Thinking | 8 September 2020

Australian Senate Committee on Fintech and Regtech publishes Interim Report

By John Bassilios 

The Australian Senate's Select Committee on Financial Technology and Regulatory Technology (Committee) has released an Interim Report outlining the preliminary issues raised in the inquiry to date.

The Committee was established in 2019 to inquire into and report on the size and scope of the opportunity of Australian Regtech and Fintech businesses and the barriers to the uptake of new technologies in the financial sector. The Committee also expanded its focus to include the challenges and opportunities for the sector in light of the COVID-19 pandemic.

The findings are categorised into five broad categories: tax, regulation, access to capital, skills and talent, and culture, with a focus on the settings required to encourage Australia’s national competitiveness in the financial sector. The Committee also considered the role of technology enablers during the COVID-19 crisis.

The Committee made 32 recommendations in total, which are summarised in the tables below.

Several key recommendations include:

  • Amending the Corporations Act 2001 (Cth) (Corporations Act) to allow companies to convene virtual AGMs, communicate electronically with shareholders and sign and witness documents electronically.
  • Further clarification around eligibility for the R&D Tax Incentive to ensure genuine software creation by Australian startups is reliably supported.
  • Establishing a new national body to implement the Consumer Data Right.
  • Creating a stronger competition mandate to promote innovation and guard against anti-competitive behaviour in Australia.
  • Supporting innovation and consumer choice like Buy Now Pay Later products.
  • Regularly assessing Australia’s external competitive position in financial services.

The full Interim Report is available here.

The Committee’s final report is due in April 2021.

Technology enablers

No.RecommendationCommentary
1The Corporations Act be amended to allow companies to decide the best format for holding their annual general meetings (AGMs) and other prescribed meetings (whether through virtual meetings, in-person meetings or hybrid meetings), while ensuring the needs of shareholders are taken into account.The Committee received evidence that the temporary changes to allow companies to convene AGMs and other meetings prescribed under the Corporations Act online were broadly supported and the changes which are in place until mid-2021 should be made permanent.
2The Corporations Act be amended to enable companies to communicate with shareholders electronically by default, with shareholders retaining the right to request paper-based communications on an opt-in basis.The Committee heard that broader changes are required to make the Corporations Act technology neutral. This includes amendments to enable companies to communicate electronically with shareholders by default, with shareholders retaining the right to request paper-based communications if they wish to do so. The report states that this measure would improve efficiency and address paper wastage.
3The Corporations Act and other relevant legislation and regulations be amended in order to allow for the electronic signature and execution of legal documents.The Committee considers that changes to enable electronic execution and witnessing of legal documents should be made permanent, and consistent across Australian jurisdictions. The report notes that this can be done while maintaining similar levels of security as ‘wet ink’ signatures, and would provide significant efficiencies in both time and cost.
4The Committee recommends that relevant regulations be amended in order to enable the witnessing of official documents via videoconferencing or other secure technological means.The Committee considers that changes to enable remote witnessing of legal documents should be made permanent and consistent across Australian jurisdictions.
5The Medicare telehealth items introduced during the pandemic be made a permanent feature of the Australian healthcare system, with ongoing refinement and review as appropriate.The Committee recommends that the telehealth services should continue to be rolled out on a permanent basis.
6The Committee recommends that work on implementing ePrescriptions in Australia continue as quickly as possible, and that the Australian Government ensure an open and accessible market for ePrescription services.The Government plans to fast-track the implementation of electronic prescriptions, with ePrescription functionality to be rolled out progressively from mid-2020. The Committee considers that this implantation should continue to be rolled out as quickly as possible.
7The Digital Identity reforms led by the Digital Transformation Agency (DTA) be accelerated in order to deliver a national, economy-wide framework for the operation of a federated digital identity ecosystem as soon as possible.The DTA’s current work program includes continuing to expand the range of federal government services accessible under the myGovID digital identity, and developing legislation that will enable a national, economy-wide set of rules to be established within which digital identity providers will operate, including state and territory government agencies and private sector providers.
8The Australian Government explore options to promote the use of Regtech solutions in assisting small and medium-sized enterprises to comply with their obligations under industrial awards.The Committee considers that there is enormous potential for Regtech products to provide practical benefit to both businesses and employees, however the Committee does not have a clear view at this stage on the best way forward in balancing the various interests at stake. Further work is required to develop a system in which Regtech solutions in this area can be used with confidence by businesses, while ensuring that employees are appropriately protected. The government, in conjunction with the Fair Work Ombudsman and other relevant stakeholders, should explore options to create a workable solution in this area.

