is for financial advisers. What roles are the financial advisers playing here?
The exemption is for the product, not the advisers. Any adviser still has to be licensed. They still have to have products on an approved product list. I doubt there would be an approved product list that would have on it a fintech product that had been listed in the ASIC sandbox a couple of weeks before. That just seems an unlikely scenario.
The Bills Digest talks about the licensing exemption as:
… limited to those providing financial advice on the relevant products or those dealing in the products. It is not available to issuers of the product.
I think what you just said is completely different to what the Bills Digest is saying. You're saying that providers of financial advice are within the company, the product or the services themselves. Presumably a product doesn't just get up and sell itself; there has to be some kind of entity behind it to sell it—or a company itself is trying to sell a product, a stream of new services or a new technology in credit. Where does the financial advice come into it?
I think we're going round in circles, Senator Whish-Wilson. Financial advisers do one thing and product manufacturers do another thing. These are product manufacturers testing their business model in a restricted licensed environment. That's all it is. I think maybe you are conflating two things.
I'd ask that you ask your staff, as to the summaries that have been put forward on what fintech is, what a regulatory sandbox is and the use of the regulatory sandbox. What we're dealing with here tonight is giving exemptions to financial advisers. That's what it says in the Bills Digest, Minister. I know these things aren't going to be sold to retail, to customers, because they're being tested; they may be one day. It certainly looks like it is aimed at getting financing, and that's why this exemption is in place. That's what the Bills Digest says. I'm interested in why we can't come to an understanding here.
I think, again, we're going round in circles and I will take it as a comment. But I will say that the financial advice, the product that is spoken about in this bill, referred to in this bill is largely things like robo-advice. It is innovations as opposed to your bog-standard everyday financial advice that you would go to a retail adviser or even a wholesale adviser for.
It could be aimed at anybody, but it is in a tested environment where the consumer upon whom it is tested is made fully aware that they are dealing with a start-up, new product, that is not fully licensed and which doesn't have the same protections that any other established product would have.
Minister, you will be aware that in other forums we have had ongoing discussions with ASIC about its resources. There was a significant collapse in the resources available to ASIC over time and it is engaged in a process, as I understand it, of retooling. It has some additional resources but is, at least as has been reported into estimates, increasing its emphasis on enforcement and investigation activity. I'd like to understand the impact of this regime on ASIC and its operations and, in particular, what the annualised cost of implementing the legislation is projected to be?
The government is ensuring that ASIC has adequate resources to oversee the enhanced sandbox. The government is committed to ensuring that the financial system regulators have the resources they need to combat misconduct in Australia's financial services industry at the same time as it bolsters consumer confidence in the sector. In fact, the government recently announced it would provide ASIC with a further $404.8 million to strengthen and intensify its approach to enforcement and to take on expanded responsibilities to stamp out misconduct in the financial sector. That money builds upon the $70.1 million in additional funding that was announced in 2018 to bolster ASIC's enforcement capabilities and enable it to undertake the new regulatory activities and investigations. So the government has given and continues to give consideration to ASIC's immediate funding needs and resources to undertake its important regulatory work.
I wanted to pick up on some of the questions that Senator Whish-Wilson was going towards—they are, the exposure of ordinary consumers to products that might not be suitable as a consequence of their inclusion in the sandbox and having regulatory relief made available to them. Other senators have talked about it in their contributions, but the consumer advocates to the Senate inquiry noted that, for example, recent innovation—as it might be termed—from payday lenders has led to more online targeting and quick loan applications for high-cost debt. It has resulted in an explosion of payday loans that originate online. That's not a particularly good consumer outcome; I would argue that's a bad consumer outcome. It is a bad product being sold to people who either shouldn't get that credit at or all or who might get it on better terms elsewhere in a more suitable product. You know, this is tightly associated with some of the things we conventionally associate with innovation—it is happening online, it is digital, it uses big data to microtarget a product to certain types of people and it is integrated with other kind of retail activities. It's certainly innovative, but it is not particularly great for consumers. One of the other examples provided by consumer advocates in the Senate inquiry process was innovation in the superannuation sector, with new entrants offering relatively high-cost options to consumers sold in a highly targeted manner online. The submission argued:
New funds … market on providing values alignment with members by investing in ethical, green, sustainable and tech related options. Fees on these new products are well above the industry average …
I guess the question is: are you satisfied with the model you are proposing, where the protections around consumer value and the best interests of consumers are not contained in the primary legislation but instead live in the regulations? You would know that we have circulated an amendment in the chamber that seeks to place that testing into the primary legislation. I'm trying to understand why government hasn't proceeded down that path.
