An Australian regulator’s view on financial technology
A speech by ASIC Commissioner Cathie Armour at the China Financial Summit 2019, 22nd China Beijing International High-Tech Expo, Beijing, 23 October 2019.
Thank you for inviting me to speak at this China Financial Summit, held as part of the 22nd China Beijing International High-Tech Expo. I am delighted to be here at this time of celebration for the 70th anniversary of the founding of the People’s Republic of China. I acknowledge China’s economic achievements, having grown to now be the world’s second-largest economy. Without question, technologies (including financial technology) have been a feature of this accelerated growth.
In comparison Australia may be a smaller market, but it is one of great opportunity. I thank you for the opportunity to tell you about what ASIC is doing in support of fintech.
ASIC – for those not familiar with our work – is Australia’s integrated corporate and financial markets regulator. Our job is all about ensuring a fair, strong and efficient financial system for all Australians. It is also our role to promote the strong and innovative development of our financial system.
We are vitally interested in the digital opportunities available for Australian financial investors and consumers, the technology that powers our markets, and promoting a capital market environment and a regulatory framework that allows business to prosper.
The Australian context
The Australian government has demonstrated its strong support for the development of a varied and sustainable fintech sector in Australia.
Indeed, Australian Prime Minister Scott Morrison recently said that driving the uptake of new digital technologies to promote innovation and competition in our financial system is a key part of the government’s economic plan. With that in mind, the Australian Government wants to work with the fintech industry to ensure Australia has an internationally competitive environment for fintech to thrive, and to attract international innovators to the Australian market.
Further evidence of this commitment to fintech in Australia is the newly created parliamentary secretary position, Assistant Minister for Superannuation, Financial Services and Financial Technology, held by Senator Jane Hume. In addition, last month saw the announcement of the Senate establishing a Select Committee on Financial Technology and Regulatory Technology. In October 2020, the Committee will report on inquiries into:
- the size and scope of the opportunity for Australian consumers and business arising from financial technology (fintech) and regulatory technology (regtech)
- barriers to the uptake of new technologies in the financial sector;
- the progress of fintech facilitation reform and the benchmarking of comparable global regimes
- current regtech practices and the opportunities for the regtech industry to strengthen compliance but also reduce costs
- the effectiveness of current initiatives in promoting a positive environment for fintech and regtech start-ups, and
- any related matters.
Whereas in China fintech is well and truly making its mark, in Australia we see the clear and compelling potential for fintech and are working to fully seize that potential.
In 2019 the EY Global FinTech Adoption Index reports that 58% of the Australian digitally active population are adopters of fintech.  Across 27 markets, this places Australia in the bottom third of the pack, but ahead of Canada and the USA. China leads as the country with the highest fintech adoption level at 87% of the digitally active population.  A separate EY publication noted that Australia’s adoption rate more than doubled between 2015 and 2018. These figures point to the opportunity for significant growth in fintech adoption in Australia and 56% of surveyed fintech founders in Australia agreed that the Australian fintech environment is conducive to growth.
We are also seeing the broadening of the Australian fintech industry: A couple of years ago the industry was narrower in scope with a focus on lending, personal finance and asset management; today it is expanding its reach with companies active in areas such as payments, wallets and supply chain, wealth and investment, and data and analytics.
ASIC supports financial technology
ASIC supports technological change that will improve outcomes across the financial system. While it is very important that we do not stand in the way of such change, we do not compromise the fundamental principles of our regulation of financial services and markets.
Certainly, evolving technology is nothing new to regulators. Over time, technological leaps and bounds have transformed financial markets and services to get us where we are today. Today’s markets are a far cry from the days of men haggling in the courtyard of the world’s first modern stock exchange, the Amsterdam bourse, at the start of the 1600’s.
Recent technological advancements continue to promise more and more, with benefits for both consumers and providers alike. Think ease of use, speed, convenience, availability of information at your fingertips, cost savings, scalability. There is also the potential to enhance financial inclusion, bridge financing gaps and develop financial capabilities.