Taxation

No.RecommendationCommentary
9The Committee recommends that the Australian Government provide further clarity around eligibility for the Research & Development (R&D) Tax Incentive to ensure genuine software creation by Australian startups is reliably supported.A consistent theme in evidence to the Committee was the call for greater clarity and certainty in relation to the operation of the R&D Tax Incentive for software. While the incentive appears to support the early phase of experimentation and development of a product, the Committee believes there needs to be greater clarity around the point at which software is seen as innovation and the point at which it is not.
10The Australian Government provide increased certainty around claiming the R&D Tax Incentive through issuing guidance in conjunction with the Australian Tax Office. In particular, clear limitations should be placed on the ability for payments to be clawed back retrospectively. The Committee also heard significant concerns around the retrospective action taken against R&D Tax Incentive claimants, with rebates being clawed back in some cases several years after initial payment. The Committee considers that this creates an unacceptable level of uncertainty for participants in the scheme. The government needs to provide clearer guidance on this issue and limitations on the ability for payments to be clawed back retrospectively.
11The Committee recommends that the Australian Government, through the Council for Federal Financial Relations, simplify payroll taxes across Australian jurisdictions.Although payroll tax is a state-imposed tax, it was raised as a significant issue by some submitters and witnesses, due to the different platforms and requirements between jurisdictions. It was also suggested that early to mid-stage startups should be supported through payroll tax concessions. The Committee recommends that the Council for Federal Financial Relations work to drive simplification of payroll taxes across Australian jurisdictions to assist ease of compliance. The Committee also sees value in state governments investigating Regtech solutions to provide a single payroll tax platform to simplify compliance processes.
12The Australian Government release the final Treasury report on Initial Coin Offerings (ICOs) when it is completed.In the context of raising capital, the tax treatment of ICOs was raised with the Committee, in particular that the issuance of an ICO is currently taxed as income.

The Committee notes that the Treasury conducted a consultation process into ICOs with an issues paper released in January 2019 and submissions received. A final report does not appear to be available.

Regulation

No.RecommendationCommentary
13The Australian Government provide the Council of Financial Regulators (CFR) with a competition mandate as advice to the government and that the CFR regularly report on competitive dynamics in the Australian financial services market.The Committee recognises the critical importance of promoting competition in the financial services sector for Australia's future prosperity. As such, ensuring financial regulators and policymakers are sufficiently focused on this outcome is key.

Rather than making further changes to the individual mandates of the various financial regulators, the Committee considers that the most efficient mechanism for elevating consideration of competition issues at the regulatory level would be to arm the CFR with a competition mandate, backed up by regular reporting to deal with this issue. This will require the Australian Competition and Consumer Commission (ACCC) to provide more regular input to the CFR than it does currently.
14The Committee recommends that the Australian Government establish a framework for the CFR, supported by Austrade, to regularly consider and report on Australia's external competitive position in financial services, including measuring technology adoption and innovation.The global nature of Fintech businesses means that there is significant upside potential if Australia can create the right settings to attract talent and capital into our financial services sector; conversely, the downside risk – if we fall behind global trends – is also substantial.

The Committee notes Austrade's evidence that it is involved in compiling research on Australia's global position in Fintech. To ensure that Australia's key financial regulators and policymakers are giving Australia's international competitive position the focus it requires, the Committee considers that the Council of Financial Regulators is best placed to take up the function of regularly considering and reporting on this issue.
15The Committee recommends that the Australian Government establish a market basis for determining the success of Australia’s financial regulators in supporting a pro-innovation and pro-competition culture in financial services.The Committee considers that in many instances, industry self-regulation can be an efficient way for innovative products in the financial services sector to emerge, while ensuring adequate protections for consumers. The development of an industry code of practice in the Buy Now Pay Later (BNPL) sector is an example of where industry is working constructively to respond to stakeholder concerns and seek to achieve appropriate regulation that benefits consumers.

Because innovation like BNPL often occurs on the fringes of regulation, it is inappropriate to force each innovation into a one size fits all approach. Industry self-regulation provides an initial framework to protect innovation which can later be backed up by a policy statement or a form of co-regulation (collaboration between industry and government).
16The Committee recommends that the Australian Government establish a culture of innovation and competition in financial services by supporting self-regulation where innovative products emerge, while ensuring strong consumer protection.The Committee considers that the Australian Government should support initiatives where self-regulation can be utilised appropriately in financial services. Although it is appropriate that ASIC and the RBA undertake reviews into various regulatory issues, the policy in this space must be set by the Parliament.
17The New Payments Platform (NPP) Australia regularly report on implementation progress of the NPP roadmap in order to drive wider access to the platform.The Committee believes that the New Payments Platform (NPP) is a vital piece of market infrastructure that will underpin improvements in the payments system and across financial services in Australia in the years to come.

The Committee considers that more regular public reporting of the progress of NPP capability upgrades (including the implementation status of these upgrades by each direct NPP participant) will enhance transparency and drive wider access to the platform. NPP Australia could deliver this reporting requirement quarterly to give full visibility as to the progress of the NPP as it matures.
The Committee agrees that consumers should be empowered to know how much they are paying in foreign exchange fees, and that this transparency would lead to increased competition.

