The committee has received a great deal of evidence and is grateful to those who have engaged with the inquiry to date. Given the number of issues raised, the committee has decided to table this interim report covering some areas of focus thus far. Further issues, as well as some follow up on issues covered in this interim report, will be contained in the committee’s final report in 2021.
Australia has a vibrant and growing FinTech sector, with a significant number of startups and early stage ventures as well as several established unicorns that clearly show the incredible potential of this sector of the economy. FinTech has the potential to revolutionise financial services in Australia, increasing competition in the sector and providing better outcomes for consumers.
Australia's RegTech industry is comparatively less well developed, however still ranks very highly in global terms, due to the sector's nascent status overall. The opportunities in RegTech span across the economy, and have the potential to be a significant export industry for Australia.
While COVID-19 has undoubtedly impacted the startup sector, it is also hastening digital transformation across the economy, providing opportunities to ensure that Australian organisations and individuals work more efficiently into the future.
To review and organise the material presented to the committee, the committee has chosen to view it through some key components of national competitiveness: tax, regulation, access to capital, skills and talent, and culture. The committee also received specific evidence relating to the impact of COVID-19 and technology enablers that have risen to prominence during the crisis.
COVID-19 issues
The committee heard that COVID-19 has had a range of impacts on the FinTech and RegTech sector. Some businesses, particularly well-established FinTechs and those in specific niches, have ‘ridden the wave’ and experienced significant growth over this period. However, many newer startups have struggled, with loss of capital inflows and faltering customer acquisition the key problems encountered. The sector has received support from a number of government initiatives including JobKeeper and programs supporting non-bank lending.
The committee also heard about technology enablers in a range of areas that have assisted businesses and individuals through the pandemic. In particular, the committee highlighted several initiatives currently underway that should be continued as a ‘new normal’ way of doing things into the future, including: enabling electronic company meetings and communications; allowing for electronic signing and witnessing of legal documents; the extended rollout of telehealth services; and the utilisation of electronic prescriptions. The committee also identified accelerating progress on the Australian Government’s digital identity reforms as a key opportunity, as well as the potential for RegTech to be used to facilitate compliance with industrial awards. The evidence received is contained in Chapter 2.
Tax issues
The committee took evidence on a range of taxation-related issues that affect FinTechs and RegTechs in Australia. The committee heard that a competitive tax framework will assist these organisations to reach their potential and maximise the impact of the sector in Australia’s future growth.
The operation of the Research and Development Tax Incentive (R&DTI) was a key issue raised in the evidence to the committee to date. Companies emphasised to the committee the importance of the incentive for startups including FinTechs. However, there was a great deal of evidence on the uncertainty around the eligibility of software development for the program, and concern about retrospective audits which can result in companies having to pay back the incentive.
The committee heard that some companies had paid for professional advice to ensure their claims complied with the rules but still had to pay back the incentive. The committee was told that as a result of the complexity and uncertainty of eligibility and audits, claims are being pared back or not lodged at all to reduce the risk for start-ups. The committee understands that companies, especially startups need as much certainty as possible and facing repayment of scarce capital would be particularly difficult for a small company. The committee is therefore recommending greater certainty around these matters.
Although a state-based tax, the committee heard that the different payroll tax platforms and requirements between jurisdictions results in complexity and inefficiency for firms, and that payroll tax requirements can create a handbrake on company growth for early stage and mid-size startups. Noting the payroll tax measures introduced by several jurisdictions during the COVID-19 pandemic, the committee is recommending that the government work through the Council for Federal Financial Relations to simplify payroll tax across jurisdictions.
The tax chapter also covers employee share schemes and the tax treatment of Initial Coin Offerings. The evidence received is in Chapter 3 and the committee's views and recommendations are in Chapter 8.
Regulation
Chapters 4 and 5 of this report canvas issues raised with the committee about Australia’s regulatory settings as they impact FinTechs and RegTechs.
A clear, consistent and pro-innovation regulatory environment is necessary for the FinTech and RegTech sectors to reach their potential in Australia. It is also critical to ensure that Australia is internationally competitive in this space, with significant opportunities available if Australia can capitalise on the growth of FinTech and RegTech globally.
Regulation of competition issues
The number of regulators with a role in relation to competition and financial services in Australia mean that it is not straightforward to ensure that competition is operating effectively in this sector. The committee understands that the main responsibility for competition lies with the ACCC but that other agencies such as ASIC, APRA and the Treasury have competition as part of their mandates. Witnesses viewed this fragmentation as a risk and saw the need for Australia's financial regulators to collectively provide greater focus on promoting competition in the financial system.
It was pointed out that competition in financial services is being driven largely from firms outside the major banks, with the rise of the buy now pay later sector showing that innovative FinTechs can drive increased consumer choice and attract significant market share from large incumbents.
The committee heard about various initiatives ASIC, APRA and the RBA are undertaking designed to support innovation in the financial services sector. The committee considers that these initiatives need to be undergirded by clear, market-based performance metrics for these regulators to ensure that they are achieving real outcomes in the sector.
In the committee’s view, the most efficient mechanism for elevating consideration of domestic competition issues at the regulatory level would be to provide the Council of Financial Regulators with a competition mandate, as advice to the government, and ensure that they regularly report on competitive dynamics in the Australian financial services market.
