This chapter and Chapter 5 examine a range of regulatory issues identified in the first year of the committee’s inquiry that impact on the FinTech and RegTech sectors.
Chapter 4 commences with a broad discussion of the regulatory environment in Australia as it affects FinTechs, including:
regulatory relief measures applied during COVID-19;
the way regulators deal with competition issues and innovation in the domestic market;
the use of self-regulation and industry codes in financial services; and
Australia's global competitiveness in financial services.
The chapter then discusses several specific regulatory issues raised in evidence to the committee, namely:
the functionality and accessibility of the New Payments Platform;
the management of property data in Australia, including data held by government; and
issues raised concerning transparency and pricing in the foreign exchange market.
Chapter 5 then deals singularly with a major regulatory reform that will create significant opportunities for the FinTech and RegTech sectors: the introduction of the Consumer Data Right (CDR).
Overview of Australia's regulatory environment for FinTechs
Australia presents a complex environment for new FinTechs, with a number of regulators responsible for different aspects of the financial sector, and a range of regulations and standards that firms must understand and adhere to. The committee heard that the ability of start-ups to navigate Australia's regulatory environment is, on its own, a significant factor in determining a company's success.
Regulatory complexity, fragmentation and duplication
FinTech Australia submitted that FinTechs are subject to a complex regulatory regime:
It includes financial services and consumer credit licensing and disclosure obligations, consumer law requirements, privacy and anti-money laundering and counter terrorism financing requirements. Depending on the type of services engaged in, fintechs may need to hold an Australian financial services licence, Australian credit licence, rely on an exemption from licensing, or even become some form of authorised depository institution. In addition to licensing they may also be required to enrol or register with AUSTRAC [the Australian Transaction Reports and Analysis Centre] and comply with requirements under the Anti‑Money Laundering and Counter-Terrorism Financing Act 2006.
It gave a further example in relation to payments regulation:
The regulation for payments is fragmented and complicated as it relies on three regulators to supervise different aspects of the payments ecosystem, which do not dovetail and are, in some instances, contradictory. In addition, much of the guidance is outdated and has not adapted to technological development.
The committee heard that the number of regulators in the financial sector causes confusion, particularly for new businesses looking for advice and not knowing where to turn. Zip for example pointed to the large number of regulators it has to engage with. Mr Peter Gray, Chief Operating Officer provided more detail:
[H]ere's the rub for fintechs: in providing cutting-edge services and products, we operate in a variety of regulatory landscapes and are faced with a myriad of current and potential regulation from different regulators that does not speak to the technology or products that we have created. As a quick snapshot, we're currently regulated or overseen by ASIC [the Australian Securities and Investments Commission], the ACCC [Australian Competition and Consumer Commission], AFCA [Australian Financial Complaints Authority], AUSTRAC, the OAIC [Office of the Australian Information Commissioner], APRA [Australian Prudential Regulation Authority], Treasury and the ASX, and now, in addition, the RBA [Reserve Bank of Australia] is also making moves.
Dr Bradley Pragnell, Principal, 34 South 45 North Consulting also raised the issue of multiple regulators creating challenges. Mr Guy Sanderson, Partner, Baker McKenzie spoke about the fragmentation of regulators to whom clients are responsible as an issue for clients:
In Australia the regulatory landscape has grown up organically rather than in an organised, top-down way. We've got…a whole range of regulators, each of which have got different priorities. For example, the RBA might want to reduce processing costs, whereas ASIC might want to enhance consumer protection and increase costs for business. You've not necessarily got all of the regulators pulling in the same direction...
Mr Guy Sanderson, Partner, Baker McKenzie suggested '[a] single point of contact would be a helpful thing'. However, he acknowledged that changing regulatory responsibilities would be challenging, adding:
There are two aspects to this: one is the structure of regulators, the other is their attitude. Some regulators here are more active. AUSTRAC can be quite proactive in what it does. Whereas some are more reactionary. ASIC, for example, is more reactionary than others. Where we've seen successful regulators, like [the Monetary Authority of Singapore] in Singapore, they are very proactive. They not only have a single point of contact for a fin-tech company across the various laws and regulations with which they have to comply, but they are also proactive.
…So I don't think it's necessary to suddenly form one super regulator in Australia. But I think having some overlay where there is a single point of contact who is also very proactive in developing an ecosystem, helping a fin-tech or reg-tech company navigate the maze of different regulators, would certainly be a way of encouraging that kind of system.
Mr John Price, Commissioner, ASIC, acknowledged that Australia's regulatory framework has a number of regulators with a number of different mandates and by way of explanation provided the following example:
I will take the example of authorised deposit-taking institutions—banks, as the community would commonly refer to them. APRA regulates banks from a financial stability point of view. They're interested in the prudential soundness of banks and making sure that depositors are looked after. ASIC, on the other hand, looks at banking regulation from the focus of, are customers being looked after and are investors adequately informed? As you can see, we have coextensive duties and mandates in respect of the regulation of banks, but they are complementary in some ways, and we try to coordinate to minimise red tape as much as we can.
Mr Mark Adams, Senior Executive Leader, Strategic Intelligence, ASIC detailed ways the regulators are improving coordination, highlighting the work of ASIC's Innovation Hub:
Through the work of the Innovation Hub we've established a network of the regulators through the committee we've got, the Digital Finance Advisory Panel. Many of the regulators you've probably heard about through the evidence you've received are all members of that. We have a network of contacts. It is routine for us to refer entities to another regulator. We often say to a fintech, if they come in seeking informal assistance, 'Don't worry if you don't know which regulator to go to. We will connect you to the right regulator.' That's often been the case with AUSTRAC. We also will meet together with an entity, if that makes sense, depending on the subject matter of what they are wanting to do. The other forms of working together include attending meet-ups with the fintech sector and the regtech sector, where all of those regulators often attend, present and we take questions together. Those are all ways of trying seamlessly to bring us together to reduce some of the issues around coordination.
Regulation of competition, innovation and global competitiveness in financial services
The committee received a range of evidence on how Australia’s financial regulators deal with competition matters in Australia and how regulatory culture can support innovation in the financial services sector. Consideration of Australia’s global competitiveness by financial regulators was also discussed.
Regulation of domestic competition issues
There was significant discussion from submitters and witnesses on how Australia's financial regulators deal with competition issues in the sector, and what regulatory approaches can help promote competition.
The committee sought to clarify with each of the core financial regulators and the ACCC what their respective roles are in relation to competition issues in the financial sector.
The ACCC's core role is to 'promote competition and fair trade in markets to benefit consumers, businesses, and the community', as well as regulating national infrastructure services. It enforces the Competition and Consumer Act 2010 and other legislation, covering areas including: product safety and labelling; unfair market practices; price monitoring; industry codes; industry regulation (for airports, electricity, gas, and telecommunications); and mergers and acquisitions.
The ACCC undertakes compliance activities including: education and targeted campaigns; industry engagement, through general advice as well as formal consultative committees; and research and advocacy activities, including sector reviews and formal market studies. It has a range of enforcement powers and can take actions ranging from infringement notices and administrative resolution of issues through to formal litigation.
The ACCC's remit covers market and consumer activity across all sectors of the Australian economy. At an organisational level, the ACCC's structure includes a standalone division responsible for the CDR. Its Specialised Enforcement & Advocacy Division deals with several areas, including Financial Services Competition.
When questioned at Senate Estimates in March 2020, ACCC representatives defended its ability to manage financial services competition, stating that the ACCC considers it has the necessary tools it needs to promote and protect competition in the financial services sector. Officials pointed to the rollout of Open Banking and other work the ACCC is undertaking in relation to mortgage pricing and foreign exchange pricing as examples of initiatives it is taking to help enhance competition in the sector.
The ACCC informed the committee that in the wake of the COVID-19 crisis, it is working with a range of participants across the financial services sector ‘to maintain and promote competition in the context of the current public health crisis both now and importantly in the future as we emerge from the COVID‑19 crisis’. The ACCC noted its current inquiry into home loan pricing stating that this work will ‘be critical to ensuring that when this crisis subsides, smaller banks and fintechs who are offering better deals, can attract customers and compete vigorously on a more level playing field’.
The ACCC also explained that it had granted interim authorisations in March and April 2020 to enable coordination of crisis response measures between financial services firms, without breaching competition law:
In the current circumstances, competitors in the financial services sector may need to cooperate with each other and coordinate some aspects of their operations. This kind of collaboration between competitors would ordinarily give rise to concerns under competition law. The ACCC’s authorisation process enables it to suspend the operation of competition law in relation to such collaboration where the public benefit outweighs any detriment.
In late March 2020, the ACCC granted two interim authorisations to the Australian Banking Association, on behalf of its member banks, to enable it to coordinate their responses and implement uniform rescue packages for businesses and consumers. On 8 April 2020 the ACCC also granted interim authorisation to the Australian Securitisation forum to enable its members, which include ADIs, both large and small, as well as a number of FinTechs, to exchange information and develop a coordinated industry response to the implementation of the Structured Finance Support Fund (SFSF).
