This article was written by Scott Farrell, Kate Jackson-Maynes, Tim Dolan, David Calligan, Roslyn Hinchliffe and Charlotte Collins.
In a world-first agreement, on 23 March 2016, the UK’s Financial Conduct Authority (FCA) and the Australian Securities and Investments Commission (ASIC) signed a co-operation agreement which provides a framework for co-operation and referrals between the “Innovation Hub” of each regulator. The framework centres on a referral mechanism under which each regulator will refer to the other innovative businesses seeking to enter the other’s market, and will provide support to businesses which have been referred to them by the other regulator. The forward-looking nature and the specific scope of the co-operation agreement are unique aspects of the arrangement, which it is hoped will drive innovation and collaboration across national borders.
Hubs and Sandboxes
The FCA launched “Project Innovate” in October 2014, with the objective of encouraging innovation in financial services in the interests of consumers. This is closely linked to the FCA’s competition-related work as it seeks to assist both new and established businesses to introduce innovative financial products and services to the market. It is also designed to help the FCA in its role, by identifying where there may be gaps in the regulatory framework, or where that framework may need to be adapted to reflect changes in the market.
Support is provided through the FCA's dedicated “Innovation Hub”, which helps businesses understand how the regulatory framework applies to them, supports them through the authorisation process and provides them with dedicated contacts at the regulator. The FCA states that its Hub has supported over 200 businesses to date, 18 of which have now become authorised.
The FCA will complement its Hub with a “Regulatory Sandbox”, which will provide a “safe space” in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences. It intends to open the Sandbox to proposals from firms for testing in the coming months.
ASIC has closely followed in the FCA’s footsteps with similar initiatives in Australia. ASIC’s online Innovation Hub has been available to eligible businesses since March 2015. ASIC’s Innovation Hub forms part of the Australian Government’s plan to make it easier for fintech start-ups to navigate the complexity of financial services laws in Australia. An entity is more likely to be eligible for this assistance if it has a potentially ground-breaking innovation or if the innovation has the potential to produce a better outcome for investors and consumers. Entities can apply for assistance using the form on this webpage.
The main regulatory issues that ASIC assists with through the Hub relate to the application of the Australian financial services licensing and credit licensing regimes to fintech start-ups. ASIC has indicated it has dealt with over 75 innovative start-ups to date, including the granting of 10 licences.
In recent announcements, the Australian Government has noted that Australia’s financial system can support a Regulatory Sandbox and that ASIC’s power to grant waivers from the corporations legislation allows it to have the flexibility and responsiveness to facilitate this initiative. The Australian Government supports ASIC and other Australian regulators on the development of a Sandbox, and work is already under way on this initiative.
Co-operation and referral
The co-operation agreement sets out how the referral mechanism between the two regulators will work in practice. Importantly, each regulator will only refer businesses which would meet their own criteria to qualify for the support of their domestic Innovation Hub. Once referred, businesses should in theory have access to the same support that local businesses receive.
This arrangement should mean that incoming businesses have a source of guidance and may therefore be better prepared for the authorisation process, although of course the provision of assistance will not automatically lead to a business qualifying for authorisation. However, the help provided should at the very least aid in demystifying the foreign regulatory framework and authorisation process for incoming businesses.
As well as providing for how the regulators will assist referred businesses, the agreement sets out how the regulators will aid one another through the sharing of information. This will include sharing information in relation to emerging market trends and developments, issues encountered with innovation in financial services, and the businesses referred, where appropriate.
Consequently, a key benefit for the regulators in this active co-operation will be learning more about each other’s markets and how the other regulator is managing the difficult balance between fostering innovation and protecting consumers. As both are active and well-respected markets, there is potentially much to be gained from this collaborative approach.
It will be interesting to see how the co-operation arrangement between the two regulators may be applied in respect of entry into the Regulatory Sandboxes in the two jurisdictions, when these are made available for play.
Fintech has really taken off in the two jurisdictions, with various new businesses including challenger banks, payment services providers, crowdfunding and blockchain (or distributed ledger technology) platforms looking to offer innovative solutions, and existing businesses bringing out new offerings and making use of new technologies. The Australian Government recently released Backing Australian Fintech, which is a statement that describes how it proposes to grow Australia’s Fintech capabilities and position Australia as a leading market for fintech innovation and investment in Asia by 2017 (see more on this here). Further, the New South Wales Government is canvassing public opinion on the ways it can build on the Commonwealth Government’s initiative and develop its Innovation Strategy for NSW. From the UK perspective, the UK Chancellor has made clear his intention for the UK to become a global leader in fintech, and the UK Treasury recently commissioned a report which considers the UK environment for fintech and compares it to the environment in other leading fintech hubs, making recommendations as to how the UK can improve the environment offered to fintech businesses. The relationship between Australia and the UK under the co-operation agreement has great potential to boost the ability of fintech businesses to access both markets. From the perspective of both centres, this is the first of what is hoped will be many such agreements.