ASIC’s role is to regulate Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance deposit-taking and credit. In fulfilling this role, we must find the right balance between:
- protecting consumers
- ensuring markets remain fair, strong and efficient, and
- encouraging innovation and businesses to flourish.
Financial services and products – even where they are created, delivered and exist within technology – are regulated by ASIC.
Our regulatory regime is principles based and operates in a technology-neutral way. What this means is that in Australia the rules are the rules no matter whether you are dealing face-to-face with a customer sitting in front of you, or via an app on the customer’s smartphone. Pragmatism means that we do sometimes amend our regulatory regime to facilitate or recognise new technologies – for example, we have facilitated electronic securities offering documents – but mostly our regulation is technology-neutral.
Globally, regulators are starting to think about whether regulatory frameworks should be more than just open to technology solutions – perhaps the time has come when we should expect and advocate for new technologies and new approaches, particularly where outcomes have otherwise been suboptimal. Nick Cook, the Director of Innovation at the UK’s Financial Conduct Authority recently posed the question, ‘can we remain “technology-neutral” in a world where technology is so embedded in the delivery of financial services and so fundamental a driver of consumer outcomes?’
Certainly, as a regulator we welcome innovation, but the true value and success of innovation will be determined by the extent of market adoption. Innovation and financial technology therefore needs to provide net realisable benefits to participants and users of Australia’s financial markets, and avoid embedding what could become future legacy issues. In so doing, it will bring benefits to the real economy.
At ASIC we launched the ASIC Innovation Hub in early 2015 so that we regulate in a way that reflects the modern reality of fintech and regtech start-ups. The Innovation Hub helps start-up financial technology businesses navigate Australia’s regulatory framework. We remain guided by the principle that we will not compromise investor and consumer trust and confidence.
What we will do is assist and support these start-ups. We do this by offering a streamlined engagement between the fintech sector and ASIC, creating opportunities for them to test the viability of their products and services, and where possible removing red tape.
In mid-2016 we expanded our scope to include engagement with the regulatory technology sector. We consider that the regtech sector has enormous potential to help organisations build a culture of compliance, identify learning opportunities, and save time and money by making it easier and simpler to comply with regulatory obligations. Done right, this will be advantageous to business and consumers. We see for ourselves a crucial role in encouraging the uptake of regtech.
Since its inception, the Innovation Hub has worked with around 500 entities – 470 of which have received informal assistance. This slide illustrates that digital advice, marketplace lending, along with payments and remittance business models accounted for a majority of Hub activity. However, in the spirit of innovation, we are also encountering a lot of hybrid business models. These entities engage in, for example, advice, regtech, and credit simultaneously.
Our statistics on the licensing of fintechs also indicate that, on average, Innovation Hub engagement has led to a material reduction in the time taken to get licensed.
This year we have also commenced a series of Regtech Initiative events. These events involve real-world test application of the latest regulatory compliance technologies. On two occasions we set regtech developers a challenge. The first was to use natural language processing to identify misleading and deceptive promotional material. The second was to use machine learning technology to improve financial advice. Most recently, we had three voice analytics providers look to automate the monitoring of telephone sales for insurance. Demonstrators engaged in problem-solving, testing, and then presented their solutions in a public forum. The series has proven to be a catalyst for the strengthening of dialogue between financial services firms and technology providers.
Regtech also presents opportunities for financial regulators. We are certainly interested in using technology to facilitate our supervisory and enforcement processes. In some respects we are quite advanced. For a number of years we have conducted real time surveillance of the Australian equities markets using a sophisticated surveillance system, and we started early on developing our capability to investigate misconduct in the dark web and other technology-enabled offending. In other ways, we still have more to do to better harness technology and data advantages.
At ASIC we have a deliberate ‘open mind’ approach. We recognise that we cannot afford to be disinterested in fintech and regtech. Our approach includes learning from industry input, from international case studies, and close collaboration and knowledge sharing with domestic and international regulators.
Beyond our own borders, ASIC participates and leads in international networks such as the Global Financial Innovation Network and the International Organization of Securities Commissions Fintech Network. These help establish greater cross-border efficiencies, while also allowing us to exchange knowledge with international regulators and government bodies.