The ACCC has commenced public consultation on both of these authorisations. This consultation process will ensure that the conduct we have authorised is not causing unnecessary or unintended consequences, particularly for smaller players in the market, including fintechs.
Since September 2018, ASIC's legislative mandate has included a provision that ASIC 'must consider the effects that the performance of its functions and the exercise of its powers will have on competition in the financial system'. This addition to ASIC's mandate was made following recommendations from the 2014 Financial System Inquiry and the 2018 Productivity Commission report Competition in the Australian Financial System.
At ASIC's public hearing appearance, Commissioner John Price provided some detail as to how these new competition considerations are being implemented in ASIC's decision making:
Our mandate in relation to competition was changed recently. The government passed some changes to our constituent legislation in October 2018. We now have an explicit mandate to consider competition matters that affect the performance of our functions and the exercise of our powers. Really it's about looking at the performance of our functions, the exercise of our powers and considering what impact they will have on competition in the financial system.
[W]e think about things like will the exercise of our powers or performing our functions create a barrier to entry? Will it create regulatory advantages? Will it improve consumers' ability to exert demand-side competitive pressure? Will particular regulation have a disproportionate impact on smaller entities? … This sort of requirement to think about competition issues may apply to functions such as when granting, varying or cancelling certain types of licence, when we ban people from conducting certain activities, when we make instruments—legislative instruments as well—that modify the law, when we register and deregister companies and schemes, when we accept enforceable undertakings, and so on.
Commissioner Price commented further:
Rather than promoting competition for its own sake, we focus on competition and how that will help us deliver on our statutory mandates around fair and efficient markets and making sure that consumers have the level of protection that is intended under the legislation that we administer. We're not the competition regulator. We're not the ACCC. In performing our functions and powers what the government has decided is that we should be able to take into account competition factors.
In attendance with Commissioner Price was ASIC Commissioner Sean Hughes, who further noted:
I think the legislative reform that took place in 2018 was deliberately crafted in a way to make sure that the consideration of competition was something that we took into account when making regulatory decisions or exercising regulatory powers. As Mr Price said, it is not our role to promote competition in the market. That was a government policy decision. That's the first point I'd make.
Therefore, that means when you come to something like buy now, pay later, where we do not exercise what I would call a gatekeeper role or a front-fence role, because we do not license buy now, pay later operators, the consideration of competition must be such that, if we undertake some consumer protection action, if we were to observe a consumer harm, then we would give consideration to the impact of our decision or regulatory action.
ASIC announced on 23 March 2020 that it would focus its regulatory efforts on the challenges created by the COVID-19 pandemic, with other work reprioritised. It stated that it is ‘committed to working constructively and pragmatically with the firms we regulate, mindful they may encounter difficulties in complying with their regulatory obligations due to the impact of COVID-19’. ASIC made a more detailed announcement regarding the recalibration of its regulatory activities on 14 April 2020. ASIC stated that it would be suspending certain regulatory obligations in relation to the provision of financial advice, in order to enable financial advisers to give affordable and timely financial advice to consumers during the COVID-19 pandemic.
Ms Heidi Richards, Executive Director, Policy and Advice at the Australian Prudential Regulation Authority (APRA), commented on how it can consider competition issues:
[F]inancial safety is our primary mandate…Competition is a secondary objective. We are required to balance considerations of efficiency and competition in achieving our primary mandate. So it is definitely part of our mandate. It is something we consider very actively in carrying out our responsibilities. Particularly when we develop a new policy proposal or a new regulation or new reporting requirements, we do give explicit consideration to competition issues. We've actually… focused on this quite a bit more in the last few years. We put out a paper last year on how we balance our mandate. We're also working much more with the ACCC. When we are working on a major policy proposal, we will consult with the ACCC to get their advice on competition issues.
Ms Richards went on further to note how and why APRA needs to balance various considerations within its mandate:
APRA is not focused only on safety, though. Our mandate requires us to balance considerations of efficiency and competition. Those are ultimately key to a long-term sustainable and sound financial system. This includes maintaining a regulatory environment that doesn't restrict the development of different business models and technology models.
APRA representatives contended that it is taking significant steps to ensure new banking entrants can compete in the Australian market, particularly through the introduction of the new Restricted ADI Licensing pathway. Ms Melisande Waterford, General Manager, Regulatory Affairs and Licensing at APRA, stated that internationally, Australia 'is the most open licensing regime in the world for neobank arrangements', and that APRA's decisions to relax some capital and other regulatory requirements for new entrants is also aimed at assisting them to foster competition in the market.
APRA noted that in response to the COVID-19 crisis, it had announced a suspension of ‘the majority of its planned policy and supervisory initiatives for the coming period to allow APRA‑regulated entities to dedicate time and resources to maintaining their operations and supporting customers’. It noted that this applies equally to APRA-regulated FinTechs and start-ups as to incumbents. APRA stated that it is ‘continuing to deliver on its mandate with respect to competition’ during the pandemic:
APRA is regularly in contact with smaller entities and their industry groups on relief measures including, for example, deferring implementation of new prudential and reporting requirements and adjustments to existing capital, liquidity and reporting requirements.
On 8 April 2020, APRA announced that it is suspending the issuance of new licences for a period of at least six months due to the economic challenges caused by the COVID-19 pandemic. It stated that the COVID-19 virus ‘has led to a fundamental change in the economic and social environment in Australia and globally’ and commented that experience has shown ‘it is challenging for new entrants to succeed even under normal economic conditions, which is why APRA does not consider it prudent to license APRA-regulated entities at this time’. APRA noted that the Monetary Authority of Singapore has recently implemented a similar measure in that jurisdiction, which ‘involves an extended assessment period for the award of digital bank licences for current applicants’.
APRA subsequently announced on 10 August 2020 that it would be recommencing consultation on several high-priority reform areas, as well as recommencing assessing and issuing new licences in a phased manner, with the first phase commencing in September 2020:
New licences issued during phase one will be issued to applicants that are branches or subsidiaries of foreign entities with significant financial resources and a strong operational track record in a similar business. APRA will also accept new licence applications from any entity from September 2020.
From March 2021, APRA envisages new licences may be issued to any entity that meets the relevant prudential requirements. APRA is also reviewing the pathways to an ADI licence, including the Restricted ADI licensing framework that was launched in 2018, to incorporate experiences to date, while continuing to support competition in the sector.
The Reserve Bank of Australia (RBA) regulates the payments system in Australia, through the RBA's Payments System Board. It explained its role in fostering competition as follows:
[A]s the principal regulator of the payments system in Australia…the Bank has the mandate to contribute to promoting efficiency and competition in the payments system and the overall stability of the financial system. In pursuit of this mandate, the Bank has had a longstanding focus on encouraging innovation in the payment system, including from new players such as fintechs and regtechs, as well as by incumbent firms.
The Bank seeks to ensure that new players in the payments industry are able to compete fairly and that there are no unwarranted restrictions on their participation in payment systems. Doing so inevitably involves managing the balance between the competition new participants can bring and any additional risks that arise, particularly where new entrants are not subject to the same form of prudential regulation as incumbents. The Bank also strives to have a regulatory regime that is technology neutral and best able to support competition and innovation in the payment system.
Dr Anthony Richards, Head of Payments Policy at the RBA, told the committee that the RBA strongly considers competition and innovation in determining how it fulfils its regulatory role:
We have responsibility for three things, which is competition, efficiency and controlling risk. Efficiency we have thought of broadly in terms of price efficiency but also dynamic efficiency and encouraging innovation et cetera. So it very much enters into our thinking…[M]ost of the bank's regulatory activity has been access regimes. We've been intervening to make it easier for new players to enter. We've imposed access regimes on the international card systems, on EFTPOS and on the ATM system. We could do so on other payment systems if we felt the need to.
Role of the Council of Financial Regulators
The role of the Council of Financial Regulators (CFR) was also mentioned in relation to regulation of competition issues. The CFR is the coordinating body for Australia's main financial regulatory agencies. It meets quarterly and is chaired by the RBA, with membership that also includes APRA, ASIC and the Treasury. The CFR's objectives are:
…to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system.
Ms Richards of APRA commented in evidence to the committee that the CFR is 'focused mainly on financial systems stability', but can also discuss competition issues and invites the ACCC to attend CFR meetings at least once a year.
Submitter and witness views on domestic competition regulation
Submitters pointed out that increased competition in financial services is being driven largely from firms outside the major banks, and highlighted developments such as the emergence of the buy now, pay later (BNPL) sector to show that innovation can drive increased consumer choice.
