For fintech startups looking to operate in Australia, the hurdle of obtaining an AFSL is often daunting. An AFSL application can be expensive and time consuming but it’s rarely necessary to obtain an AFSL from day one. Whether it’s through an exemption, relief or authorisation, there’s usually another way.
Not all fintech applications are consumer facing. Often, the innovation is an enabling technology that is provided to an existing financial services player eg a bank or fund manager.
The AFSL regime captures a broad range of conduct, but it typically only focusses on the ‘issuer’ of the product or service and some entities in the advice and distribution chain. Providers of background enabling technology, such as payment gateway providers or developers of roboadvice tools, may not be directly captured. Startups playing in this part of the sector are unlikely to need an AFSL.
Financial services regulations include a number of exemptions from the need to obtain an AFSL. Fintech founders should explore any available exemptions before applying for a licence.
The startup sector has often called for a generic exemption for small new entrants and some members of the Digital Finance Advisory Committee – an industry engagement committee hosted by the Australian Securities and Investments Commission (ASIC) – have renewed these calls. An exemption like this has not yet materialised, but other existing exemptions may be applicable. For example, small payment facilities are exempt, provided they fit within monetary caps per user and in the aggregate and small managed investment schemes with limited members may also be exempt.
Because of the breadth of the AFSL regime, it can sometimes capture activities which were never intended to be captured. his is where, in addition to existing exemptions, ASIC’s power to grant relief is useful.
ASIC acknowledges that fintechs can sometimes be unintentionally captured by the AFSL regime and are open to relief applications from the sector.
Startups would need to assess this option carefully, though, as applying for relief may be just as hard as applying for an AFSL and your application may ultimately be unsuccessful.
Finally, if there is no available exemption or relief, fintechs could explore authorisation. This involves partnering with an existing AFSL holder who can authorise you to provide your product or service. Essentially you’re hiring their licence, instead of getting your own and ASIC recently confirmed that it has no preference whether startups get their own licence or are authorised by someone else.
Under an authorisation, the AFSL holder is responsible for your conduct so they will want to impose a level of due diligence and supervision and will charge a fee. If you find a suitable AFSL holder, putting an arrangement in place is relatively simple and quick. You can then take the leap and apply for your own AFSL once you prove your concept and are getting to scale.
For all its complexity and challenge, the AFSL regime is scalable and provides many paths to market for fintech startups.