sandboxes, rabbit costumes and regulation
FinTech is firmly on the national agenda with the Government recently outlining reforms, including a proposed “regulatory sandbox”, expected to feature in the May budget.
Before pressing the launch button, those entering the burgeoning FinTech sector should pause to consider whether their business model raises legal issues. It almost certainly does.
We discuss how FinTech is regulated, the risks of non-compliance – including highlighting recent penalties imposed on pay-day lender Nimble (known for its ads featuring a man in a rabbit costume) – and take a look at the proposed reforms.
What is FinTech?
FinTech is the integration of technology with financial services. It is an evolving industry thought by many to be on the verge of revolutionising the financial services sector.
While incumbent financial service providers are investing big in their own technology, there is a movement of start-up providers capitalising on low-cost business models.
Their goal is to provide consumers with greater accessibility, reduced costs and increased choice by offering innovative services. These include: digital currencies, mobile payments, peer-to-peer lending and robo-advice.
Such is the interest in FinTech that large corporates (notably, the big banks) and venture capitalists are actively backing and pursuing partnerships with these emerging providers. 
What is changing?
Key to the Government’s reforms is the proposed “regulatory sandbox” which describes a controlled environment whereby FinTech providers can test their products and services before obtaining their financial services licence. 
While guidance to date is scant, we believe this concept will involve conditional relief from various compliance requirements intended to encourage FinTech providers to re-allocate their resources into improved services and speed to market.
We expect to hear future developments and will continue to monitor this space with interest. In the interim, providers should familiarise themselves with the existing laws as the regulatory spotlight shines brightly over the FinTech sector.
Do you need an Australian financial services licence (AFSL)?
In most cases – yes – if you are carrying on a business of providing a financial service, such as financial product advice or dealing in financial products you will need an AFSL.
You must also comply with all obligations associated with holding an AFSL, including:
- solvency and financial resources requirements;
- qualifications, experience and competency of representatives;
- conduct and disclosure; and
- dispute resolution and compensation requirements (if retail clients).
It’s not always obvious
Determining whether a particular service falls within the definitions of ‘financial service’, ‘financial product’ or ‘credit activities’ often requires careful analysis and is not always immediately apparent.
Unfortunately, the compliance landscape is extensive, complex and often difficult to navigate.
By way of example, compare peer-to-peer lending and digital currencies – two relatively new forms of FinTech products.
Peer-to-peer or marketplace lending, which generally involves the use of an online platform through which lenders are matched with borrowers, is heavily regulated. Providers usually require an AFSL and, in some circumstances, an ACL.
In stark contrast, the rapidly evolving sector of “digital currencies” or “crypto-currencies” such as Bitcoin is largely unregulated at this time. 
In our view, this discrepancy is an anomaly and is indicative of the existing framework failing to keep pace with the emergence of new technology.
ASIC’s recent investigation into Nimble underscores the importance of compliance.
ASIC found that the pay-day lender famous for its Nimble bunny failed to properly assess its customer’s financial circumstances prior to providing loans.
Instead Nimble opted to rely on mathematical algorithms which ASIC considered insufficient.
Following the investigation, Nimble agreed to refund more than $1.5m to customers and review its business operations. 
This serves as a timely reminder for providers to continuously monitor the nature and scope of their activities to ensure that they are compliant with the law.
Non-compliance not only carries the risk of financial and reputational harm if your activities capture the attention of the regulator, it also may act as an impediment to a future capital raise or sale event.
In extreme cases, operating a financial services business without the required licence may result in jail time.
Don’t bury your head in the sand. Wilful blindness is no defence.
Despite the challenges – there are solutions. If you are unsure whether your activities require an AFSL or ACL, or need other legal assistance, contact us for advice so that you can participate in the great opportunities that FinTech offers.