Mr Anthony Eisen, Chief Executive Officer (CEO) and Managing Director of Afterpay, argued that the regulatory framework needs to reflect the needs of innovative companies trying to compete with the major financial institutions:
We would especially urge the committee to consider what it means for innovative companies to compete with very large incumbents and regulation that has been built with incumbents and not startups in mind. Senators, it needs to be acknowledged that some large Australian corporates have tried to use legacy regulation as a way to stifle innovation and competition, and continue to do so, but traditional regulation should not be pushed onto fintechs as an end in itself. This kind of thinking is dangerous as it inhibits competition and new entrants. It has absolutely nothing to do with leniency as it relates to customer protections, which should be held paramount for every player in the market, but it has everything to do with outcomes that benefit consumers, promote choice and promote competition.
Mr Ben Heap, Founding partner, H2 Ventures, commented:
[R]egulation is really important in financial services. However, there's a point here about getting those settings right to maximise competition. If you set a regulatory boundary so high that, for example, only the highly funded, large banks are able to meet that hurdle, the downside is, of course, that you will lose competition and you will lose a competitive pressure for the benefit of consumers. If you get the settings right, if you make sure that companies seeking to build financial services in this market are able to do so without an overly burdensome regulatory environment, where you therefore rely a little bit more on the impact of competition to drive the best outcome for consumers, that will be more effective longer term.
Ms Simone Joyce, Founder and CEO of Paypa Plane, told the committee:
[W]e're not advocating for a relaxation of how companies are assessed from a consumer protection perspective. What we're advocating for is a change in the way that regulation is done so that the rules of behaviour and codes of practice and of operating are friendly towards innovative products that do meet those safety standards and that do meet the requirements of providing benefit back to the community, be it a small business or a consumer. Without a reassessment of how those regulations are designed, we run the risk of having all new products needing to fit into the mould of what has gone before, which doesn't extend those new benefits that can be gained by the community.
A number of submitters and witnesses argued that there needs to be greater focus at the regulatory level on promoting competition in Australia's financial services sector, given the lack of a single regulator to deal with conduct and competition in financial services.
Several submitters contrasted Australia's position with that of the United Kingdom (UK) and Singapore. It was noted that in the UK, the Financial Conduct Authority (FCA) is responsible for both general financial services regulation as well as market competition issues in the sector, and the FCA is equipped with competition powers that apply to the financial services industry and are equivalent to the powers of the UK’s economy-wide competition regulator, the Competition and Markets Authority. FinTech Australia commented:
[O]ne of the [FCA’s] operational objectives is to promote effective competition in consumers’ interests, as long as it does not conflict with the FCA’s duty to protect consumers and enhance market integrity. The Monetary Authority of Singapore (MAS) has a similar mandate, where the MAS must undertake supervision of the market in a way that does not unnecessarily impair the competitiveness of financial services market participants. This mandate also requires that MAS take into account the business and operational concerns of these businesses so as to not hinder them, provided that these businesses exercise good risk management and governance, and are supported by long-term and sustainable strategies.
Mr Alan Tsen, Chair of FinTech Australia, gave evidence that the regulatory structure in the UK has enabled the FCA to proactively push through an agenda seeking to enhance competition in that jurisdiction; something that is less straightforward in Australia due to the division of responsibilities between ASIC and the ACCC:
I understand the position that regulators are in in Australia, given that financial services is, for all intents and purposes from a corporate law perspective, in the remit of ASIC. Yet, obviously…ACCC has the remit around competition law. The end outcome in Australia is that, from a financial services perspective and pushing forward competition, it in many ways falls between those two regulators. That is a challenge; we understand that.
I think [consolidating the competition agenda is] a good starting point. Look at the ACCC. For all intents and purposes, in financial services, they are not specialists in that area. That is part of the challenge around having a competition watchdog that doesn't sit all day every day in financial services. That is what I mean by falling between the cracks.
FinTech Australia noted that in order for the ACCC to intervene, there must be an alleged breach of the Competition and Consumer Act 2010. FinTech Australia advocated for ‘a more proactive approach as has been adopted by both the FCA and MAS’, led ideally by ASIC:
Under this approach, the designated regulator would look to accelerate competition in the financial services industry by reviewing and then implementing (subject to their legislative power) changes that could ‘substantially enhance competition in the financial services industry’.
In our view, this would likely need to be administered by a regulator that has the ability to implement these changes by way of, for example, administrative exemption. In this regard, we are of the view the best placed regulator would be ASIC. It is worth noting, the ‘proactive competition’ approach we propose should be distinguished from the amendments made [in 2018] that require ASIC to take into account the impact their decisions have on competition. This again, is not pro‑competitive but simply ensures decisions made by ASIC are competition neutral.
FinTech Australia stated that an alternative approach could be to create an entirely new authority to be charged with enhancing competition in the financial services industry. It acknowledged that ‘this would require further amendments to the current regulatory framework… [however], it may provide a more robust means to ensure continued enhancement of the industry’s structure from a competition perspective’.
Seed Space Venture Capital commented:
Government regulatory support for competition is an additional area with potential for improvement in Australia. Policies should be finely tuned to ensure that opportunities to access the Australian market, and to compete on a level playing field are available to emerging FinTechs. Policy settings that unduly hinder new market entrants act to prevent the creation of new technologies, products and services and so prevent innovation and the creation of jobs.
Ideally the Australian government, ASIC, and APRA would adopt a progressive pro-competitive approach to implementing any mandates for competition and use the UK experience as a benchmark.
Stone & Chalk submitted that it has encountered ‘a substantial number of instances where the implementation of new technological solutions by regulated entities have met resistance by APRA’ because APRA either lacks the capability to adequately assess the technology or insists that regulated entities continue to implement and use legacy systems 'which in APRA’s determination represent a relatively lower technology related risk profile'.
Stone & Chalk argued that this practice 'is severely damaging the uptake of Australia’s enterprise platforms in the financial services sector due to regulatory pressure'. It stated further that this issue has also been encountered by firms seeking licencing by ASIC where the firm 'is seeking to introduce a new business model or technology that does currently fit within existing licencing guidelines and regulation'.
Stone & Chalk suggested that all financial regulators as well as Treasury to have a competition mandate. Mr Alex Scandurra, CEO of Stone & Chalk, commented further in evidence to the committee:
Currently, these regulators are heavily focused on policing, particularly in the case of ASIC when it comes to conduct and APRA when it comes to prudence. I don't believe that it's feasible any longer for the ACCC alone to have a competition mandate as there are too many ways in which, if we are not careful, current mandates for other regulators and their priorities might be such as to unnecessarily increase the barriers to entry as opposed to lowering them over the longer term.
Mr Benjamin Heap, Founding Partner of H2 Ventures, expressed strong support for ASIC adopting a stronger competition mandate, and commented:
[A] risk we run at the moment is that there has been perhaps over the last year or two, and perhaps with good reason, an incentivisation towards the compliance role of ASIC. ASIC does have a compliance role to play… But I think competition, as the opposite side of the balance there, is a really important component piece. I think, if we have our choice between regulating our way to best consumer outcomes and creating a competitive environment so that actually the market solves [issues] to give the best consumer outcome, the second option is more likely to be successful longer term.
Afterpay argued that consideration should be given to ASIC having formal competition powers, and that 'at a minimum ASIC should be given powers to authorise or approve industry initiatives which promote good consumer outcomes but which may technically trigger competition laws'.
The Australian Finance Industry Association commented that more collaboration and coordination between regulators is required, potentially through the Council of Financial Regulators, to avoid duplication and set a cohesive FinTech regulatory agenda.
Supporting a pro-innovation regulatory culture
The committee took additional evidence on how Australia can promote a pro‑innovation regulatory culture in financial services.
As noted earlier, several of Australia’s financial regulators offer innovation programs designed to support new and prospective entrants into the market, the most prominent of which is ASIC’s Innovation Hub.
ASIC Innovation Hub and Regulatory Sandbox
ASIC explained that its Innovation Hub, established in 2015, has been seeking to support FinTech and RegTech start-ups and scaleups navigate Australia’s framework through the provision of informal assistance and removing red tape where possible. ASIC submitted that it applies a 5-point approach to innovation, involving:
Engagement with the sector to maintain and support effective information sharing, including through industry events and initiatives, regular meetings with FinTech and RegTech networks, international roundtables and conferences, and a quarterly RegTech Liaison Forum.
Streamlining ASIC’s assistance to entities with innovative business models through the provision of informal assistance (accelerating their licensing applications) and access to the Regulatory Sandbox.
Enhanced communication including through a one-stop shop Innovation Hub website that contains tailored resources and guidance.
Coordination in ASIC’s internal innovation approach through its centralised Innovation Hub and disseminating information via senior committees, internal working groups, staff onboarding, and external networking. In addition, ASIC has established a network of domestic agencies dealing with innovative businesses with a view to promote information sharing and a cross-agency coordinated approach.
Formation of the Digital Financial Advisory Panel, which meets quarterly and brings together FinTech and RegTech industry representatives, academics, and national regulators (Treasury, APRA, AUSTRAC, OAIC, ACCC and RBA).
ASIC submitted that since the introduction of the Innovation Hub in March 2015, a total of 96 licence applications (full and variation) were approved to 86 innovative FinTech service providers (out of 145 licence applications from 124 FinTechs).