Witnesses also highlighted that Australia must ensure its regulatory settings for FinTech and RegTech are internationally competitive in order to attract investment capital, skills and talent to Australia. It was suggested to the committee that Australia should undertake regular benchmarking of these regulatory settings against global standards. As such, the committee considers that the Council of Financial Regulators should regularly consider and report on Australia’s external competitive position in financial services.
Foreign Exchange Transparency
The committee took evidence from several innovative FinTechs offering products in foreign exchange services and international money transfers that are disrupting these markets to the clear benefit of consumers. The lack of clear requirements around the transparent pricing of foreign exchange fees charged is of concern. Addressing this issue will enable newer players offering better deals to customers to compete on a level playing field with larger incumbents.
Consumer Data Right
An important reform to encourage greater competition and provide consumers with more power is the Consumer Data Right (CDR), which launched in the banking sector on 1 July 2020. Open banking will give customers greater access to and control over their own banking data, with banks required to share customer data with accredited third parties when directed to do so by the consumer. The expected outcomes are to improve price transparency, facilitate comparison services, assist customers with the choice of the most appropriate products and facilitate switching from one provider to another.
The committee heard unanimous support for the rollout of open banking. Several issues were raised that require consideration and refinement, in the areas of: governance arrangements; intermediary access; the role of digital data capture practices; education and awareness; and expansion of CDR into other financial services.
It was highlighted that governance of the CDR is overseen by three different regulatory bodies, and that consolidation of these arrangements, and regulatory arrangements for data policy more broadly, could confer significant benefits. This is an area of significant potential reform, which the committee intends to catalyse through this inquiry. A new national body will provide focus and accountability.
On the issue of intermediary access, the committee heard concerns that the current CDR framework may not sufficiently enable third party ‘intermediary’ organisations to participate in the CDR ecosystem. Noting that the rules relating to intermediaries are still being finalised, the committee considers this issue needs to be adequately addressed to ensure the full benefits of the CDR can be realised.
An area of concern related to the roll out of the CDR is the practice of digital data capture or ‘screen scraping, which the committee understands is used in the banking and financial services industry. This method is used by some FinTechs, with the agreement of customers, using their login details to access their bank accounts and data to provide a service. Contrasting views were expressed to the committee on this continuation of this practice, noting the advice from ASIC that they were not aware of any consumer loss from screen scraping.
In relation to education and awareness, the committee supports the intention of the CDR to provide consumers with greater access to and control over their data. However, the committee agrees with submitters and witnesses that the Australian public needs to be made aware of this significant reform and the opportunities it provides, and that funding commitments from government and industry are required to drive this initiative forward.
Looking to the expansion of the CDR, the committee heard that other areas of financial services, in particular superannuation and general insurance, would benefit greatly from the increased transparency and consumer functionality provided by the CDR. Work to explore the practical considerations of expansion into these sectors should commence now.
Access to Capital
Evidence received by the committee highlighted the critical role that access to capital plays in fostering the growth of innovative businesses in Australia, including FinTechs and RegTechs.
Chapter 6 focuses on the operation of the Early Stage Venture Capital Limited Partnerships (ESVCLP) program and the Early Stage Innovation Company (ESIC) tax incentives, the potential role of Collective Investment Vehicles (CIVs), and the need for collaboration between large and small businesses. The committee also heard about the potential for the superannuation sector to become more actively involved in investing in Australian startups and scaleups, either directly or indirectly through venture capital funds, to spur this sector of the economy forward.
The committee has made recommendations to strengthen ESVCLP and ESIC, and create a new CIV structure to enhance Australia’s global attractiveness as an investment destination. Additionally, the government should explore options in relation to incentivising collaboration between large businesses and startups as a means of attracting additional capital into new businesses. Superannuation funds should also be encouraged to invest more broadly, including into the Australian startup sector.
Culture
The committee received evidence indicating that culture was a crucial factor in creating a national ecosystem conducive to innovation and startup success.
In particular Chapter 7 examines several specific issues that impact on innovation culture, both for FinTechs and more broadly. This includes looking at the challenges faced by startups in participating in government procurement processes. Government should play a proactive role in encouraging growth opportunities for innovative firms through appropriate procurement policies. The committee considers that the government should undertake work to better understand the costs and complexity for small businesses, including FinTechs and RegTechs, in Commonwealth Procurement.
The committee also heard of the importance of government-led, challenge‑
based innovation initiatives to enable X-tech firms to solve policy and service delivery challenges. There are some initiatives in this area already underway, and the Australian Government can play a greater role in advancing this area.
In its consideration of innovation culture in the Agricultural sector, the committee heard that while much work is being done on innovative agricultural technology (AgTech) initiatives, there is a lack of coordination in relation to AgTech policy development and implementation. The committee is recommending the establishment of an AgTech Advisory Council to help drive this agenda forward.
Skills and talent
Inquiry participants informed the committee that a substantial pool of local and international talent is required to accelerate and grow the Australian FinTech and RegTech sectors. The global demand for tech talent means that Australia must position itself well in order to attract and develop the necessary skilled employees to drive forward new industries such as FinTech and RegTech.
In this context, Chapter 7 looks into how the government can facilitate lifelong learning and retraining in ways that would benefit both workers and employers, including via microcredential qualifications and Fringe Benefit Tax exemptions. The importance of creating training and reskilling opportunities through these mechanisms was emphasised in the context of COVID-19, which has hastened the need to ensure that Australian workers can adapt to suit the needs of emerging industries. The newly created National Skills Commission is a significant reform in this area that will be able to provide further direction on priority areas and means of advancing Australia’s skill set in key technology areas.