Sandbox or sandtrap?
Like many occupations and professions today, you must get a licence to carry on a financial services or consumer credit business, unless you’re lucky enough to fit within an exemption.
It’s not easy to get a financial services or credit licence. But until you get one, you can’t really test your business model or products. This is a dilemma for financial services and credit start-ups such as fintechs: licensing is a barrier to market entry.
ASIC’s regulatory sandbox for “concept validation testing” announced in December last year gives some limited relief.
One good feature of the ASIC scheme is that authorisation is not required to use the sandbox, unlike schemes in other jurisdictions such as the UK and Singapore. As long as you meet all the conditions, you’re automatically eligible. There are a lot of conditions, though, and the scope of what you can do is limited.
So is it worth trying, or is it better to shoot for the green and go straight for a licence?
Limits of the sandbox
A financial services licensee (AFSL) can do the following (if the licence covers these services) but the sandbox exemption does not permit any of them:
Issue products.
Deal or advise in relation to these types of insurance: home building, motor vehicle, travel, consumer credit, sickness and accident, or life.
Deal or advise in relation to home contents or personal and domestic property insurance for a sum insured of more than $50,000.
Deal or advise in relation to payment products not issued by an ADI.
For some financial services, of course, you need more than just a licence from ASIC. Banking and insurance businesses require authorisation from APRA. If you are going down that path, using the interim step of the sandbox might not make sense.
On the credit side, a credit licensee (ACL) can do the following (again if its licence covers these activities), but a sandbox business can’t:
Be a credit provider (as opposed to a credit services provider).
Offer small amount credit contracts or reverse mortgages.
Offer consumer leases.
Offer loans secured by a mortgage over residential property.
Offer loans above $25,000.
Charge more than 24% (annual cost rate).
If you want to do any of these things, the sandbox is ruled out for you.
A licensee also has no limit on the number of customers, compared to a limit of 100 retail clients for a sandbox business. On top of that, the sandbox has a $10,000 overall exposure limit for a retail client for deposit products, simple managed investment schemes, securities and payment products.
What’s more, the sandbox exemption only goes for 12 months, while a licence continues indefinitely.
Sandbox conditions
Even if you can operate within the limited range of services authorised under the sandbox exemption, the conditions attached could make you think twice about using it.
Financial services businesses using the exemption must give a retail client most of the information that would be given by a licensee in its Financial Services Guide (FSG).They also have to comply with the “best interests duty” and related obligations of licensees.
Just like a credit licensee, a credit sandbox business must comply with responsible lending obligations (including giving a quote and a proposal document).
Both financial services and credit businesses using the sandbox must also:
have internal dispute resolution procedures that meet ASIC requirements;
be a member of an approved external dispute resolution scheme;
provide disclosure about dispute resolution; and
have compensation arrangements (PI insurance).
The main things you are excused from in the sandbox are:
having qualified and experienced responsible managers (which new entrants do sometimes find to be a real challenge); and
having to comply with all other licensee obligations (and documenting your compliance with those obligations).
If you’re truly committed to the course of starting a business that will require a licence, these are obligations that you must eventually deal with, whether or not you do sandbox testing. The sandbox is only buying you a bit of time to get your house in order.
But if you’re not sure about whether you will end up applying for a licence, maybe the sandbox is an option to help you decide.
It will be interesting to see how many start-ups jump into the sandbox.
Patrick Dwyer
Legal Director
4 March 2017