ASIC noted that on average, FinTech businesses that engage with the Innovation Hub prior to submitting their application for approval for an Australian financial services or credit licence receive approval 22 per cent faster than those who do not.
ASIC informed the committee that since the onset of the COVID-19 pandemic, individual FinTechs and RegTechs have continued to engage with ASIC’s Innovation Hub, and that ASIC has held discussions with industry groups, regulators and other government agencies through a series of forums. It indicated that it intends to continue with meetings of the Digital Finance Advisory Panel (DFAP), industry meet-ups, and quarterly RegTech Liaison Forums, albeit in a webinar format. ASIC stated that its planned RegTech Initiative Series activities for FY2019-20 have had to be reviewed, with consideration being given to proceeding with some activities via virtual platforms and postponing or cancelling others.
ASIC Regulatory Sandbox
In late 2016 Australia announced the introduction a ‘regulatory sandbox’ framework for FinTech companies, administered by ASIC, which would allow companies to test FinTech products and services without holding an AFS or credit licence for up to 12 months, providing certain criteria are met. ASIC explained that the sandbox is comprised of three mechanisms to support testing a new product or service without a licence:
existing flexibility in the regulatory framework (e.g. acting as a representative of a licensee), or exemptions already provided by the law or ASIC, which mean that a licence is not required;
ASIC’s FinTech licensing exemption, which allows eligible FinTech businesses to test certain specified dealing or advising services without holding an AFS or credit licence for 12 months; and
tailored, individual licensing exemptions from ASIC to facilitate product or service testing.
ASIC reported in December 2019 that a total of seven entities have participated in the ASIC Sandbox, with a further 44 entities having submitted preliminary notifications but not meeting the criteria necessary to qualify.
On 10 February 2020, legislation to create an Enhanced Regulatory Sandbox (the Treasury Laws Amendment (2018 Measures No. 2) Bill 2019) was enacted by Parliament. These changes will allow ‘more businesses to test a wider range of new financial and credit products and services without a licence from ASIC, for a longer time’.
Regulations implementing the changes received Royal Assent on 28 May 2020, and the new sandbox arrangements will commence on 1 September 2020. Senator the Hon Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology, stated:
The enhanced sandbox will provide a further boost to Australia’s rapidly maturing fintech ecosystem, reducing barriers to entry and promoting competition. Australian consumers will benefit from greater choice in financial services, with technology-driven offerings that are convenient, tailored and cost effective.
The sandbox creates a safe environment for fintech firms to test the viability of new products and services without first holding licences that can be costly and time-consuming to obtain. Innovative firms now have 24 months to test their products with customers in the sandbox before obtaining a financial services licence or a credit licence from the Australian Securities and Investments Commission (ASIC).
Under the enhanced sandbox arrangements, FinTechs will be able to test specified financial services including financial advice, the issuing of consumer credit contracts and facilitating crowd-sourced funding for up to 24 months.
FinTech Australia reported the following views in relation to ASIC’s Innovation Hub:
Whilst a relevant resource, members report that the Innovation Hub is not always helpful in achieving their objectives. Members have noted it is difficult to get involved and hard to get questions answered or access assistance from ASIC. Whilst members accept that the ASIC Innovation Hub cannot provide legal advice, there is anecdotal evidence that some who have relied on indications provided by officers at the hub have received conflicting views from ASIC and as a result had to close businesses to avoid regulatory consequences. As one member put it, “What is the purpose of the Innovation Hub?”
The committee heard strong support for the changes in ASIC’s enhanced regulatory sandbox framework.
Stone & Chalk stated that when considering how regulators deal with competition and innovation issues, government needs to prescribe clear outcomes based on ‘key performance metrics and reporting which demonstrate how effective regulators have been in fulfilling their charters and in particular the proactive steps they have taken to increase competition for the benefit of Australians’. It argued further:
Whilst there have been a number of competition and innovation initiatives taken by ASIC and APRA in recent times including innovation hubs, sandboxes and phased licensing, it would be beneficial to look to the UK approach to measuring regulator performance, particularly given the UK Government’s expectations as to the explicit and proactive role the [Financial Conduct Authority] and [Prudential Regulatory Authority] has been directed to take. Robust performance measurements should still be in place regardless of whether the mandate is to ‘promote’, ‘facilitate’ or ‘consider’ competition issues.
Stone & Chalk recommended that the Australian Government:
stipulate the specific Key Performance Indicators it wishes ASIC and APRA to achieve in relation to its competition obligations and expectations;
stipulate acceptable internal operating service levels for ASIC and APRA in relation to their competition mandate; and
ensure that regulators such as ASIC and APRA fully integrate their competition obligation through staff training, decision making processes and outcomes reporting.
Supporting innovation via self-regulation
Some innovative sectors within the financial services industry are seeking to ensure consumer protection via self-regulation in the form of industry codes and similar measures.
Afterpay noted in its submission comments made on the topic of industry self-regulation by APRA Chair Mr Wayne Byres in August 2019:
...if self-regulation is not in good shape, we need to restore it. More formal regulation and enforcement cannot be the only answer to the issues of community concern. It must be accompanied by a healthy degree of self-regulation: industry codes of practice with genuine force, stronger frameworks of governance and accountability within companies, and a commitment by individuals to seek to operate with ethical restraint. Everyone needs to step up to the challenge. Governments and regulators can help to restore the foundations for self-regulation, but only the industry and its participants can return it to full health.
The committee heard a range of evidence in this regard relating to the Buy Now Pay Later (BNPL) sector. Unlike other credit providers, BNPL products are not covered by the National Consumer Credit Protection Act 2009 (the National Credit Act) and as such BNPL providers have no legal obligation to adhere to the responsible lending obligations in the Act.
ASIC considered issues relating to regulation of the BNPL sector in a November 2018 report. ASIC stated that it had not yet formed a view that it would be necessary to require BNPL providers to comply with the National Credit Act, and that it would continue to monitor the industry to assess whether this was required.
It is the strong view of consumer groups, represented at this inquiry by the Financial Rights Legal Centre (FRLC) and the Consumer Action Law Centre, that BNPL products should be regulated through the National Credit Act. Mr Drew MacRae of the FRLC told the committee that:
[The BNPL model of credit as opposed to traditional credit] is a slightly different model but it is a form of credit in the general understanding of what credit is. We would want them to be regulated under the National Credit Code. We're not arguing that they need to have the maximum amount of regulations that are applied there. What we are arguing for is a scalable form of regulation to ensure that when people use the service they're able to pay it back. We've already seen too many people who've found themselves in trouble. The people who we see who use by now, pay later services use them as a bit of a last resort credit option, because there's not much they need to do. They don't have to do the same responsible lending checks they do when they obtain a credit card.
Regulation of the BNPL sector was then considered by the Senate Economics References Committee in a 2019 report on credit and financial products targeted at Australians at risk of financial hardship, which recommended:
that the government consider, in consultation with ASIC, consumers and industry, what regulatory framework would be appropriate for the buy now pay later sector; and
that the BNPL sector develop an industry code of practice.
The Australian Finance Industry Association (AFIA), which represents a range of finance providers in Australia including Online Small Business Lenders and Buy Now Pay Later (BNPL) providers, announced on 19 December 2019 the development of an industry code for its BNPL members, designed to:
set consumer protection standards for the BNPL industry; and
address the recommendations from the Senate Economics Committee in February 2019 and ASIC’s Report 600 in November 2018.
Public consultation on the draft BNPL Code commenced in January 2020, with the intention for the code to be operational from 1 July 2020. Following significant feedback from stakeholders, AFIA announced in May 2020 that it would be undertaking further work on the draft code with a view to having it finalised for a commencement date of 1 January 2021.
Mr MacRae of the FRLC noted during his appearance before the committee that in his organisation's view, the draft BNPL Code does not go far enough to protect the interests of consumers:
As I understand it, it does address a few of the issues but I don't think it covers everything that we would want it to and I don't think, from the consumer movement's perspective, it goes far enough in terms of the regulation in responsible lending requirements that we would hope to see in this space.
Mr MacRae noted that young people were increasingly seeking assistance from his organisation when encountering problems with BNPL services:
A lot of the new fintech products, like buy now, pay later services, definitely lean towards younger people. That is a cohort that doesn't tend to look for help through our services but is increasingly doing so. We have found that there have been significant issues or problems arising from the use or misuse of buy now, pay later services in Indigenous communities. The younger crowd and Indigenous communities are the two that come to mind. They have had problems with buy now, pay later services. You don't tend to have older people using these services, but that may change over time. They're pretty new.
ASIC Commissioner Mr Sean Hughes told a recent hearing of the Parliamentary Joint Committee on Corporations and Financial Services that ASIC had provided feedback to AFIA in relation to the draft BNPL code:
Our initial feedback to the association was that we thought the code could be strengthened by using more definitive language and could more directly address the perceived problems we identified in our Report 600 of overcommitment, excessive late fees and merchant surcharging.
