Recommendations in the Interim Report

Ahead of final reporting date (16 April 2021) the Senate Select Committee on Financial Technology and Regulatory Technology has released an interim report into how competition in the financial services sector (and beyond), can be improved through supporting technological innovation and streamlining/updating existing requirements to ensure they are fit for purpose.  The report also considers whether temporary COVID-19 measures implemented to enable use of technology during the pandemic should be made permanent as well as the potential for Regtech to streamline compliance.

The report includes 32 recommendations which Committee Chair Senator Andrew Bragg described as a 'series of quick wins'.  Mr Bragg comments,

'If we are going to compete with Singapore and Tokyo, we first need to get our house in order at home. Much progress has been made but it’s time for some recalibration. Government should not be afraid to act like in FinTech and be iterative'.

The final report will deal with 'longer term structural issues'.

The Committee's terms of reference are here.

The full list of recommendations in the interim report is here. 

'Quick wins' in five key areas 

1. COVID-19 related measures/'technology enablers': Recommendations 1-8 in the report
2. Tax issues: Recommendations 9-12
3. Regulation: Recommendations 13-18 of the report are aimed at 'elevating consideration of competition issues at the regulatory level', recommendations 19-23 concern the Consumer Data Right specifically
4. Access to capital and funding: Recommendations 24-27
5. Fostering a culture of innovation, ensuring skills and training in new technologies are available: Recommendations 28-32

1.  'Technology enablers': modernising existing legal requirements to enable use of technology and promoting use of technology 

Broadly, recommendations 1-8 in the report, are aimed at permanently modernising existing legal requirements (eg in relation to meetings, electronic execution of documents, shareholder communications and in the medical context, telehealth/eprescriptions) to enable businesses to utilise technology (recommendations 1-7) and to promote the use of regtech by businesses (recommendation 8) which the committee heard 'will become of increasing importance for businesses as a result of the COVID-19 pandemic'.

The recommendations are as follows.

Electronic meetings, shareholder communication and execution and witnessing of documents

• Recommendation 1 is that 'the Corporations Act 2001 be amended to allow companies to decide the best format for holding their annual general meetings and other prescribed meetings (whether through virtual meetings, in-person meetings or hybrid meetings), while ensuring the needs of shareholders are taken into account'.
• Recommendation 2 is that the 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'.
• Recommendation 3 is that the relevant legislation/regulations be amended 'in order to allow for the electronic signature and execution of legal documents'.
• Recommendation 4 is that 'relevant regulations be amended in order to enable the witnessing of official documents via videoconferencing or other secure technological means'.

In a short statement welcoming the recommendations, Governance Institute CEO Megan Motto commented, 

'In its current form, the Corporations Act simply does not contemplate the use of technology. These changes are long overdue and would be hugely significant for industry as it grapples with the unchartered waters of 2020 and beyond while trying to map their way to recovery…We are delighted the Committee was persuaded by our submission and our evidence and we look forward to the next steps in this process'.

Telehealth and eprescriptions

• Recommendation 5 is that 'Medicare telehealth items introduced during the pandemic be made a permanent feature of the Australian healthcare system, with ongoing refinement and review as appropriate'.
• Recommendation 6 is 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'.

Digital Identity reforms

Recommendation 7 is that 'Digital Identity reforms led by the Digital Transformation Agency 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 report makes clear that in implementing this recommendation 'the government must ensure that the digital identity solutions created under the framework are accessible on an opt-in basis only (rather than being mandated); and should be available in addition to the other forms of identity verification currently in use, rather than replacing those alternatives'.

The Committee considers that the reform would not only deliver 'significant time and cost savings to individuals and businesses' as well as 'opportunities for innovative Fintechs and others working in the digital identify space' but that it will deliver broader benefits,

'the federated digital identity ecosystem would not be to create a single digital identity solution for individuals or businesses to use; rather, it would develop a common set of ground rules for both government agencies and private sector organisations to be able to develop tailored digital identity management products and solutions. This can enable innovation and competition among providers to occur, while ensuring that consumers retain control over which (if any) digital identity providers they choose to engage with'.

Promotion of the use of regtech to promote compliance eg compliance with obligations under industrial awards

Recommendation 8 is that the 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 report states that the Committee is supportive of 'any initiatives that would help small business to comply with industrial awards and protect the interests of employees, and considers that Regtech solutions can be of significant assistance in this area'.  However, the report stops short of endorsing suggestions around how use of regtech by SMEs in this context could be/should operationalised.  The report states that at this stage, the Committee has no 'clear view' on the 'best way forward in balancing the various interests at stake'.