The ACCC has published best practice guidance documents for businesses on the transparent pricing of foreign currency conversion services, and on the disclosure of international transaction fees. In addition, the ACCC will be monitoring industry implementation of this guidance and reporting back to government by September 2020, and that a cross-agency working party has been established to look at foreign exchange issues. The Committee considers that a mandatory code of best practice for industry participants should be strongly considered as part of these developments.
18The Committee recommends that, if the ACCC finds poor industry adherence to its best practice guidance for foreign currency conversion services and international transaction fees, the development of a market code of best practice to promote integrity and transparency within the foreign exchange market should be considered.The Committee agrees that consumers should be empowered to know how much they are paying in foreign exchange fees, and that this transparency would lead to increased competition.

The ACCC has published best practice guidance documents for businesses on the transparent pricing of foreign currency conversion services, and on the disclosure of international transaction fees. In addition, the ACCC will be monitoring industry implementation of this guidance and reporting back to government by September 2020, and that a cross-agency working party has been established to look at foreign exchange issues. The Committee considers that a mandatory code of best practice for industry participants should be strongly considered as part of these developments.
19The Australian Government establish a new national body to consolidate regulatory responsibilities in relation to the implementation of the Consumer Data Right (CDR).There is concern that oversight of the CDR is unnecessarily fragmented and regulatory arrangements need to be consolidated. More broadly, the Committee heard that great benefits could be achieved by consolidating national data policy under a single agency. The Committee agrees that it is time for a clear, effective and accountable regulatory structure for all aspects of data management and privacy in the digital economy.

As this broad goal may take some time to achieve, as a starting point the Committee is recommending that a new national body be established to take on regulatory and operational responsibility for the CDR. Over time, other functions relating to data policy could also be consolidated under this new body.
20The Committee recommends that the ACCC, or the new proposed national Consumer Data Right body, finalise the rules for intermediary and third party access to CDR banking data by late 2020, and enable intermediaries to enter the CDR ecosystem as soon as possible thereafter.The Committee heard significant concerns that the current, single accreditation level of 'unrestricted data recipient' is not a viable proposition for many Fintechs due to the costs and rigour associated with becoming accredited at this level. As such, an appropriate accreditation regime for third parties and intermediaries will be critical if Open Banking is to achieve its intended purpose of increasing competition and providing greater choice for consumers.

The Committee notes the ACCC is currently undertaking a consultation process on draft rules relating to third-party intermediary access to Open Banking data. It is critical that this framework enables access by a wide range of intermediary organisations, and that intermediary organisations can commence getting accredited as soon as possible.
21The Committee recommends that the Australian Government work with the banking industry to establish and implement targeted campaigns to educate consumers on the CDR and the opportunities that Open Banking provides.The Committee notes that it is vital that consumers themselves are educated about the benefits and opportunities of the CDR in order for these benefits to be realised.

The ACCC should require, at a minimum, that the major banks provide agreed messaging to their customers in order to promote the CDR, as well as considering advertising campaigns specific to Open Banking (as opposed to the broader, economy-wide CDR initiative). The Australian Banking Association may be well placed to help facilitate the coordination of this messaging.
22The Committee recommends the Australian Government maintain existing regulatory arrangements in relation to digital data capture.In the Committee's view, it is pertinent that ASIC has found no evidence of consumer harm as a result of these practices. It is also clear that it will take some time for the Open Banking regime to provide a level of data quality and ubiquity that is currently available using digital data capture services.

The Committee considers that an outright ban on screen scraping is not prudent at the present time, and that in many cases these practices are enabling companies to innovate and provide competition in the financial services sector. This situation should continue to be monitored, however, as Open Banking is rolled out. ASIC's current consideration of the ePayments Code will also provide important input on this issue.
23The Committee recommends that the Australian Government expand the CDR to include other financial services, starting with the superannuation sector and then including sectors such as general insurance.The Committee considers that, given the technical infrastructure already in place and the ongoing work on data availability in the superannuation sector, the CDR should be expanded to superannuation as soon as possible.

The Committee also considers that the general insurance market would benefit considerably from the rollout of the CDR. The government should flag its intention to expand the CDR into insurance and provide an indicative timeline in which this may be possible.