…[the BNPL industry] code cannot be approved by ASIC once finalised, as buy-now pay-later arrangements are not regulated under the national credit act.
ASIC is due to present a follow-up report to government on issues relating to the BNPL sector by the end of September 2020.
In a supplementary submission discussing the performance of the BNPL sector in the context of the COVID-19 crisis, AFIA stated that, consistent with other parts of the financial services industry, 'BNPL providers initially experienced a spike in hardship requests in March and April 2020, including from consumers who proactively contacted them concerned about their potential financial and personal circumstances', however:
…even at the peak in March and April 2020, at aggregate accords the BNPL industry the percentage of customers approved for hardship compared to the total number of customers was less than 1%, with some BNPL providers experiencing significantly lower incidences.
Advantages to industry codes as a regulatory tool
AFIA noted that in the final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne noted that industry codes offered a form of self‑regulation by which industry participants set standards on how to comply with, and exceed, various aspects of the law.
AFIA commented more broadly on the potential of industry codes:
We believe industry codes allow for self-regulation of an industry, particularly for emerging industries, and can help with raising standards of industry practices and establishing boundaries for new participants into a sector.
Industry codes can provide a dynamic means of ensuring there are appropriately set standards for new product and service offerings and emerging customer expectations are captured and reflected in standards.
Industry codes can balance the needs of financial services providers to operate prudently and commercially while optimising consumer protection. We support the Federal Government’s proposal to continue to allow for ASIC approved, non-ASIC approved and Government to mandate codes where there is a gap in regulation.
AFIA stated that it supports self-regulation as a key strategic priority because self-regulation:
assists members to meet community standards;
promotes the interest of members and responds to member demand for Codes of Practice;
strengthens trust and good standing of the finance industry among stakeholders;
allows members to self-regulate and demonstrate to customers a level of service, product design and distribution capability that gives an operational context and commitment to the law and sets a standard of behaviour that exceeds the law; and
improves industry ownership of Codes of Practice, and therefore, responsibility and accountability around compliance and best practice.
Co-regulation through ASIC-approved industry codes
ASIC is able to approve financial services sector codes of conduct relating to activities for which ASIC has a regulatory responsibility. Under this regulatory model, ASIC will formally approve industry codes where they meet a defined set of criteria, outlined in ASIC’s Regulatory Guidance 183: Approval of financial services sector codes of conduct. ASIC has stated that the primary role of such codes is ‘to raise standards and to complement the legislative requirements that already set out how product issuers and licensed firms (and their representatives) deal with consumers’.
ASIC approved the Australian Banking Association’s (ABA) Banking Code of Practice (Banking Code) in July 2018, which is the first comprehensive broad-based industry code ASIC has approved under its relevant powers. The Banking Code provides ‘a set of enforceable standards that customers, small businesses, and their guarantors can expect from Australian banks’.
ASIC noted that in approving the Banking Code, it considered that:
the rules in the Code are binding on the ABA's members and form part of the contracts between banks and their customer;
the Code was developed and reviewed in a transparent way, which involved significant consultation with relevant stakeholders including consumer and small business groups; and
the Code is supported by effective administration and compliance mechanisms, with a Banking Code Compliance Committee to have oversight on banks' Code compliance, tools to require banks' cooperation with their monitoring and investigations, and a range of sanctions available for non-compliance with Code provisions.
Consumer representative groups Financial Counselling Australia, Financial Rights Legal Centre and Consumer Action Law Centre, stated that the new Code included some enhancements, including:
more proactive assistance for customers experiencing financial difficulty;
improved commitments for more inclusive and accessible banking, including better promotion about low or fee-free accounts;
a three-day cooling off period after signing a guarantee; and
a commitment to no longer bundle the sale of consumer credit insurance with a loan.
The consumer groups also pointed to several areas they viewed as ‘gaps in the new Code’, raising issues relating to the treatment of credit cards, direct debits, debt collection and penalty fees.
After ASIC’s initial approval, changes to the Banking Code were subsequently sought by the ABA and approved by ASIC for commencement on 1 July 2019. Further temporary changes to the Banking Code were made in June 2020 as a result of the COVID-19 pandemic.
Consideration of Australia's global competitiveness in financial services
The committee heard a range of evidence on the need for Australia to undertake regular benchmarking of its regulatory settings, to ensure that they are internationally competitive.
Mr Scandurra from Stone & Chalk commented on the need to keep looking globally when considering Australia's regulatory settings:
One thing that I would stress and caution is that over the five years I've been engaging with government there also tends to be a tendency to look at what we've done in the past as opposed to what we need to do to outdo our competitors. And so through this review what I'd like to encourage is seeking to outdo our regional competitors and perhaps in some cases global competitors in terms of the policies we put in place to ensure we attract the best talent, capital and expertise to Australia, as opposed to doing better than we did last year.
Mr Heap of H2 Ventures stated that without the right regulatory settings, Australia will become an importer of new financial services rather than an exporter:
The issue we have is that, if our settings are such that it's just a little bit more difficult than it is in other markets to build successful financial services organisations, then other financial service organisations, fintechs from offshore, will arrive in Australia. They will just offer a service—think Uber: that's just better than what you can get in this market. Consumers will and should say, 'Actually, that's a better service; I'm taking that one.' And before we know it—and it will happen very quickly—we will have significantly eroded our financial services in this country, to everyone's disadvantage. So it's important we recognise that we are competing internationally. It's not getting the settings right for a particular sort of set of requirements in this market. We're setting those settings to ensure that companies in this market can be competitive globally, because that's the only way to make sure that companies globally don't have a disadvantage or an advantage over companies here.
The RegTech Association submitted that RegTech should be an area in which Australia can leverage its relative strength in regulatory systems to create world-leading products:
Australia is ranked 22nd in the Global Innovation Index 2019 (slipping two positions since 2018). Australia has particular weaknesses around knowledge, technology, creative outputs and business sophistication. However, this same index rates the quality of our regulatory systems as a strength, suggesting this is a major export opportunity when coupled with our overall product development global ranking.
Like most countries (except US and China), Australia does not have the capital or capacity to compete in each of the technologies driving the Fourth Industrial Revolution (e.g. robotics, biotechnology, nanotechnology). It must select key applications for development, that meet the needs of its own economy, as well as those that are in demand globally. We believe Australia has a strategic advantage to act as a fulcrum for the inevitable evolution of global regulation.
The next two years are crucial in determining which markets generate the RegTech solutions that will underpin global regulation going forward. Australia has the skills, infrastructure and experience to lead a global Centre of Excellence for RegTech; providing a vehicle to improve our ranking in global innovation, and to make RegTech a key aspect of “Brand Australia”.
Dr Dimitrios Salampasis of the Swinburne Business School at Swinburne University of Technology submitted that the Australian Government should consider a range of strategic interventions including 'conducting annual benchmarking analyses comparing Australia to other FinTech hubs and leveraging the unique value proposition of the Australian economy and the FinTech competitive advantage'.
Submitters and witnesses referred to a range of benchmarking reports and indexes that can help assess Australia's international position in relation to financial services generally, and FinTech and RegTech specifically, including:
the Global FinTech Hub Report, compiled by Cambridge Judge Business School;
the Global FinTech Adoption Index released biennially by Ernst & Young (EY);
KPMG's The Pulse of FinTech, a biannual publication looking at key activities and trends in FinTech globally;
H2 Ventures and KPMG's Fintech 100 Leading Global Fintech Innovators, which ranks FinTech companies globally based on a range of metrics;
Cambridge Centre for Alternative Finance's Global RegTech Industry Benchmark Report;
The World Economic Forum's Global Competitiveness Report;
The IMD Business School's World Competitiveness Ranking;
The Global Innovation Index, published annually by Cornell University, INSEAD and the World Intellectual Property Organization; and
AlphaBeta's 2019 report Australia's Digital Opportunity: growing a $122 billion a year tech industry.
Austrade told the committee that, in addition to utilising benchmarking research generated by the private sector, it 'publishes capability reports on fintech and the wider financial system for Australia which includes information on Australia’s regulatory regime including', to assist international investors looking to enter the Australian market.
It was noted that other jurisdictions are continuing to progress initiatives to further their growth and competitiveness in the FinTech sector. For example, the UK Government announced a review of the FinTech sector in that country in its March 2020 Budget:
The government has invited Ron Kalifa OBE to lead a major review into the fintech sector. The review will identify what more industry and government can do to support growth and competitiveness, to ensure that the UK maintains its global leadership in this vital sector. The government will also extend funding for the Fintech Delivery Panel, as well as touring the regions and nations of the UK to showcase its diverse range of fintech firms.
Access to the New Payments Platform
A number of FinTechs raised concerns with the committee about their ability to access the New Payments Platform (NPP).
As noted in Chapter 2, the NPP is a real-time payments infrastructure platform developed by 13 Australian banks and financial services providers, which became available to the public in February 2018. The development and operation of the NPP is overseen by a joint venture company NPP Australia (NPPA) established for this purpose.
