ASIC’s regulatory sandbox: is it time for a reset?

A regulatory sandbox is a controlled framework established by a regulator or government that allows participants to test innovative products, services, or business models in a real-world environment for a limited period without obtaining the licenses or regulatory authorisations usually required. Testing takes place under defined conditions and regulatory oversight.

Regulatory sandboxes help balance  the need to foster financial innovation with maintaining strong consumer protections, market integrity and financial stability. They also support policy development in allowing regulators to observe how novel technologies, products or business models behave in real-world conditions. 

The ERS was introduced in September 2020 and is administered by the Australian Securities and Investments Commission (ASIC).^[1]

It gives individuals and businesses an opportunity to test certain innovative financial and credit products and services in a live market environment with real consumers. Participants are provided with a full licensing exemption of up to two years, enabling them to test their products and services without the need to obtain an Australian financial services (AFS) or Australian credit licence. 

The review considered the role of regulatory sandboxes in supporting financial innovation in Australia. It also critically evaluated the ERS to assess its current effectiveness, whether it is fit-for-purpose and how it measures up alongside comparable international schemes. 

The review found that to date, the ERS has benefitted participants (particularly early-stage businesses and start-ups) by providing them an opportunity to test the viability of their innovative products and services with a limited number of consumers prior to rolling them out to the broader market.

However, it also identified several significant limitations with the ERS in its current form: 

• Unclear objectives: the objectives of the ERS are ambiguous compared to comparable overseas sandboxes. The review found that countries with clear, overarching government strategies and national objectives are more likely to foster effective innovation ecosystems.
• Restrictive scope and eligibility requirements: certain firms are constrained by the ERS's scope and eligibility requirements, particularly due to the client exposure limits imposed and the absence of some products and services from the eligibility criteria.^[2]
• Limited integration with ASIC's broader functions: the ERS is insufficiently integrated with ASIC's core functions, including licensing and supervision, which ultimately limits its value as a pathway to licensing for participants. For example, the review found that (at the time it was conducted) of the 16 firms that had previously participated in the ERS, 12 appear to no longer be operating.
• Limited relevance for established financial institutions: licensed entities are only eligible to participate in the ERS where their existing licence does not already authorise the product or service being tested. Consequently, large financial institutions (such as major banks) holding broad AFS licenses are effectively excluded from participating. This narrows the ERS’s relevance for incumbent innovation. 
• Limited ability to adapt to innovation: defining the scope of the ERS in primary law and regulations has led to ASIC being reluctant to utilise their existing powers to evolve their approach to sandboxes in response to innovation and technological development.^[3]

The review found there is value in ASIC continuing to operate a broad regulatory sandbox, both as a signal of support of innovation and experimentation and in recognition that innovation can come from a diverse range of sources. 

However, it recommended various amendments to the ERS to improve its effectiveness, including: 

• reforming the ERS to broaden its scope and enhance its flexibility. The review suggests this would be most effectively achieved by repealing the current ERS legislation and regulations and transitioning to a sandbox model that leverages ASIC's existing relief powers;^[4]
• more closely integrating the ERS with ASIC's broader functions, particularly licensing and supervision, to ensure it aligns with ASIC’s overarching regulatory approach and provides a clear pathway to licensing for participants;
• providing more proactive ASIC support to applicants and successful participants to assist with navigating licensing and other ASIC processes;
• providing participants with bespoke regulatory relief (rather than a one-size-fits-all approach) to better accommodate different business models and support innovation by established entities; 
• considering using thematic sandboxes within areas of ASIC’s sole regulatory responsibility to target specific sectors and emerging technologies,such as tokenisation and AI. The teview noted that thematic sandboxes are increasingly being used by overseas regulators; and
• establishing a Treasury-chaired public-private committee comprising financial regulators, industry representatives and independent members, to: 
  • identify, prioritise and manage the implementation of thematic sandboxes, and review their performance; 
  • determine the lead, participating agencies and industry participants; 
  • monitor industry and technological developments; and 
  • support coordination between regulators on financial innovation.

The review also recommended that the Australian Government develop a national financial innovation strategy to coordinate efforts across industry, regulators and government.

The review signals a potential shift in how the Australian Government will approach the facilitation of financial innovation through regulatory sandboxes.  

If the recommendations are adopted, both new and existing financial services firms may benefit from a more flexible and supportive regulatory environment for testing innovative products and services. In particular, tailored regulatory relief and thematic sandboxes could create opportunities for businesses working with emerging technologies such as tokenisation and artificial intelligence. 

Businesses operating in the financial sector should monitor developments closely as the government considers its response to the review and assess whether any proposed changes could create opportunities to test new products, services or business models.