Fostering Innovation by Navigating the Evolving Regulatory Landscape Technology & Innovation - the Future of Banking & Financial Services conference

Grand Hyatt, Melbourne, 1st June 2016

Professor Deborah Ralston, Monash University, (Chair ASIC Digital Finance Advisory Committee)

Agenda• The evolving regulatory landscape

• How is Australia’s regulatory regime for fintech compared to the rest of the world?

• Examining the role of the ASIC’s Innovation Hub and proposed ‘regulatory sandbox’

• Understanding how the growth of fintech will impact the ways bank operate – also on financial regulation

Finance is dynamic; so too must be its regulation.

(CAPRIO 2013)

Financial regulation post-GFC

Stability EfficiencyGoals of financial regulation• Stability and Confidence • Efficiency and competition• Consumer protection

Response to GFC - in bank capital & transparency in markets• Micro v. macro prudential regulation – systemic risk??• concentration – competition• Deleveraging of banks – in lending• consumer protection – informed by behavioural finance

Appeal of fintech• Stability of financial system

– New entrants = diverse ecosystem • Efficiency of financial system

– Lower margins + higher volumes = higher productivity • Democracy of financial system

– Greater access* + lower cost = social value

*Financial inclusion – 2 billion of 38% world pop.n are unbanked

A Haldane, Bank of England 2016

Regulating fintechChallenge for regulators in dealing with fintechs:

• collaboration, approachability, flexibility, harmonisation, and timeliness

Internationally, the approach has been active or passive depending on factors such as:

• Political will• “Regulatory philosophy” eg. Belief in market forces v.

public policy

Different approaches to market place lending

Source: World Economic Forum, 2015, A Paradigm Shift for Small Business Finance Lending p.27

International approachesUnited Kingdom

– Dramatic contraction in bank lending post 2008-2013– Leading regulator - FCA – competition mandate - Innovation Hub – UK Govt. direct financial support for alternative lenders– Mandated sharing of SME data Small Business, Enterprise and

Employment Bill 2014 – “New Bank Start-up Unit” – SSBs authorised on £1m capital – Forthcoming Second Directive on Payments Services, known as

PSD2 - will allow fintechs to act as intermediaries between banks and their customers.

International approachesChina• Population 1.35bn, formally banked 63%, mobile phones 86% -

few branched, or ATMs• Rapid growth in fintechs (around 2000 in 2014):

– Payments via fintech platforms increased over 400% in 2013-14– Yu’e Bao a fund launched by Ant (parent of Alibaba) grew > US$90 billion

in just 10 months becoming 4th largest MMF in the world

Source: Douglas W. Arner, Jànos Barberis, Ross P. Buckley, 2015, The Evolution of FinTech: A New Post-Crisis Paradigm?

Fintech regulation in China• In July 2015, Guiding Opinions on Promotion of Healthy

Development of Internet Finance – Policy measures to encourage FinTech innovation eg. preferential

taxation and stamp duty treatment for small enterprises • December 2015

– draft regulation on peer-to-peer lending platforms and – regulation on non-banking online payment service providers

• Multiple authorities involved • Some rationalisation expected

International approachesUnited States• Jump Start Our Business Startups (JOBS) Act 2012 opened the

way for SME loans provided by online lenders • Regulatory landscape is complex and fragmented.

– the Federal Reserve, Consumer Financial Protection Bureau (CFPB), the Financial Industry Regulatory Authority, Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC) etc., along with the 50 state regulators.

– Many fintechs regulated under state legislation

• United States – an emerging national agenda– CFPB Innovation Policy

• February 2016, to facilitate consumer-friendly innovation and allow FinTech companies to apply for No-Action Letters to clarify regulatory uncertainty during product development.

– OCC White Paper • March 2016 the regulator of federally chartered national banks and savings associations

to provide guidance for financial institutions and companies regarding the development of products and services in the financial technology (“FinTech”) sector.

AUSTRALIA• ASIC is the single point of contact for any company seeking a financial

services license to: – provide advice, investments, credit, payments service, offer credit raise capital

from retail consumers • ASIC’s remit is to:

– Promote investor and financial consumer trust and confidence;– Ensure fair orderly and transparent and efficient markets; and– Provide efficient and accessible registration.

• Innovation Hub and FinTech Taskforce to provide advice• Digital Finance Advisory Committee – promote collaboration between

fintechs and regulators

Fintech regulation in Australia• Flexibility in regulation

– Licensing through a third party– Waivers eg, RG 167 (regulatory discretion) RG 167.51 (calculators) – ASIC will grant relief if there is a demonstrable net regulatory benefit – Graduated payments regulation

• Current issues:– Treasury, GST treatment of digital currency, Discussion Paper, May 2016– Regulatory guideline on Market Based Lending– Consultation Paper 254 Regulating digital financial advice– Regulatory Guide 000 on Providing digital financial product advice to retail clients.– Productivity Commission issues paper on Data availability and use – Legislation on Crowdsourced Equity Funding went to parliament in Dec 2016.

Regulatory sandbox• A consultation paper on the proposed Regulatory Sandbox by the end of

June 2016• Supported in the Treasurer’s National Innovation and Science Agenda• ASIC consultation paper due June• Allow fintechs “product testing” under some form of limited licence eg

– “Grace period” on requirements for a responsible manager– Consumer protection – restrictions on individual investments etc– Types of activity – products and services no systemic risk

• General discussion see FCA Consultation Paper Regulatory Sandbox November 2015

The future for banking and fintechs• Challenges for fintechs to grow

– Access to data– Customer acquisition

• Challenges for banks in adjusting to fintech environment– Developing a customer rather than product focus– Fostering innovation requires a more flexible innovative culture – risk!

• Potential for partnerships– Challenge of collaboration v. competition – Requires a different style of leadership– KPMG reports 25% of fintech deals involve a corporate with 60 deals of over

$50m in 2015 (KPMG March 2016)

Regulation into the futureRapid innovation in financial markets requires a technical response to regulation

RegTech – postulates that disruption of finance will be accompanied by innovation in regulation of

finance and ultimately the automation of regulation. *

This will include:– Active and productive two-way regulatory dialogue and regular feedback loops

(COLLABORATION)– Standardized presentation of data (regional/global) – Automation of data collection – Open source compliance systems (encouraging FinTech participation) – Compliance criteria built into protocols (removing human error)

• ASIC is currently in regular discussion in matters of RegTech*Source:Dwyer, J, 2015, Regtech — Not Reg+Tech But RegTech, Celente, July.

Summary• Benefits of fintech are significant in terms of efficiency and

financial inclusion• Very different international approaches to fintech regulation –

harmonisation?• In Australia regulation of fintech is primarily about the licensing

of platforms through ASIC• Increasing number of partnerships between fintechs and

traditional providers• RegTech is showing the way to more flexible regulation with

lower compliance costs