More than 66 million accountholders are now able to make and receive payments via the NPP (estimated at about 90 per cent of all accounts that will eventually be reachable). According to analysis conducted by the RBA, the adoption rate of the NPP is proceeding at least as quickly, if not faster, than the take up of real time payments in other overseas markets.
The NPP operates as an economically self-sustaining entity, with the NPPA’s operating costs recovered from its shareholders via wholesale operating charges.
Mr Adrian Lovney, CEO of NPPA, informed the committee how governance and decision-making processes relating to the NPP are structured:
The NPPA board has 12 voting directors: three independent directors, including the chair; a director representing the Reserve Bank of Australia; four directors from small to medium-sized banks and payment aggregators; and only four directors from the four major banks. Each director has one vote. Collectively, the directors appointed by the four major banks have only one-third of the votes on the board. Incumbent banks do not have a say in how decisions about direct access or indirect access to the NPP are made. Applications for direct access are assessed by management, with the final decision made by a board subcommittee, which is made up entirely of independent directors and me. This same committee also determines wholesale transaction fees and oversees banks' compliance with mandatory NPP functionality under our mandatory compliance framework.
NPP access and costs
The NPPA outlined that there are different connection options for organisations wishing to access the NPP, 'catering to market participants with different regulatory status, technology capability, risk and compliance capabilities, and with different cost implications in terms of upfront versus ongoing fees'.
Direct NPP participants must contribute capital to build and operate the NPP platform, meet extensive technical connectivity requirements, take on significant risks (security, fraud etc) and commit to providing mandated functionality as it is rolled out. They are charged a wholesale transaction price set by NPPA. There are currently ten NPP direct participants, including: the four major banks, three aggregator businesses (ASL, Cuscal and Indue), Macquarie Bank and RBA Banking.
Organisations are able to connect to the NPP indirectly, via services offered by directly connected participants (currently five direct participants are offering such services). 80 organisations (including banks, credit unions, building societies and FinTechs) are currently accessing the NPP indirectly in this way, primarily via the three aggregator businesses.
The NPPA offered further explanation on the access model pursued by the NPP:
The NPP has been intentionally designed to be ‘open access’, encouraging broad participation across the payments ecosystem. One of the three stated constitutional objectives of NPPA is facilitating fair access to the NPP as mutually owned utility infrastructure. It is the first clearing and settlement system in Australia to be designed with access as one of its primary objectives.
Direct connection to the NPP is likely to be a practical option for only a few organisations. Some of Australia’s largest banks are among 77 organisations who have elected to access the NPP indirectly. The vast majority of organisations seeking access to the NPP do not want to connect directly because of the technical requirements that this entails, and the complexities involved in connecting to a real-time, 24/7 payments infrastructure (specifically operational, security, availability, and resilience requirements imposed by NPPA, as well as maintenance and functionality upgrades). By contrast, connecting indirectly provides organisations with a lower cost, lighter integration option for providing NPP payment services to their customers.
Given this, ensuring a competitive secondary access market to the NPP is important.
A number of submitters argued that direct access to the NPP should be opened up to a broader range of FinTechs and payments providers. FinTech Australia argued that a reliance on intermediary aggregators to access the NPP will lead to negative outcomes over time:
[FinTech Australia members] would also like to see more fintechs approved for full usage of the NPP. Approval for full usage is a cost issue as much as it is a regulatory and compliance one. The significant costs of direct access mean that new entrants remain reliant on third party incumbents to access Australia’s world leading payment system. Whilst this may not be a problem in the short term, it has longer term ramifications, including that it further entrenches incumbents and prevents further innovation in the payments space. Opening up access involves more than just accepting members into the [API] sandbox. Instead, opening up direct access to the NPP should be viewed as a future initiative to drive competition in the payments space.
Airwallex commented that the current requirements for organisations seeking direct access to the NPP are limiting for non-bank FinTechs that don’t hold an ADI licence:
For these non-bank institutions, their ability to access the NPP is restricted to partnership with an NPP Full Participant, many of which offer competing services. Creation of an additional category to support creation of PayIDs…for the purposes of funding payments and foreign exchange and related services would enable faster, more seamless payment experiences for the customers of providers that do not hold an ADI.
Xinja, a neobank that launched its first products in the Australian market in 2019, outlined a range of difficulties associated with accessing the NPP in its submission:
We have found NPP accessibility to be expensive, which is not unexpected given that pricing is on a cost recovery basis rather than to promote widespread adoption. We have been quoted $2m to be a direct member of the NPP, in addition to per transaction fees of 8c for each NPP payment sent or received, (compared to direct entry payments on the [Bulk Electronic Clearing System] at 4c per transaction sent). When we explored indirect access, we were quoted costs of at least ~$350k plus implementation costs plus year 1 tiered transaction volume-based fees. There is no price regulation for indirect access, nor are there [Service Level Agreements] for implementation of NPP connection.
Xinja noted that when connecting indirectly, there are four parties involved at a minimum to implement an NPP connection, and that indirect access 'essentially puts us at the mercy of another small participant in the NPP'. Further:
We estimate that it may take 6 months to implement as a new player, however we don’t believe it needs to take this long. By comparison it took us 6 weeks it took us to do an implementation of Apple Pay and Google Pay, which also involved 4 parties…Uncertainty in delivery timeframes has a disproportionate impact on pre-revenue startups like Xinja.
Xinja expressed support for several measures it considered would improve the situation for startups seeking to access the NPP:
the government could consider either regulating the cost of access, and/or provide grants and/or subsidising NPP connection and ongoing transaction costs, to reduce the financial barriers to connection and strengthen the business case for investment in NPP capability;
government could invest directly in the NPP to allow some cost recovery by its existing owners, whilst also reducing the upfront and ongoing costs of connection to the NPP for new participants; and
Service Level Agreements for connectivity to the NPP should be introduced to provide new participants with more certainty of timeframes for connection and associated business cases to invest in NPP access.
FinTech Australia recommended similarly that the government 'consider subsidising NPP transaction costs to incentivise ADIs to provide access to the NPP, allow them to recoup the investment and reduce the cost for fintechs to access the NPP'.
Mr Adrian Lovney, CEO of the NPPA, commented on the issue of transaction costs at a public hearing of the committee:
The cost of NPP transactions has been raised by some as an issue. NPPA operates as an economically self-sustaining entity, recovering its operating costs from shareholders via wholesale operating charges. Ultimately, NPPA will charge a wholesale fee per transaction, which will be published. As volumes grow, this fee will come down. The NPP wholesale fee is one input cost of many, and what banks choose to charge their customers is a commercial decision. But as this fee comes down and the same fee is charged by us to every bank, all organisations seeking to access the NPP should benefit.
On the broader issue of access to the NPP, Mr Lovney argued that the market for providing NPP access services should become more competitive as the platform matures, enabling greater ease of access at lower cost:
The NPP is only two years old…[F]ive organisations provide access to third parties which are mostly financial institutions. Two indirectly connected organisations, which are not ADIs and which are both fintechs, Assembly Payments and Monoova, specialise in providing third-party access to other fintechs and non banks. Over time, we think there'll be more competition in this space as more organisations, whether directly connected or indirectly connected, deliver access services, including APIs. We're aware of a number of fintechs that are in the advanced stages of obtaining access as we speak. This issue is largely one about timing and maturity.
Mr Lovney commented further that some of the business models and use cases for NPP functionality sought by FinTechs (for example, cryptocurrency exchanges, blockchain-based services or short-term lending) are diverse and unfamiliar to those providing NPP access services, with the result that they may be perceived as riskier and 'the market is therefore less competitive for this kind of access'. Mr Lovney argued that 'this too, will change over time as familiarity grows with the kinds of services that are sought and a broader range of organisations move to deliver them'.
It was noted that the NPP is still in the process of developing and rolling out additional functionality that will enhance the types of services able to be offered by participants. The NPPA released a roadmap in October 2019 that lays out the expected functionality to be added to the NPP by the end of 2022, with six key priorities:
Development of NPP message standards to utilise the structured data capabilities of the NPP.
Development of a ‘Mandated Payments Service’ to support recurring and ‘debit-like’ payments on the NPP.
Implementation of payment initiation capability across the platform (‘Basic Payment Initiation Service’).
Implementation of services to support the domestic leg of an inbound cross‑border payment.
Supporting the use of QR codes on the NPP.
Extension of the NPP API framework and an upgrade of the API sandbox.
Mr Lovney commented that the capability that is most frequently requested, and which will have the biggest positive impact on NPP access and use, is third-party payment initiation capability, which will be available from late 2021. Mr Lovney noted that because of its specific technical nature, this capability 'will be accessible via a broader range of access points, both direct and indirect access points, than is the case for the services that we have in the market today'.