2.  Tax issues: Clarification and simplification of incentives, streamlining of existing requirements 

Chapter 3 of the report focuses on tax issues including the effectiveness of existing mechanisms to incentivise investment in research and development.
Recommendations 9-10 are broadly aimed at clarifying the operation of existing tax incentives:

• Recommendation 9 is that the government provide 'further clarity around eligibility for the Research and Development Tax Incentive to ensure genuine software creation by Australian startups is reliably supported'.
• Recommendation 10 is that the government provide increased certainty around claiming the Research and Development 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.
• Recommendation 11 is that the government 'through the Council for Federal Financial Relations, simplify payroll taxes across Australian jurisdictions'.

On the issue of the tax treatment of initial coin offerings, the Committee recommends the release of the final Treasury report on Initial Coin Offerings when it is completed' but makes no further recommendation (Recommendation 12).

Recommendation 32 is that government 'explore including eligible outplacement training under the Fringe Benefit Tax exemption provision for eligible startups to improve the regulatory environment and provide benefits to employers and employees impacted by technological advancement'.

3.  Regulatory issues: 'elevating consideration of competition issues at the regulatory level' 

Recommendations 13-18 of the report are aimed at 'elevating consideration of competition issues at the regulatory level', including through giving the Council of Financial Regulators a larger voice.

• Recommendation 13 is that the 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'.
• Recommendation 14 is that the government 'establish a framework for the Council of Financial Regulators, supported by Austrade, to regularly consider and report on Australia's external competitive position in financial services, including measuring technology adoption and innovation'.
• Recommendation 15 is that the 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 suggests that this could take the form of giving ASIC and APRA 'clear Key Performance Indicators' to increase their focus on supporting competition and innovation in the market. The Committee suggests that the UK model used to measure regulator performance 'may be helpful in this regard'.

Self-regulation 

The report does not recommend tightening regulation of newcomers, including regulation of buy now pay later providers, but rather advocates self-regulation as the best means of fostering innovation and competition in the sector. '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 report comments.

• Recommendation 16 is that the government 'establish a culture of innovation and competition in financial services by supporting self-regulation where innovative products emerge, whilst ensuring strong consumer protection'.
• Recommendation 18 is 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'.

BNPL providers

Commenting specifically on the Buy Now Pay Later sector, the Committee comments that

'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)'.

Access to the New Payments Platform (NPP)

The report acknowledges the 'strong concerns raised' around access arrangements and functionality offered by the New Payments Platform (NPP) and that a range of options is available improve access to the NPP for Fintechs and smaller market participants.  However, the Committee stops short of recommending that any of these measures be taken up 'at this time' in light of the RBA's Payments Systems Board planned formal review into access arrangements and functionality planned for 2021.

Rather Recommendation 17 is intended to increase transparency around the progress of NPP capability upgrades with a view to driving wider access to the platform.  Recommendation 17 is that the 'New Payments Platform Australia regularly report on implementation progress of the NPP roadmap in order to drive wider access to the platform'.  The report suggests that this report could be delivered quarterly to 'give full visibility as to the progress of the NPP as it matures'.

Consumer Data Right

Recommendation 19-23 of the report relate to the initial roll-out of the Consumer Data Right as well as to the (possible) future expansion of the scheme to the superannuation and general insurance sectors.   

• Recommendation 19 is that the government 'establish a new national body to consolidate regulatory responsibilities in relation to the implementation of the Consumer Data Right'.  The report suggests that in the first instance this new body would 'take on regulatory and operational responsibility for the Consumer Data Right' and that over time other functions could be added.
• Recommendation 20 is that the 'Australian Competition and Consumer Commission, or the new proposed national Consumer Data Right (CDR) 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'.
• Recommendation 21 is that the government 'work with the banking industry to establish and implement targeted campaigns to educate consumers on the Consumer Data Right and the opportunities that Open Banking provides'.
• Recommendation 22 is that the 'government maintain existing regulatory arrangements in relation to digital data capture'.  That is, the Committee did not recommend that the practice of screen-scraping be banned, through the report comments that this should 'continue to be monitored'.
• Recommendation 23 is that the government 'expand the Consumer Data Right to include other financial services, starting with the superannuation sector and then including sectors such as general insurance'.

