M&A and FinTech | Where to from here?

An important review is currently underway by the senate select committee on Financial Technology and Regulatory Technology. It focuses on the current state of Australia’s FinTech and RegTech industries. The committee is investigating opportunities to promote effective sustainable growth in these sectors and make them more attractive to overseas capital and investment. The committee is to present its final report on or before 15 April 2021.

The Commission’s view is that FinTech and RegTech are ‘central to ensuring Australia remains a nation that creates employment and technology’.[1] These industries are seen as critical ‘to ensuring that Australia remains globally competitive’ in terms of attracting funding and talent.[2] This issue is especially sensitive within the context of ‘COVID-19, rapidly increasing global digitisation and the decline of Hong Kong as a financial services hub’.[3] Amongst others, some of the innovations that the committee is considering implementing are:

• An Enhanced Regulatory Sandbox (ERS)
• R&D Tax simplification
• New Collective Investment Vehicles
• Red Tape reduction

As with any developing industry, there are considerable opportunities for consolidation as the industry develops and matures.  As well as traps for the unwary.

The state of the FinTech and RegTech markets

FinTech, or “financial technology” is the intersection of financial services and technology and is often regarded as the future of financial services.[4] RegTech, or “regulation technology” is the intersection of regulatory compliance services and technology.[5] Both are examples of applying AI and machine learning to solve problems that traditional finance and compliance institutes solved using legacy methods and systems. These two industries seek to disrupt the norm and challenge the status quo, creating competition in existing markets and in some cases creating entirely new markets. FinTech and RegTech have been growing at an incredible rate, with a 479 per cent growth in Australian FinTech start-ups and an increase from 13 to 58 per cent adoption rate in the period between 2014 and 2017.[6] This rapid growth represents great investment opportunities with the value of FinTech investment peaking at $1.17 Billion USD in the second quarter of 2019. [7] Despite this growth however, Australia still lags behind its antipodal counterparts in innovation and size within these two industries. Due to a weaker financial presence and being less of a technological hub than FinTech and RegTech leaders such as Singapore, the US and the UK, Australia still has some ground to make up if it wants to compete at the international level in these arenas.

Capital and Fundraising

Capital and funding are widely regarded as life-or-death issues for innovation organisations including those in the industry.  There were several possible ways identified as to how the government may provide easier access and better attraction to funding:

• addressing globally low levels of superannuation investment in private and venture capital asset classes;
• bringing Australia’s tax and legal framework for private capital investment into line with international best practice;
• characterisation of capital gains from venture capital Limited Partnerships for non-super fund domestic investors; and
• capability and investment capacity to support new ventures and innovative businesses located in regional and rural areas of Australia.

 Possible simplification of R&D Taxes

R&D business spending in Australia is already lower than in many other countries – less than 1.88 per cent of gross domestic product, compared with an OECD average of 2.38 per cent.[8] The committee is interested in investigating the possible simplification of the R&D tax regime in order to create greater incentives for private investment.[9]  Specifically the Australian Investment Council has observed that: ‘Australia’s legal and tax framework for private capital investment is inconsistent with international best practice. It currently necessitates duplicate and complex structures and deters higher levels of foreign investment’.[10] Consistency and certainty in the tax treatment of investors committing capital through existing vehicles should be provided in order to encourage domestic investment into high-growth businesses and attract offshore capital.[11]

New collective investment vehicle

Another initiative under consideration is to create a new best-in- practice limited partnership (LP) collective investment vehicle (CIV). This would allow Australia to compete globally for capital and could be transformative for the domestic private capital industry.

 Reducing red tape

The Australian Government committed $11.4 million of the 2020-21 Budget over four years to deliver a RegTech Commercialisation Initiative to streamline government administration and simplify regulatory compliance.[12]

Going Public

The committee is interested in measures that encourage founders of successful local company founders to list their companies in Australia rather than overseas. In order to do so, the committee is interested in a possible scheme similar to that of the US Rule 10b5-1 trading plans. This rule permits insiders of publicly traded corporations to set up a trading plan for buying or selling a predetermined number of securities at a predetermined time, and provide an affirmative defence to insider trading. Such as scheme would benefit both companies and their insiders by offering clarity and certainty on how insiders can plan and structure securities transactions to avoid incurring liability.[13]

Regulation Sandbox for FinTech

 It will be interesting to see if Australia takes a similar approach to that of the UK and Singapore which like other OECDs seek to develop and grow their respective FinTech and RegTech sectors. This is primarily done through regulation concessions such as regulatory sandboxes. The Australian Government introduced a regulatory sandbox in December of 2016.  Such a concession allows natural persons and businesses to test a broader range of innovative financial and credit services without the need to obtain an Australian Financial Services Licence or Australian Credit Licence. This sandbox was superseded by the enhanced regulatory sandbox (ERS) and came into effect from 1 September 2020 with a planned duration of 24 months. Such a regulatory structure lowers the barriers to innovation for eligible FinTech companies, placing Australian FinTech in a more globally competitive position.

Conclusions

The FinTech and RegTech spaces should be watched and monitored closely, both for investment opportunities and regulatory developments. The Australian government has placed great importance on the Australian FinTech and RegTech sectors having identified them as key sources of future employment and opportunities. In order to place Australia in a more competitive position for attracting global capital, the government will look simplify current and develop new relevant frameworks and legislation to support FinTech and RegTech companies.

[1] Senate Select Committee, SENATE SELECT COMMITTEE ON FINANCIAL TECHNOLOGY AND REGULATORY TECHNOLOGY (Issues Paper No 1, 2019), 2.

[2] Senate Select Committee, SENATE SELECT COMMITTEE ON FINANCIAL TECHNOLOGY AND REGULATORY TECHNOLOGY (Issues Paper No 1, 2019), 3-6.

[3] Senate Select Committee, SENATE SELECT COMMITTEE ON FINANCIAL TECHNOLOGY AND REGULATORY TECHNOLOGY (Issues Paper No 2, 9 November 2020), 1.

[4] Q&A: What is FinTech?, PwC (Web Page, April 2016) <https://www.pwc.com/us/en/industries/financial-services/library/qa-what-is-fintech.html#:~:text=Overview,make%20the%20most%20of%20it> ; What is FinTech?, FinTech Australia (Web Page) <https://www.fintechaustralia.org.au/learn/>.

[5] What is RegTech, Ascent (Web Page) <https://www.ascentregtech.com/what-is-regtech/>.

[6] EY Global FinTech Adoption Index 2019, 8

[7] Value of fintech investments in Australia from first quarter 2017 to second quarter 2020, statista (Web Page, June 2020) <https://www.statista.com/statistics/1039155/australia-fintech-investment-value/>.

[8] OECD Science, Technology and R&D, Gross domestic spending on R&D, 2019.

[9] Paper 1 Page 2 Senate Select Committee, SENATE SELECT COMMITTEE ON FINANCIAL TECHNOLOGY AND REGULATORY TECHNOLOGY (Issues Paper No 1, 2019) 5).

[10] Australian Investment Council, Investing for Growth, Policy Proposals for the incoming Federal Government, April 2019, 6.

[11] Australian Investment Council, Investing for Growth, Policy Proposals for the incoming Federal Government, April 2019, 6.

[12]  Budget 2020-21, Budget Paper No. 2: Budget Measures, 65.

[13] Senate Select Committee, SENATE SELECT COMMITTEE ON FINANCIAL TECHNOLOGY AND REGULATORY TECHNOLOGY (Issues Paper No 2, 9 November 2020) 6).

Note: The author James Halliday gratefully acknowledges the contributions of Jacob Thai