FinTech Australia submitted:
Members appreciate that realising the full potential of the NPP requires the technical and ideological alignment of all the banks, which takes time. It is acknowledged by members that whilst the NPP has not been easy to access for fintechs, many of the services fintechs demand are simply not available yet.
In this regard, the recently released NPP roadmap does create more transparency around the plans and future service rollouts.
It was noted, however, that some of the capabilities contained in the NPP roadmap will only be optional for NPP participants to implement; FinTech Australia argued that incumbent providers must enable access to full NPP functionality by all market participants as it becomes available:
The success of the roadmap will rely upon the 'participants' (ie the banks) being committed to supporting the new functionality - both at technical and service level. Though the NPPA has reviewed their messaging standards (particularly around PayID protection and service level commitments), it will be increasingly important to maintain universal adoption. An example of this is the current APIs available from the NPPA. Though they are available, they cannot be accessed unless the participant bank supports them. This limits the ability for Fintech's to access APIs as not all banks yet support the APIs meaning adoption will not be at an optimal level.
FinTech Australia recommended that the NPP Roadmap be fully implemented, and that incumbent players with direct access to the NPP ensure that they fully rollout the capabilities of the NPP in a fast and open manner.
Consideration of NPP issues by the RBA
The RBA which has responsibility for the regulation of the payments system in Australia through the Payments System Board, noted in its submission that the RBA undertook a review into functionality and access issues relating to the NPP in 2018–19, with assistance from the ACCC. It stated that this consultation was partly in response to concerns raised by stakeholders, including some FinTechs, relating to services offered through the NPP and ways of accessing the platform.
The RBA published the conclusions and recommendations of this review in June 2019, which found that while the NPP was generally operating well:
…the report also noted that there had been a slow and uneven rollout of NPP services by the major banks, which had likely slowed the development of new NPP functionality and contributed to stakeholder concerns about access to the NPP. The report therefore included a number of recommendations aimed at promoting the timely rollout of NPP services and development of new functionality.
The report also addressed concerns raised by some stakeholders, including some fintechs, about a number of access issues that could present potential barriers to entry for new participants. In response, the report included a number of recommendations relating to NPP access.
The RBA stated that it has been satisfied with NPPA's response to its recommendations and the planned functionality roadmap released by NPPA. Dr Anthony Richards, Head of Payments Policy at the RBA, commented on these issues further at a public hearing of the committee:
We looked at the access arrangements that were already available and were broadly happy with them. We made some recommendations which NPP Australia Ltd has enacted. The fact is that there are 13 direct participants in the NPP, and then a lot of institutions connect indirectly to the NPP. That's very standard. It's actually quite difficult to do a connection to a real-time payment system that has to be operating 24/7.
So it's not unusual to have a system where have you a relatively small number of direct connectors and then indirect connections provided by other entities. The fact is that there are close to 80 smaller institutions, mid‑sized banks and even, I think, increasingly some of the large foreign banks. They are connecting through either the three aggregators, who are providing indirect services, or the two fintech providers, who are also providing indirect services. A couple of the major banks are also providing indirect connection. So there is an increasingly active market for indirect connection. The NPP's constitution says it's supposed to be an open access utility. There will be the same price for all. The smallest direct connector will pay the same price as the largest one. So there's a lot of access friendly activity.
The RBA noted that it has committed, along with the ACCC, to commence another review of NPP functionality and access issues starting no later than mid‑2021:
This review will be an opportunity to re-assess whether NPPA’s access arrangements are warranted in light of developments in the market. This review could commence earlier if the Bank becomes aware of significant issues or concerns regarding NPP access or functionality.
Blockchain and distributed ledger technologies
The committee heard about the potential of blockchain technology, estimated at $175 billion annually within five years and $3 trillion by 2030. Mr Michael Bacina, Partner, Fintech Group, Blockchain Group, Piper Alderman told the committee that in his view, 'most fintech and regtech projects will either be built predominantly on distributed ledger technology or blockchain or heavily using that within the next 10 years'.
The National Blockchain Roadmap from the Department of Industry, Science, Energy and Resources, mentioned in Chapter 3, highlights blockchain's potential as well as opportunities for blockchain to add economic value to a range of business sectors. The leading industries for blockchain activities are financial and insurance services, followed by professional, scientific and technical services and retail trade but other areas include healthcare and social assistance, agriculture as well as real estate services.
Witnesses noted the potential for blockchain in the property sector including property investment, blockchain as a reporting tool and management of property data.
The Australian Taxpayers Alliance drew attention to the report by Professor Jason Potts and Dr Trent MacDonald titled Who should Regulate Bitcoin? Challenges and opportunities for blockchain technology in Australia and the potential of using blockchain technology to 'encode, confirm, and transfer almost all forms of property'. This use was also highlighted in the report by Dr Chris Berg, Professor Sinclair Davidson and Professor Jason Potts, titled, What Does the Blockchain Mean for Government – Cryptocurrencies in the Australian Payments System.
Lakeba noted using blockchain, AI and cloud computing technologies to develop successful commercial ventures such as Bricklet which:
has revolutionised property investment, by enabling investors to directly own fragments of real estate; thereby expanding the property investment market to those who are unable or unwilling to purchase entire properties.
This technology 'makes it more affordable for people to invest in property by enabling small parcels of a property title, known as 'bricklets', to be purchased by individuals. Bricklets can then be traded in the same way entire property titles are bought and sold, only incurring pro rata costs'.
Dr Kate Galloway, Dr Louise Parsons and Dr Francina Cantatore also spoke about the 'fractionalisation of real property through integration of a blockchain platform with the land register'.
A.T. Kearney highlighted government initiatives in the UK where the Financial Conduct Authority (FCA) in collaboration with R3, Royal Bank of Scotland and other global banks 'built a prototype application for regulatory reporting of mortgage transactions on distributed ledger technology (blockchain)'.
Government Property Data
Although a state and territory government issue, the issue of government property data (GPD) was raised by FinTech Australia:
GPD predominantly comes from the various state and territory governments. It is provided primarily by valuers, government departments and land registration service providers (land titles offices). Critically, government property data (“GPD”) represents the core data that sits at the heart of any national property database that is required to build analytics such as an automated valuation model. Fintechs face a significant hurdle in attempting to build a national property database because they have to deal with 8 different data licenses and application processes to become a value added reseller…of GPD.
FinTech Australia was of the view that the NSW Open Data Initiative 'represents the gold standard to which other State and Territory governments should aspire…' The cost of accessing this data was also raised with FinTech Australia arguing that 'appropriate protections to keep GPD affordable have not been put in place'. It recommended that:
Every Australian State and Territory should make Government property data available to the Australian public, including fintechs, free of charge under the Creative Commons Attribution Licence (or equivalent) in order to allow fintechs and other parties to develop solutions that improve information asymmetries in the Australian property market.
The ASX spoke with the committee about the potential of blockchain or distributed ledger technology to 'build the next generation of financial services and reduce costs for consumers'. Mr Cliff Richards, Executive General Manager, Equity Post Trade, ASX, indicated that the opportunities provided by blockchain are 'much larger than just addressing the clearing and settlement functions of the stock market'. Mr Richards explained:
Our architecture and the work that we're doing now that is parallel and separate to CHESS replacement are making the same infrastructure, the blockchain infrastructure, available to any technology company of any size. We will be making available as another service the same safety and security that we're putting into the replacement of CHESS. There are examples of fintechs, regtech and technology companies in general coming to us because they see the value of an infrastructure using distributed ledger technology being available by a trusted, recognised brand such as ASX. It allows them to focus on the differentiation that they want to present to their clients.
When asked whether this technology could be applied to the state government management of property data Mr Peter Hiom, Deputy Chief Executive Officer, ASX, responded:
The short answer is yes. The slightly longer answer is: when we talk about blockchain—blockchain is a broad church of technologies. Some blockchains are open and public, which means data is shared in a very universal way, meaning everybody gets everything. Other blockchains, such as the one we're using, create a private permission blockchain where the data that is received by each participant in that ecosystem only pertains to the data they have a right to see. I think those sorts of blockchains can play a role, particularly when, embedded in the software programming language you're using, you have the ability to define everyone's rights and obligations as they relate to data. As long as you have those things—you're segregating the data such that users only get what they are entitled to see and it isn't predicated on sharing everything, and you have the ability to encode the data governance that pertains to maintaining the appropriate consumer protections around data— then I think the answer is yes.
Mr Hiom added there could be 'a series of interconnected nodes in individual states'.
CHESS replacement project
Concerns were raised about the ASX CHESS replacement project, which replaces the ASX’s core system that facilitates clearing, settlement and other post‑trade services with distributed ledger technology. ASX has been working on the replacement project since 2016. The ASX’s technology partner to deliver the project is distributed ledger technology firm Digital Asset, in which ASX holds an equity stake.
The project was described as 'a very significant change to the technology that will progressively and materially change the structure of the Australian equity capital market and how it works compared to today'. Computershare argued that this will result in changes to the roles, responsibilities, processes and custody of data and as such ASX should acknowledge this change in the market structure and 'allow the appropriate scrutiny and governance to occur'.
