Australia senate

Recommendations seek to take advantage of Hong Kong’s decline as a financial centre.

A senate committee in Australia has delivered 32 recommendations to boost the country’s competitive edge in financial and regulatory technology with some of its proposals proving controversial.

Opinion is split over an Australian senate committee’s advice around areas concerning data privacy and in regulating ‘buy now, pay later’ online retailers.

The committee submitted 32 recommendations to quickly boost the country’s Australian fintech and regtech sectors. This follows from the Senate Select Committee’s September 2 release of a 281-page interim report on financial technology and regulatory technology. It was hoped this would allow Australia several “quick wins” by taking advantage of fintech and regtech as the country copes with its first recession in 30 years.

Law firm Herbert Smith Freehills wrote in a note that many of the recommendations in the report have already been the focus of other government enquiries.

The interim report covers regulation, culture, skills, tax, capital and funding, and aims to drive more financial services competition and consumer choice. The final report is expected in April 2021.

In a statement, Andrew Bragg, committee chair and Liberal party senator, said it is clear that the country needs more jobs, and the best way to achieve that is to embrace technology and become globally competitive.

“Australia should continue developing as a leading Asia-Pacific fintech nation, especially as Hong Kong declines as a financial centre,” he declared. He explained that Australia had already shown innovativeness during the pandemic, such as allowing listed companies to conduct their annual general meetings online which Mr Bragg believes should be allowed to continue in future. These measures were welcomed by the Australian Computer Society (ACS), an association for Australian technology professionals.

“The Covid-19 pandemic illustrated how digital technologies have become essential to delivering traditional goods and services,” said Dr Ian Oppermann, ACS president. “Financial services is a sector where Australia has long-standing expertise and fintech is a field where the local information and communications technology (ICT) community can show its global competitiveness.”

The committee noted that Australia’s regtech sector is comparatively less well developed, but nonetheless ranks highly globally with significant export potential.

Among its specific regtech recommendations, the committee said the government should explore options to promote the use of regtech solutions to help smaller businesses comply with regulatory obligations. Related to that, it said the government should better understand the costs and complexities smaller businesses face in terms of public sector procurement. It advised the government to consider holding event-based challenges to help regtechs and fintechs solve policy and service delivery challenges. It noted how the UK Treasury and Financial Conduct Authority have gone to considerable lengths to successfully support the UK sector.

In terms of talent, the committee advised the government to work with industry to reskill workers who have lost their jobs so they can be employed in the industry.

Lacking investment

The Regtech Association (RTA) was enthusiastic about the recommendations: “Australia is ranked third in terms of global regtech centres of excellence – and can deliver value throughout the Australian economy,” said RTA CEO Deborah Young. But she warned that investor interest in the sector is limited, with 70% of RTA members being self-funded and the Australian sector barely attracting 1% of globally available capital, estimated at A$6bn ($4.36bn).

She therefore welcomed the committee’s call to allow company pension funds to be invested in regtech and fintech firms. The committee also suggested improved tax incentives to support start-ups and open banking. The RTA sees these funds as being potential investors and buyers of regtech.

According to data compiled by RTA, Australia ranked third in regtech behind the US and UK – the two countries hosting the world’s largest financial centres.

The association believes there is significant opportunity for Australian regtech, given its ties with the US and the 21 member states of the intergovernmental forum, Asia-Pacific Economic Co-operation. It also sees potential if a free trade agreement is struck with the UK.

Being able to more easily branch out into other jurisdictions would give Australian regtechs more opportunity to scale up.

Herbert Smith Freehills said in its note that, among the measures welcomed by the industry, are the enhancements and clarifications on the research and development tax incentive (RDTI), which are critical to many start-ups.

Many fintech respondents to the report complained about difficulties in applying for RDTI and about uncertainty around making claims for software development. In response, the committee said the government should clarify these areas, particularly over whether new software is classified as being innovative or not. It also asked for more certainty around audit procedures relating to RDTI claims so there is less risk of applicants being asked to later repay credits they thought they were entitled to.

The advocacy group Fintech Australia praised the committee’s “constructive” suggestions on RDTI, but would like to see rebates under the scheme increased and the introduction of a collaboration premium.

A separate committee is studying the RDTI regime and is expected to report on its thoughts after October.

Courting controversy

So far so good. However, where the committee strayed into controversy is on its recommendations that ‘buy now, pay later’ online retailers, such as Afterpay and Zip, should remain self-regulated. This is counter to what consumer protection groups were pushing for. They want these firms to come under consumer credit laws, arguing that they should face the same legal obligations as traditional financial services providers, such as credit card issuers.