I can see where you are going with this, Senator McAllister, but I think you have probably answered your own questions. First of all, payday lending is not included as an acceptable product in the enhanced regulatory sandbox. Secondly, you mentioned the fact that this is a fast-moving space. Because it is such a fast-moving space, because it is so fluid, the flexibility with which regulations enable ASIC in particular to act are, I think, a far greater consumer protection than having it locked into legislation.
I guess I'd make the assertion that, whether it is a credit product, an insurance product or an advice product—which Senator Whish-Wilson alluded to—there is kind of a baseline test which ought to be met, which is that the product has the capacity to introduce innovation that genuinely benefits consumers. I don't think that is a test that is disputed. My question is: why would a general test that goes to consumer benefit not be included in the primary legislation? It would provide some assurance to those who are watching the process here and asking themselves about where the consumer fits in in all of this. I understand that payday lending is not on the menu for the sandbox at the moment, but it is a very good example of the kind of innovation you can come up with if you really put your mind to it that uses digital, uses online, uses targeting, looks really nifty and is integrated with other kinds of business services but is actually really terrible for consumers. I present it—and, presumably, the consumer advocates present it—because we shouldn't be naive about the idea that innovation, in and of itself, is good for consumers. Some innovations are and some aren't. Our position, I guess, is that the idea that that test ought to be good for consumers should be a core feature of the legislation, not just something that is popped into a subordinate instrument and can be removed pretty easily by a minister.
It can't be removed. It still has to be disallowable, so that means there is parliamentary oversight there. The government's position of having this in regulations helps us to make changes as necessary, including at the conclusion of the recommendations that come out of the review in 12 months time.
In relation to the kinds of products that we are talking about, I noticed that the services and products that can be issued under a licensing exemption are the subject of limits in order to minimise the risk of losses to consumers. This includes a whole range of things, including that businesses relying on an exemption can only provide services to up to 100 retail clients and so on and so forth. The maximum credit contract can be $25,000. In terms of the financial advisers providing advice on these kinds of products, I've got to find 100 retail clients to test my new innovation in insurance in the sandbox. Can you give us some examples of the kinds of advisers that are currently working with companies in the sandbox, or is this a totally new paradigm?
Minister, these people aren't going to find clients on their own. They're creating products; they have actually got to find the 100 retail clients, for example, to test their products—the consumers of financial advice. How do the advisers get familiar with these products, and are there any working with companies in sandboxes at the moment?
Senator Whish-Wilson, in fact most fintechs start with clients who are friends and family, and by word of mouth. They don't go through national advisers.
When we debated the bill in here about crowdsourcing, I totally got that. I know that's definitely the case with crowdsourcing. I find it hard to believe that about financial products, although you're saying that some very complex financial products, like derivatives products, won't be included in this—I'm very glad to hear that! But I would have thought that with some of the products that you outlined earlier, the range of products that are now available in the sandbox—all sorts of credit products, insurance products and deposit products—do their friends really understand those kinds of products? I'm quite amazed as to where there is any mature market for this kind of high-risk product with retail investors. If there is, I've never heard of it. Can you give me some examples—perhaps in other countries if it's not an established market here?
You're talking about an app—the use of an app, for example. That's like a couple of the disasters that we've seen which I listed in my second reading debate speech. Are you talking about technology platforms here or are you talking about engineering new financial products as well? Or is it the two together? Are they mutually exclusive? If it's just delivery of financial products then I can see your point. But you mentioned there that a whole range of new products are going to be included in the sandbox. I suppose it's hard for me to ascertain exactly what you mean until I see some examples of the kinds of products that you're talking about.
Well, the good news is that those products are going to be listed on the website, thanks to Senator Lambie. Can I just remind you that advisers are still going to be subject to the best-interest duty? They will still be subject to the FASEA Code of Ethics and they are still subject to the design and distribution obligations in ASIC, the product intervention powers at ASIC and all disclosure requirements.
That's great to hear, Minister, but you said earlier that you didn't think they'd be going through advisers, that they'd be going through friends and family when they establish their products. I'm sure they would want to get some relationships going with good advisers so that they could find clients to test their products. If I were a banker or an insurance company that wanted to look at add-on products that might innovate in these areas I'd probably use my existing client base, and maybe even my financial advisers' client bases. My question is: are there actually any examples of this working? Are we totally in the infancy of this market? You said there are some in the sandbox already. Perhaps you could take it on notice to give us some examples of those companies which are already in the sandbox and what kinds of advisers they've used to find the crash test dummies for their products?