Computershare indicated that it holds concerns that the suggested benefits of the project may not be realised 'due to the presentation of inaccurate information, the absence of critical analysis, or the reliance of secondary or tertiary events that are beyond the control of ASX'. It expressed further concern 'over the risk accumulating in this project in light of the April 2021 go live deadline' as 'ASX has still not released all information about the project, inhibiting the industry's ability to prepare and increasing the risk on the market'. Computershare argued:
At this stage, and with the information available, it seems the ASX is attempting to entrench its monopoly powers over the industry. As our industry continues to evolve and new technologies are adopted, the Government must take an active role in encouraging growth and market competition.
A key concern outlined was:
At the heart of industry concerns is the potential conflict of interest of ASX being the project owner responsible for the design of the replacement project, the body controlling the rule amendments that govern all users, as well as its future operator and a for-profit ASX (self) listed entity.
These concerns were supported by the Australasian Investor Relations Association (AIRA) which agreed with Computershare's recommendation that 'legislation is passed to allow the Council of Financial Regulators and the Australian Competition and Consumer Commission to enforce appropriate parameters around the ASX's use of its monopoly powers and provide oversight of ASX's rule making powers'. While acknowledging the ASX decision to reconsider the consultation and implementation schedule in light of COVID-19, AIRA submitted that in its view 'the go live date should be pushed back 12 months to at least April 2022' with the date chosen through engagement with industry. AIRA also argued that a 'broader review of the governance and scope of the Replacement Project is required to remove uncertainty and safeguard a level playing field for all participants'.
The ASX was asked to respond to these concerns which it did by way of a supplementary submission. It reported that significant progress has been made on the CHESS Replacement Project with the 'deployment of software representing close to 90% of core clearing and settlement functionality in the customer development environment, and…the publication of 100% of the functional customer technical specifications for the new system'. It reported that the scope of change is the result of a comprehensive consultation process with the market. In addition, '[a]ll changes to ASX's operating rules are subject to an extensive public consultation and regulatory approval process overseen by ASIC'.
In response to the COVID-19 pandemic and feedback from stakeholders, the ASX reported that the go-live date has been delayed until April 2022, noting that this is also subject to public consultation.
Addressing governance and conflict of interest concerns, the ASX stated:
There have been no conflicts of interests demonstrated in the development of the CHESS replacement system. ASX operates clearing and settlement facilities subject to strict licence obligations under the Corporations Act. This includes being accountable for the development, implementation and operation of the technology that supports those facilities. We take these responsibilities extremely seriously and as a result the project is operated under robust governance processes within ASX. ASX’s equity stake in Digital Asset is neither evidence of a conflict nor unusual. Companies often make investments in their vendors as they work together on mission critical projects. In fact similar to ASX, several other financial services and technology firms who are working with Digital Asset have made investments in the company.
The project is also subject to significant regulatory oversight by the RBA, ASIC, ACCC and the Treasury. This is based on the regulatory framework applicable to CHESS as critical market infrastructure. ASX has a structured and intensive program of engagement with the regulatory agencies on the project, which includes the provision of a range of detailed documentation.
The ASX added that the new system is being built to enable the 'safe and secure sharing of CHESS data between entitled parties, and to enable others to use the infrastructure to build innovative new services that will benefit issuers, investors and the intermediaries that service them'. While acknowledging this may challenge business models that rely on manual processing:
…an overwhelming majority of participants believe that further digitisation of the industry - making richer data sets more widely available -will benefit the market as a whole. Many in the industry are embracing the opportunity that the new system will provide them. This infrastructure is being developed to unleash innovation by allowing fintechs, participants, and existing service providers to be able to build their own services directly on top of it.
Foreign exchange pricing and transparency
Airwallex raised the issue of transparent pricing for foreign exchange transactions and explained:
Due to the traditionally complex nature of foreign exchange, customers rely on the advice of trusted financial services providers to make decisions on FX and international payments. The [opacity] of this function however has created an environment in which FX providers are able to charge unreasonable and overinflated rates and fees to customers that are ill-equipped with the data needed to make informed decisions.
This view was supported by FinTech Australia which noted '[i]n relation to fees, it is well known that there is a lack of transparency in foreign exchange (“FX”) around the world'. It added this is 'further compounded by a lack of transparency in advertising fees to provide these services'.
FinTech Australia recommended that the government 'enact laws requiring all foreign exchange fees to be transparently displayed including the exchange rate, markup and upfront fees, all displayed as a total cost'.
Airwallex suggested a different approach:
Australia should look to the United Kingdom’s Financial Conduct Authority (FCA) FX Global Code, a market code of best practice to promote integrity and effectiveness within the FX market. Under this code, full and upfront disclosure of associated fees and markups is encouraged to equip customers with the data required to make informed decisions. If a market code of best practice in Australia is made mandatory, especially for the big banks and other market participants that are less transparent in their foreign exchange pricing, it will help promote better outcomes for customers by giving them visibility over the actual costs of performing foreign exchange transactions. This will ultimately increase competition across the sector by calling out bad players that do not transparently disclose the cost of exchanging one currency for another.
The RBA acknowledged the issue around transparency of foreign exchange. Dr Anthony Richards, Head of Payments Policy, pointed to work undertaken by the ACCC and stated:
The [RBA] governor made a speech in December. He showed a very interesting graph that showed that if you go to one of the big four banks and try to make a foreign exchange transfer, you will often pay about four or five per cent.
If you go to one of the non-traditional providers, one of the new business models, you might pay something closer to 70 basis points or 100 basis points. So you might pay one-fifth of that or less. So it's very clear that there are competitors out there providing cross-border payments much more cheaply than the banks. We think that's a problem that needs solving…
In October 2018 the ACCC started an inquiry into the supply of foreign currency conversion services in Australia. In September 2019 it released its final report. In relation to price information presented to consumers the ACCC report stated:
Inquiry stakeholders noted that there was inadequate disclosure of prices by some suppliers and consumers have expressed concern that they do not always know what the total price for an FX service will be up-front. Our inability to easily collate complete price information from publicly available sources demonstrates how difficult it is for consumers to compare total prices.
In the report the ACCC referred to research commissioned by the UK government in 2018, undertaken by the UK’s Behavioural Insights Team (BIT) which conducted a study presenting price information to participants in five scenarios: low (baseline), medium (2 scenarios), high transparency and a current market option. The ACCC summarised that the study found:
…only 42 per cent of participants were able to identify the best option when the low transparency format was used. In contrast, 69 per cent of participants identified the best option when the medium transparency format was used…Study participants performed (slightly) poorer with the high transparency format.
The ACCC concluded:
The BIT hypothesised that results observed could be because providing consumers too much information could lead to ‘choice overload’, where an excess of information in (complex) choice situations can lower engagement and decision-making quality’. This suggests that any proposed price disclosure regime would need to strike an appropriate balance between providing transparency and avoiding overloading consumers with unnecessary information.
The ACCC found that 'prices lack transparency' and considered that 'improving price transparency will support price competition by making it easier for consumers to seek out the cheapest suppliers'. The final report also investigated international approaches to improving price transparency and comparability looking at the US, UK and European Union. The ACCC recommended measures to improve how prices are presented to consumers:
Up-front correspondent banking fees
International money transfer (IMT) suppliers should take the necessary steps to inform their customers up-front of the total price, inclusive of any retail mark-ups and fees, of conducting an IMT transaction.
Suppliers of IMTs and foreign cash should offer digital tools on their websites to calculate the total price, inclusive of any retail mark-ups and fees, for those services for consumers.
Foreign cash prices on rate boards
Foreign cash suppliers should ensure that they provide price information that will enable an in-store consumer to understand the total price, inclusive of any retail mark-ups and fees, of foreign cash transactions.
Disclosure of international transaction fees
Merchants offering goods and services online to Australian consumers should inform consumers if they are likely to be charged an international transaction fee. Merchants should provide this information prominently and clearly, before a customer enters into a transaction. If consumers are charged an unexpected international transaction fee, they should contact their bank or card scheme to request a refund of the fee.
In its report, the ACCC undertook to 'monitor the take up of [the] recommendations and assess whether further response is needed, either by the ACCC or government'.
In December 2019, the ACCC published on its website best practice guidance documents for businesses on the transparent pricing of foreign currency conversion services, and on the disclosure of international transaction fees. This guidance states that the ACCC 'will be monitoring the uptake of our guidance and will consider enforcement action where appropriate'.
The ACCC informed the committee that the Treasurer has formally required the ACCC to report back to government by September 2020 on industry’s implementation of the ACCC’s recommendations.
At the 4 March 2020 Senate Economics Legislation Additional Estimates hearing, the ACCC told that committee that following their earlier work, they have established a working party on foreign exchange issues which involves:
…a number of parties within government that have got an interest in the issues. We're working actively within that group to figure out how we can reduce some of the obstacles that were being put in the way of some of those fintechs.