How an ‘underutilised’ Government incentive could shape the future of Fintech in Australia

10th October, 2024

In 2020, the Australian Government implemented the Enhanced Regulatory Sandbox Regime (Sandbox) to enable the testing of innovative financial services and credit activities without licences for 24 months from the time of entry into the Sandbox. The Sandbox is intended to enable startups in the Fintech industry to have a testing ground in an ever-increasing complex regulatory environment.

The Fintech industry in Australia has experienced a rollercoaster ride in recent years which ultimately has impacted funding trends – published data reports that 41% of Australian Fintechs are not meeting their capital raising expectations per the 2023 EY FinTech Australia Census. Amidst this backdrop, the ‘underutilised’ Sandbox could potentially address the market entry difficulties in the early phases for Fintech startups by allowing them to test their products without the burden of compliance obligations associated with financial services and credit activities licencing (and the heavy expenses incurred to do so).

How does it work?

The Sandbox framework aims to facilitate innovation by providing a controlled environment for testing without the full regulatory burden, while ensuring consumer protections are in place by requiring startups in the Sandbox to adhere to conduct and disclosure standards, dispute resolution mechanisms and maintaining professional indemnity insurance. If the product or service is successful, the Fintech company could consider applying for a full Australian financial services licence, Australian credit licence or becoming an authorised representative of an existing licence holder.

To utilise the Sandbox, a Fintech company must be eligible (as discussed below) and lodge a valid notification with ASIC, including specific information such as the provider’s details, a description of the financial services to be tested, why the exemption will benefit the public and why the service is new or an improvement on an existing service. The notification must be lodged in the ASIC prescribed form with the exemption becoming available if ASIC does not object within 30 days of lodgement.

Eligibility criteria

To take advantage of the Sandbox regime, eligible Fintech startups will need to meet, amongst others, the following criteria:

  1. meet the net public benefit test – provide detail on how exempting each eligible financial service, financial product or credit activity will result, or be likely to result, in a benefit to the public;
  2. meet the innovation test – provide detail how each eligible financial service, financial product or credit activity is considered either new or a new adaptation or improvement of another service;
  3. total aggregate client (wholesale and retail clients and credit consumers) exposure limit of AUD $5 million;
  4. comply with consumer protection requirements such as notifying clients and/or ASIC when certain events occur;
  5. have adequate compensation arrangements that have a minimum AUD $1 million cover; and
  6. have both internal and external dispute resolution processes such as procedures which cover complaints by retail clients.

For more information on the Sandbox framework, ASIC has published a guidance here.

MPH has had extensive experience with assisting startup companies in all phases of operation. To find out more about how we can assist, please contact Michelle Huang by email on mhuang@mphlawyers.com.au or on (08) 9221 0033.

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