Other senators seem to have exhausted their questions for the minister. I'd like to move now to the amendment that's been circulated in my name. I seek leave to move amendments (1) to (8) together.
(1) Schedule 1, item 2, page 4 (lines 16 to 21), omit subsection 926B(3), substitute:
FinTech sandbox exemption
(3) A FinTech sandbox exemption may apply unconditionally or subject to specified conditions.
(3A) A FinTech sandbox exemption does not apply in relation to a person and a financial service unless:
(a) the person has lodged a notification in relation to the service with ASIC that complies with subsection (3B); and
(b) the 30-day period starting on the day the notification was so lodged has ended without ASIC giving the provider written notice of a decision under subsection (3C) relating to the notification.
(3B) For the purposes of paragraph (3A) (a), the person must lodge a notification with ASIC that includes the following:
(a) a description of each financial service (including of any related kind of financial product) for which the person is proposing to use the exemption;
(b) a justification of why exempting each of those financial services will result, or be likely to result, in a benefit to the public that will outweigh the detriment to the public that will result, or be likely to result, from exempting that service;
(c) any other information required by regulations made for the purposes of this paragraph.
(3C) ASIC may, after considering the notification referred to in paragraph (3A) (a), decide it is not satisfied of one or more of the following:
(a) that the financial service:
(i) is new; or
(ii) is a new adaptation, or new improvement, of another financial service;
(b) that exempting the financial service will result, or be likely to result, in a benefit to the public that will outweigh the detriment to the public that will result, or be likely to result, from exempting that service;
(c) that any other condition prescribed by regulation s made for the purposes of this paragraph is met.
(2) Schedule 1, item 2, page 4 (line 22), omit "an exemption", substitute "a FinTech sandbox exemption".
(3) Schedule 1, item 2, page 4 (line 26), omit "An exemption described in subsection (3)", substitute "A FinTech sandbox exemption".
(4) Schedule 1, item 2, page 4 (after line 28), at the end of section 926B, add:
(6) In this section:
FinTech sandbox exemption means an exemption that:
(a) is made for the for purposes of paragraph (1) (a); and
(b) exempts a person or class of persons from subsection 911A(1) to enable testing of particular financial services.
(5) Schedule 1, item 5, page 5 (lines 10 to 14), omit subsection 110(2), substitute:
FinTech sandbox exemption
(2) A FinTech sandbox exemption may apply unconditionally or subject to specified conditions.
(2A) A FinTech sandbox exemption does not apply in relation to a person and a credit activity unless:
(a) the person has lodged a notification in relation to the activity with ASIC that complies with subsection (2B); and
(b) the 30-day period starting on the day the notification was so lodged has ended without ASIC giving the provider written notice of a decision under subsection (2C) relating to the notification.
(2B) For the purposes of paragraph (2A) (a), the person must lodge a notification with ASIC that includes the following:
(a) a description of each credit activity (including of any related kind of credit activity) for which the person is proposing to use the exemption;
(b) a justification of why exempting each of those credit activities will result, or be likely to result, in a benefit to the public that will outweigh the detriment to the public that will result, or be likely to result, from exempting that activity;
(c) any other information required by regulations made for the purposes of this paragraph.
(2C) ASIC may, after considering the notification referred to in paragraph (2A) (a), decide it is not satisfied of one or more of the following:
(a) that the credit activity:
(i) is new; or
(ii) is a new adaptation, or new improvement, of another credit activity;
(b) that exempting the credit activity will result, or be likely to result, in a benefit to the public that will outweigh the detriment to the public that will result, or be likely to result, from exempting that activity;
(c) that any other condition prescribed by regulations made for the purposes of this paragraph is met.
(6) Schedule 1, item 5, page 5 (line 15), omit "an exemption", substitute "a FinTech sandbox exemption".
(7) Schedule 1, item 5, page 5 (line 19), omit "An exemption described in subsection (2)", substitute "A FinTech sandbox exemption".
(8) Schedule 1, item 5, page 5 (after line 21), at the end of section 110, add:
(5) In this section:
FinTech sandbox exemption means an exemption that:
(a) is made for the for purposes of paragraph (1) (a); and
(b) exempts a person or class of persons from subsection 29(1) to enable testing of particular credit activities.