The cyber resilience of our regulated population is another technology-related focus for ASIC. As the digital footprint of companies, consumers and investors expands, their vulnerability to cyber threats also increases.
Our goal is to improve the cyber resilience of all entities operating in Australia’s financial markets.
We have published good practice guidance and key questions for boards to ask about their firm’s cyber resilience. We also collate, analyse and publish the results of cyber resilience assessments of firms in Australia’s financial markets.
This slide plots the sophistication of Australian financial market firms cyber resilience capability from ‘partial’ in grey (meaning policies are not formalised or non-existent and responses ad-hoc or reactive) to ‘adaptive’ in dark blue (meaning continual evolution responding to changes in the cybersecurity landscape). You can see the current state is some way from the target state.
While we have observed a growing understanding that cyber risk is a strategic, enterprise-wide issue, there remains disparity between firms when it comes to investment in cyber security and more to be done to drive continuous improvement in cyber resilience. We also note that use of third-party service providers and partnerships – often intended to optimise operational efficiencies – heighten the risk of cyber incidents.
Cybersecurity, especially data integrity and protection, are crucial for consumer trust. Fintech and regtech developments need to get this right or else the consequences could be devastating.
Enhancing competition and innovation
Several recent developments in Australia focus on enhancing competition and innovation, which can be expected to create opportunities for new fintech.
The ‘Open Banking’ initiative in Australia which will be introduced in phases since July 2019 through to mid-2021 will give consumers the right to access their banking data and share it with other businesses. This is expected to be transformative – increasing transparency and competition in the financial sector. It will assist consumers to more easily shop around for a better deal and then switch between financial institutions. And the accessibility and portability of consumer data will reduce the information advantage that established banks have traditionally had over fintechs.
Another relevant policy setting is the Comprehensive Credit Reporting regime which will give lenders access to more data to make a more accurate assessment of a borrower’s true credit position. This will allow innovative lenders to offer more tailored products priced according to the risk posed by the borrower.
Another is the new ‘restricted’ bank licence introduced last year by the Australian Prudential Regulatory Authority, the regulator that supervises banks in Australia. The framework is designed to assist and make it easier for new entrants to the banking industry, particularly small firms with limited financial resources. The restricted licence allows the entity to conduct a limited range of business activities for two years while it builds its capabilities and resources. The framework is designed to balance the competing objectives of encouraging competition and innovative new business models while maintaining safety and stability in the financial system.
Distributed ledger technology
Distributed ledger technology, or DLT, is currently at the forefront of some of the most significant financial market innovation in Australia.
ASIC is currently closely monitoring a significant transition in Australian market infrastructure as the Australian Securities Exchange, or ASX, implements a new DLT-based clearing and settlement system.
Anticipated benefits of the new DLT system are improved record keeping, reduced reconciliation, more timely processing of transactions, and better quality source-of-truth data for participants. ASX’s view is that these features will reduce market participants’ clearing and settlement costs and drive savings throughout the post-trade supply chain, improving the competitiveness of Australia’s financial markets.
ASX anticipates it will also provide a platform conducive to innovation by enabling open source smart contract programming language so that ASX and third parties can design, build, and implement new distributed products and services for the Australian post-trade services market in the coming years.
Of course, the efficiencies and opportunities promised by DLT technology is exciting, but our regulatory focus remains on ensuring that – no matter which technology solution is used – Australian financial markets retain their integrity, resilience, and robustness, and operate fairly and effectively.
China showcases much potential for financial technology. In Australia, we are on the cusp of a transformative ‘revolution’ of financial technology into the mainstream. This makes now a time of great opportunity for fintech and regtech in Australia.
The Australian government and regulators – ASIC included – are supportive of competition and innovation in the financial system. We want to see financial markets systems become more efficient and consumer-focused. We want to see reduced information asymmetries, better risk mitigation and a more efficient allocation of scarce resources. We want to see technology create better outcomes for both consumers and business.
At ASIC our goal is for a strong, fair and efficient financial system for all Australians. We recognise that financial technology is a key component of our financial system and we expect its prominence to only increase into the future.