Capital

No.RecommendationCommentary
24The Committee recommends that the Australian Government amend the Early Stage Innovation Company (ESIC) and Early Stage Venture Capital Limited Partnerships (ESVCLP) qualification criteria to widen access to startups and investors.The Committee is of the view that the ESIC and ESVCLP initiatives were designed on the basis that they could be recalibrated. It believes that such schemes must be iterative in order to facilitate success and be responsive to the needs of the sector, and that the qualification criteria for these programs now need to be amended to widen access to startups and investors.
25The Committee recommends that the Australian Government implement a Limited Partnership Collective Investment Vehicle and a Corporate Collective Investment Vehicle regime to drive inbound capital investment for Australian startups.The Committee notes evidence received from the Australian Investment Council that the current Australian Collective Investment Vehicle (CIV) regime may be acting as a deterrent to international investors. Implementing CIVs as a priority would boost Australia’s competitiveness as an investment destination as investors are familiar with this form of investment. This action could help capitalise on recent political changes in Hong Kong which may lead to the deterioration in its status as a global financial centre. The uncertainty that has been created provides opportunities for other regional centres including Australia to attract new investment, companies and talent to become a regional technology and financial services centre.

The Committee agrees that the creation of a Limited Partnership CIV and a corporate CIV would be beneficial in encouraging international investment in the Australian Fintech and Regtech sectors.
26The Committee recommends that the Australian Government consider incentives to encourage collaboration between large businesses and startups.The Committee is of the view that government has a role to play in creating an ecosystem which encourages competition and choice, and facilitates getting more innovative Fintech and Regtech products to market.

The Committee considers it appropriate that the government consider incentives to assist in and encourage collaboration between large businesses and startups.
27The Committee recommends that the Australian Government foster a culture where superannuation funds invest more widely, including in Australian startups, without undermining the sole purpose test.The Committee is mindful of the sole purpose test in superannuation; that is, the legal requirement that requires super funds be maintained for the sole purpose of providing retirement benefits to their members, or to their dependants if a member dies before retirement.

The Committee is not suggesting that a particular component of superannuation be mandated for a particular investment purpose. Additionally, the Committee is mindful that superannuation funds must consider levels of risk appetite and prudently manage their costs in relation to investments.

However, the Committee is of the view that there is merit in further investigation as to how the vast pool of capital available in superannuation funds can be appropriately and prudently invested.

Culture

No.RecommendationCommentary
28The Committee recommends that the Australian Government undertake a stocktake to better understand the costs and complexity for small businesses, including Fintechs and Regtechs, in Commonwealth Procurement.The Committee considers that government should play a proactive role in encouraging growth opportunities for innovative firms through appropriate procurement policies, including at the Commonwealth level.
29The Committee recommends that the Australian Government consider holding event-based challenges or initiatives to enable innovative Fintechs and Regtechs to solve policy and service delivery challenges.The Committee noted the work being done as part of the Business Research and Innovation Initiative (BRII) and is of the opinion that the BRII is valuable not only in opening up opportunities for SMEs to showcase their potential and grow their business, but also for allowing government to access and support innovative technologies.

The importance of hackathons and similar challenge-based events was also highlighted to the Committee as a means of allowing innovative firms to pitch ideas and contribute solutions to problems across a range of areas. The Committee suggests that the government consider holding event-based challenges based on specific problems to augment the initiatives already taking place. Issues such as the challenge of modern award complexity could be excellent candidates for this type of program.
30The Committee recommends that the Australian Government create an Agricultural Technology (AgTech) Advisory Council to advise on AgTech policy in a consolidated manner.The Committee is encouraged by the work being done by the National Farmers’ Federation, the rural and research development corporations, university-based incubators, and individual companies in the AgTech space. It considers there is immense potential for Australian AgTech innovations to deliver productivity, market, and employment benefits both domestically and internationally.

The Committee is of the view that the AgTech sector would benefit from a national leadership group to provide guidance and leadership on AgTech policy matters in a consultative and consolidated manner.

Skills

No.RecommendationCommentary
31The Committee recommends that the Australian Government work with industry to ensure reskilling of workers affected by economic change and the availability and accessibility of microcredentials for those seeking to join the Fintech and Regtech industries.The Committee heard that microcredentials and similar skills programs will be of critical importance as Australia transitions its workforce towards emerging technologies and industries, particularly in the context of COVID-19.

The Committee sees merit in the proposal submitted by the Business Council of Australia for a HECS-style Lifelong Skills Account, which would provide opportunities for individuals to retrain and reskill throughout their careers by updating their training through microcredential qualifications. The Committee is of the view that further investigation should be conducted to progress such a policy.
32The Committee recommends that the Australian Government explore including eligible outplacement training under the Fringe Benefit Tax exemption provision for eligible startups.The Committee sees value in the recommendation put forward by EY and agrees that eligible outplacement training should be exempt from Fringe Benefits Tax.

The Committee considers that this change would improve the regulatory environment and provide benefits to employers and employees impacted by technological advancement.

This article was written with the assistance of Sarah Khan, Law Graduate.

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John Bassilios

John has broad experience in financial services, funds management, blockchain, corporate and commercial law, with a particular emphasis...

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