This follows on from my earlier remarks to the minister. The legislation provides exemptions for certain firms from some regulatory obligations. As I argued earlier, we think that these exemptions should only be available to firms that have products and services that are genuinely innovative and will benefit customers. It's the second part of the test that seems to me to be quite important, given the very large number of examples that we have available to us of innovation that in fact is not good for customers and is only good for businesses by virtue of exploiting customers. The amendment that's been circulated sets out a basic test that ASIC would apply. It would empower ASIC to prevent products and services that don't meet the innovation-and-benefit test from accessing the exemption.
We acknowledge that the government has issued draft regulations that incorporate a test that is like this, but the concern is that that really doesn't go far enough. I think that, as a matter of general principle, if the parliament is going to provide for regulatory exemptions in legislation it should also provide the baseline threshold of consumer protection in the same legislation, and that protection should be approved by parliament itself, not merely contained in subordinate legislation. It's our view that the test ought to be incorporated within the substantive legislation and that it should be an enduring protection for consumers, not one that can be changed by the minister.
Earlier in debate, Minister, you made the observation that regulations can be disallowed. That's true, but I think everyone here understands that a legislative protection is a more powerful protection than a protection contained in subordinate legislation. In an environment where trust in financial services is low, our view is that incorporating that protection into the primary legislation is an important step. It's hard to see what the objection to doing it would be. It doesn't create detailed implementation requirements for how exactly that test would apply in relation to any particular product. It merely establishes a benchmark, which is that there must be a benefit for consumers. I think that that safeguards the purpose of providing a sandbox. The sandbox isn't there just to encourage innovation; it needs to be connected to benefit. I also think that it provides an important reassurance that the public interest must always be established in any kind of regulatory relief. We want firms to innovate—of course we do—but we don't want to provide a backdoor for firms to avoid regulations that apply to the rest of industry.
I haven't looked at the amendment in any detail. I think the principle is a good one, but I'm not sure how it is going to work. It sounds very subjective to me. I think ASIC making a deliberation about whether it will be good ultimately for the consumer or to the consumer's benefit, or in the public interest, kind of defeats the purpose of having a sandbox and testing these products. I'd be interested to hear what the minister has to say, but I'm not sure how ASIC would come to those conclusions for an individual company or a product or service that's being tested. I'd be interested to hear what the minister has to say about how that would work in principle.
Given that the minister isn't going to make this observation, I'll say in response to Senator Whish-Wilson's observations: essentially, the same test is embedded in the regulations that are proposed. ASIC will need to make an assessment based on the regime that's been established now. Our argument's a procedural one. This is a reasonable and sensible thing to ask ASIC to do in the case of every application that comes before it for regulatory relief. Why wouldn't you put it in the primary legislation?
Look, I accept that. I think ASIC would assume that any company seeking to go into the regulatory sandbox would want to develop a product that would ultimately be to the consumer's benefit, so it's going to be successful and they will make money out of it because it'll take off. But it would be interesting if ASIC knew how to spot a spiv—someone who just wanted to get a product out there and raise some capital, which, I think the minister is aware, is a source of concern for me. I'm not sure how they would do that—whether a company would need a certain track record for a period of time when it was developing a service or a product that was going to go into the sandbox.
It is unusual to be talking across the chamber to someone who is putting up an amendment, but I would be keen to hear from Labor one more time as to how ASIC would make that deliberation. Would it be a test on, for example, the directors? That wouldn't be a bad one if they had had previous records of a whole range of illegal activity or any kind of shady behaviour. A little bit of background would probably be enough to help me, Senator McAllister—through you, Chair—with how ASIC would actually come to those conclusions.
I would probably just draw Senator Whish-Wilson's attention to the amendment sheet that's been circulated. It sets out a process where a person would lodge a notification with ASIC that included a description of the financial service for which the person, or the business, was proposing to use the exemption and 'a justification of why exempting each of those financial services will result, or be likely to result, in a benefit to the public that will outweigh the detriment to the public that will result, or be likely to result, from exempting the service'.
That weighing of costs and benefits is a central public policy process that ASIC will need to undertake, and it's similar to the process proposed by the government in their draft regulations. It's not perfect, of course. I think your earlier comment, Senator Whish-Wilson, made the obvious observation that it's sometimes difficult to pick in advance a person who wishes to do harm. But it at least establishes a baseline proposition and requires applicants to make the case for why regulatory relief is in the consumer's interest or the public's interest. The government, as I understand it, doesn't disagree with that principle. It is a legislative principle that we are in dispute about, and our argument is that this test ought to sit in the primary legislation.