Labour party senators also slammed the idea of these firms operating under a voluntary code, as it may not properly protect consumers. Those senators want additional safeguards, such as making these firms carry out identity checks, limit multiple accounts, limit access by minors and to cap late payment fees.

The fact that some of these firms do not conduct credit checks was also criticised as it could lead vulnerable consumers further into debt.

However, these firms argued that credit checks are unnecessary because they already cap late fees and block consumers from spending more when they are late on their repayments.

The committee strayed into controversy is on its recommendations that ‘buy now, pay later’ online retailers, such as Afterpay and Zip, should remain self-regulated.

Mr Bragg justified the committee’s recommendations on the basis that these activities occur on the fringes of regulation, meaning that a one-size-fits all regulatory approach is inappropriate.

He believes that self-regulation is the best course for now, but could later be augmented by federal rules. These firms were relieved by the committee’s suggestions saying that regulation would have stifled innovation.

Mr Bragg, meanwhile, said in an interview with the Australian Broadcasting Corporation that there was no evidence that these firms were detrimental to the consumer and did not want regulation to impede the growth of fintechs.

But the committee was criticised for relying too heavily on evidence from the Australian Finance Industry Association, a lobby group, showing that hardship cases among those shopping with these firms was very low.

Improving open banking

Open banking officially started in Australia on July 1, 2020, coinciding with parts of the Consumer Data Right (CDR) regime covering credit and debit cards, deposit accounts and transaction accounts going live. From November 1, consumer data relating to mortgage and personal loan data will also become shareable.

That means the country’s four largest banks, ANZ, NAB, Commonwealth Bank and Westpac, for example, must share customer data with other financial service providers if their customers request it.

The committee is particularly enthusiastic about this initiative, following a major banking scandal which was investigated by a royal commission in 2017–2019, because it believes it reflected a lack of competition in the sector.

The Australian Prudential Regulation Authority (APRA) contends that the country’s licensing regime for neobanks is the most open in the world, thanks to its restricted authorised deposit-taking institutions (ADI) licensing pathway. The regulator relaxed some capital and other regulatory requirements for new entrants and aims to assist them in fostering competition in the market.

The committee quoted management consultancy firm Kearny, which said the Covid-19 crisis may boost open banking. The firm explained that the increased use of digital channels provides fintechs with an opportunity to exploit their competitive advantages and may be best placed to serve customer needs post-crisis.

Simultaneously, the population lockdowns forcing people to do more of their activities online may have made them more comfortable about sharing their data with other financial services providers, the consultancy said.

The committee cited the Australian Competition and Consumer Commission, which stated on July 1 that there should be around a dozen official data recipients by September 2020, with 39 firms having commenced the approval process. However, the committee noted that the pandemic had put a spanner in the works, seeing many fintechs delaying getting involved as they were coping with the fallout.

Although respondents to the committee’s inquiries believed CDR to be adequate, concern was expressed about public awareness of open banking and its benefits.

The committee advised the government to work with industry to launch educational campaigns targeted at consumers. It recommended including other financial services, such as company pension products and then general insurance. Another committee suggestion is to set up a national body to oversee the implementation of CDR.

Data scraping

One topic that did raise eyebrows was that of data scraping and the committee’s stance of not banning it. This is an activity involving software extracting data from the output of other programs and is a technique employed by some financial firms for the sake of efficiency. It would also make it easier for fintechs to harvest customer data and to tailor their services accordingly, which is why many of them support it.

Though some objectors believed the practice poses security issues, the committee decided that, for now, it enables companies to innovate and provide competition. Nonetheless, the committee said the activity should be monitored.

To help speed up the pace of regtech and fintech development, some respondents to the report called on Australia to mimic the UK and Singaporean approach. In particular, they highlight that both countries have single regulators dealing with financial services conduct and competition. They believe that, at a regulatory level, this gives them an advantage when it comes to promoting financial services competition.

They reported that, on competition issues, it remains unclear who is in charge of overseeing competition in Australia’s financial services. Since a tweak to its mandate in 2018, the Australian Securities and Investment Commission has more scope to consider competition issues. However, the APRA and the Reserve Bank of Australia also have competition considerations embedded in their mandates.

As part of a more holistic approach, the committee urged the government to give the Council of Financial Regulators responsibility for competition and to report on the competitive dynamics in the Australian financial services market. It said the CFR should also oversee the country’s global fintech and regtech competitiveness.

Although there are a few points of contention in the report, such as around the regulatory treatment of ‘buy now, pay later’ online retailers and data scraping, the bulk of it was well received across industry and much of the political establishment. Therefore, there will not likely be many changes between the recommendations of the interim report and the final one due around April 2021.

This article first appeared in The Banker's sister publication Global Risk Regulator

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