Collaboration to enable innovation
Establish a permanent public–private sector collaborative committee, the ‘Innovation Collaboration’, to facilitate financial system innovation and enable timely and coordinated policy and regulatory responses.
Government should establish a committee to facilitate financial system innovation, the Innovation Collaboration (IC), consisting of senior industry, Government, regulatory, academic and consumer representatives.
The minister responsible should propose and take forward an implementation approach for forming and operating the IC. The IC should include representatives from: financial sector start-ups and innovators; consumer groups; academia; and relevant Government agencies and regulators, such as the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA) and the Australian Taxation Office.
The IC should aim to:
- Improve Government and regulator awareness and understanding of financial system innovation and the benefits of emerging business models.1
- Identify and promulgate action on emerging network benefits and innovation opportunities that provide user benefits and positive system-wide effects, and identify impediments to innovation.
- Facilitate interactions between financial sector innovators, Government and regulatory agencies in a single coordinated forum.
- Enable submissions to be made to the Council of Financial Regulators (CFR) where system-wide regulatory responses may be required.
- Embed understanding of, and openness to, financial sector innovation within Government and regulators through closer collaboration with industry and innovators.
- Ensure Government, regulators, industry, consumers and academia work together to identify financial system–wide opportunities and potential network benefits, where Government may need to coordinate and facilitate industry action.
- Ensure financial system innovators, start-ups and/or firms with innovative products have a single entry point for dealing with regulators and Government on innovation and a forum in which their views can be heard.
Innovation is an essential ingredient in building a dynamic, competitive, forward-looking and growth-oriented financial system. Although the benefits of innovation are difficult to quantify, efficiency gains and improved consumer convenience are evident in a range of areas, such as online banking, payments and insurance. As the pace of technology-enabled innovation accelerates, it is crucial that Government and regulators be aware of, and enable, the benefits of innovation to flow through the financial system while appropriately managing risks.
Problems the recommendation seeks to address
Low awareness of, and impediments to, innovation
For many innovators, the entry point into the Australian financial system is via regulators: organisations with strong ‘safety’ mandates and generally low-risk appetites. Stakeholder discussions indicate Government and regulators have limited understanding of and openness to innovation, resulting in regulatory approaches that unnecessarily impede innovation in some areas. In some cases, regulators may not have regard to the whole-of-system benefits of innovation where such developments fall beyond the breadth of their existing regulatory mandates.
Siloed perspectives and inability to identify system-wide opportunities
Existing Government structures and regulatory architecture tend towards a siloed view of the financial system. They also have a low awareness of issues that are increasingly important to the financial sector (but were not traditionally so), such as data use and privacy. Lack of industry input and the absence of a system-wide perspective hamper efforts to identify system-wide opportunities and network benefits efficiently. Consequently, Government and regulators may fail to take timely, or any, action to facilitate or coordinate innovation that is beneficial to consumers and overall system efficiency.
Inability to influence Government and regulators in a coordinated way
In the absence of a forum with a system-wide view, there is no mechanism to influence Government and regulators when a coordinated change, a regulatory response or harmonised processes are needed. In some cases, innovations do not clearly fit into existing regulation or under the responsibility of a single regulator. For example, elements of some payments system innovations (discussed later in this chapter) may be affected by financial system licensing, taxation, and privacy and data requirements that fall under the remits of several regulators and Government agencies.
No single point of contact for innovators
Lack of a single point of entry for innovators, start-ups and those with innovative products can be a significant challenge given the complexity of regulation and regulatory mandates. Stakeholders, particularly new entrants, point to a lack of consolidated entry and liaison points where impediments can be discussed and, if necessary, arguments put forward for their removal. Innovators often do not have a voice with regulators or at regulatory forums and tend to have limited understanding of regulation.
Potential impacts on international competitiveness
In many countries, policy settings are deliberately pro-innovation as governments seek to foster dynamic, vibrant financial services sectors. In Asia, the monetary authorities of Hong Kong, Singapore and Malaysia, for example, have statutory mandates to promote and market financial sector development, including providing streamlined entry points for new entrants.2
The Financial Conduct Authority in the United Kingdom runs Project Innovate to support industry innovation that improves consumer outcomes.3 The United Kingdom ‘fintech’ industry also has its own industry body, Innovate Finance, to support technology-led financial services innovators.4,5 This body affords members a single point of access to regulators, policy makers, investors, customers, educators, talent and commercial partners.
The pace of innovation in the financial sector is rapid. Estimates suggest $27 billion of current banking industry revenue is under threat of digital disruption.6 Accordingly, Government and regulators need to be aware of innovative developments to respond in a considered, timely and coordinated manner. Various industry bodies support more collaboration between industry and policy makers.7
With a mix of stakeholders, the recommended IC model merges industry and policy expertise to help identify innovation opportunities. Innovators could access a forum that offers them a better entry point to financial sector regulators and improves their potential to influence across agencies — if necessary, through the CFR.
The Inquiry considered alternatives to the IC model, including a solely industry-led model. However, with no direct link to Government, there was concern such a model would have limited ability to influence policy. The Inquiry also considered extending existing regulator mandates to include business promotion, as occurs in other jurisdictions. Chapter 5: Regulatory system recommends ASIC’s mandate include a specific requirement to consider competition issues, a complement to this recommendation.
Industry should note that international experience suggests the best results for collaboration occur where the fintech industry has its own representative body of innovators and new entrants to ensure it can speak with a unified voice. Industry representatives might then also be selected and rotated from this body for the IC.
1 These are often referred to as ‘disruptive’ business models — those that disrupt existing value chains in financial services. Examples include crowd financing mechanisms that remove the need for a financial institution to intermediate between borrower and lender.
2 Hong Kong Monetary Authority 2014, Hong Kong as an International Financial Centre, Hong Kong Monetary Authority, viewed 31 October 2014; Monetary Authority of Singapore 2014, Singapore Financial Sector, Monetary Authority of Singapore, viewed 31 October 2014; Bank Negara Malaysia 2013, Financial Sector Development, Bank Negara Malaysia, viewed 31 October 2014.
3 Wheatley, M 2014, Making innovation work for firms and customers, address at Bloomberg by Chief Executive, Financial Conduct Authority, 19 May, London.
4 ‘fintech’ refers to a synthesis of technology and financial services.
6 KPMG 2014, Unlocking the potential: the Fintech opportunity for Sydney, The Committee for Sydney, Sydney.
7 Refer, for example, to Australian Bankers’ Association 2014, Second round submission to the Financial System Inquiry, page 80; Australian Payments Clearing Association 2014, Second round submission to the Financial System Inquiry, page 16; Association of Superannuation Funds of Australia 2014, Second round submission to the Financial System Inquiry, page 117.