Possible expansion into superannuation and insurance

•  'Open Super'?  The report comments that 'given the technical infrastructure already in place and the ongoing work on data availability in the superannuation sector, the CDR should be expanded into superannuation as soon as possible'.  In terms of the scope of the proposed expansion, the Committee is of the view that both customer-level data and product reference data should be included in the scheme.  The Committee also comments that superannuation funds should automatically be accredited to receive Open Banking data. 
• Expansion into general insurance? The report comments that the government should both 'flag its intention to expand the CDR into insurance' and 'provide an indicative timeline in which this may be possible'.

5.  Improving access to capital

Recommendations 24-27 are aimed at improving access to capital to promote the growth of innovative businesses including Fintechs and Regtechs.

• Recommendation 24 is that the government 'amend the Early Stage Innovation Company and Early Stage Venture Capital Limited Partnerships qualification criteria to widen access to startups and investors'
• Recommendation 25 is that the government 'implement a Limited Partnership Collective Investment Vehicle and a Corporate Collective Investment Vehicle regime to drive inbound capital investment for Australian startups'.
• Recommendation 26 is that government 'consider incentives to encourage collaboration between large businesses and startups'.
• Recommendation 27 is that the government 'foster a culture where superannuation funds invest more widely, including in Australian startups, without undermining the sole purpose test'.

6.  Promoting a culture of innovation, skills/training

The report states that the 'government should play a proactive role in encouraging growth opportunities for innovative firms' including through: 'appropriate procurement policies' and enabling 'X-tech firms to solve policy challenges set by government'.

• Recommendation 28 is that the government should 'undertake a stocktake to better understand the costs and complexity for small businesses, including Fintechs and Regtechs, in Commonwealth Procurement'.
• Recommendation 29 is that the government 'consider holding event-based challenges or initiatives [eg hackathons] to enable innovative Fintechs and Regtechs to solve policy and service delivery challenges

Establishment of a National Agtech Advisory Council
Recommendation 30 is that the 'Australian Government create an Agricultural Technology (Agtech) Advisory Council to advise on Agtech policy in a consolidated manner'.  The Committee considers 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 and training
The Committee heard that ensuring workers have the necessary skills and knowledge to transition to new technologies will be increasingly important and will require lifelong skills training.  Workers will need to regularly update their skills/training through completion of micro-credentials throughout their working lives.   

• Recommendation 31 is that the government 'work with industry to ensure reskilling of workers affected by economic change and the availability and accessibility of micro credentials for those seeking to join the FinTech and Regtech industries'
• Recommendation 32 is that the 'government explore including eligible outplacement training under the Fringe Benefit Tax exemption provision for eligible startups'.

Initial response – industry associations have welcomed the findings, consumer advocates have raised concerns

• Financial Services Council (FSC): In a statement welcoming the recommendations overall, FSC CEO Sally Loane said the Committee's 'draft recommendations provide a forward-thinking framework to better enable technological transactions as well as streamline tax and regulatory requirements to support Australia’s economic recovery'.  In particular the FSC singled out the recommendation to develop a Corporate Collective Investment Vehicle.  Ms Loane commenting 'This is a long standing Government commitment which has yet to be implemented and something the FSC has advocated for over a long period'.
• Australian Finance Industry Association Limited (AFIA): In a statement, welcoming the recommendations overall, AFIA CEO Diane Tate highlighted in particular, the report's support of self-regulation of innovative companies as the best approach. Ms Tate commented that 'AFIA is particularly pleased that the Senate has recognised that the work AFIA is doing with our BNPL members on a world first BNPL Code of Practice is an example of where industry is working constructively to respond to changes in market conditions and community expectations…AFIA strongly supports industry codes as an important part of the regulatory framework. Self regulation is key to advancing good industry practices, ensuring competition and innovation is accompanied by appropriate protections that deliver good customer outcomes, and ensuring the industry is being clear about what it stands for. Industry codes also help educate customers, stakeholders and others about the products, services and technologies offered as well as drives good cultural outcomes across the industry.
• Consumer Action Law Centre (CALC): In a statement, CALC expressed disappointment that the report does not recommend tighter regulation of the BNPL sector, and more particularly recommend that BNPL providers be required to comply with consumer protections under national credit laws.  CALC also expressed disappointment that the report does not recommend prohibiting the practice of screen-scraping which exposes consumers' information to 'misuse, identify theft and forces Australians to breach the terms and conditions of their banking services.  Allowing this practice to continue will lead to two digital economies: one where digital-haves use the safer Consumer Data Right regime and another where digital have-nots are forced to use unsafe screen scraping practices. And it will be the increasing numbers of financially vulnerable Australians who will suffer the results' Financial Rights’ Policy and Advocacy Officer Drew MacRae said.