2017 is likely to be a key year for FinTech development globally. NZ has introduced initiatives to support FinTech but is falling behind other countries in the support it provides. In my view the NZ government needs to take a more strategic approach to FinTech and the financial services sector generally, if NZ is to gain the full benefits of FinTech innovation.
On 17 January I attended a seminar in London where UK regulators and market participants set out their view on where FinTech is heading in the UK and elsewhere. Key insights from that seminar include:
- A sector expert stated that the speed with which other countries have embraced FinTech is “stunning”. The UK, Australia and Singapore have all introduced “regulatory sandboxes” (which streamline FinTech licensing and compliance requirements) and “innovation hubs” (which provide support to bring FinTech-based products and services to market). The UK has co-operation agreements with Australian and Singaporean regulators to support overseas expansion.
- A representative of a large bank noted that he’d seen more progress in FinTech since the “regulatory sandbox” became available than in the previous four years.
- Services supported by artificial intelligence and block chain will become more prominent in 2017- beta versions of block chain enabled services will be launched.
- Despite the large size of the FinTech sector in China (which accounts for a significant proportion of all FinTech investment), the less stringent regulation of financial services there may slow entry into other markets (I think that will be an issue but the recently announced sale of UDC to HNA Group, a Chinese conglomerate, shows that investment capital is a factor that will smooth entry).
- Europe has focused on encouraging innovation via regulation (since it lags the US in tech innovation more broadly). A key initiative is the Revised Directive on Payment Services, which will (among other changes) provide for even greater consumer protection and allow third parties to access bank data (with customer permission) to provide enhanced services e.g. consolidating information from a customer’s accounts at multiple banks.
- The focus has moved from “disruption” by FinTech start-ups towards collaboration between existing financial services firms and start-ups. Examples include Barclay’s accelerator programme and the tie-in between RBS and Funding Circle.
What does it mean for NZ?
NZ took some relatively early steps to support FinTech, including by passing fairly permissive equity crowdfunding and P2P lending regulation as part of the broader consolidation and improvement of financial markets law. The KiwiBank FinTech Accelerator has just started providing support to early stage businesses. Despite that NZ has not kept fully in touch with FinTech initiatives in countries we often use as bench-marks (I don’t consider the on-going failure of Australia to implement a crowdfunding law is material). In my view the key issue isn’t a failure to implement one or more FinTech initiatives but the apparent absence of a true strategic approach at government level to FinTech and the financial services sector more broadly. This was identified in October 2016 by Chapman Tripp, which proposed establishing a FinTech Advisory Group and other measures. The risk from a failure to take a more strategic approach to this sector is that NZ will not realise the full benefits that FinTech offers.
Should NZ better support FinTech?
Other countries provide greater direct and indirect financial support for FinTech e.g. the crowdfunding sector in the UK is underpinned by investor tax benefits. Clearly the financial services sector is more important to the economies of those countries (and even mission critical) – that also suggests that they’ve already taken a more effective long-term strategic approach to the sector. So a key decision for NZ is whether we should provide that type of support for FinTech (film making, a relatively recent service sector export champion, is underpinned by tax breaks).
Does NZ need an export orientated financial services sector?
A broader strategic question is whether NZ wants (and needs) an export orientated financial services sector. We don’t have one currently but in the internet age it is possible. Supporting FinTech may have relatively little benefit (beyond improvements in efficiency and service in the domestic market) if NZ FinTech start-ups move to countries that are more supportive of FinTech, in order to grow (and to access capital). There are obvious risks for small countries operating in that sector (Ireland and Iceland) but there are also success stories (Switzerland and Singapore). In my view NZ’s legal framework, and the approach of government and regulators, at best reflect an ambivalent attitude to supporting the export of financial products and services from NZ (see for example Cygnus Law’s submissions on the proposed changes to the FSPR law).
Whatever decisions are made, NZ has a key advantage in that it is an easier place to do business than many other countries. For example, financial services regulation in the UK is significantly more complex than in NZ (though good regulation can also be a benefit). However, in my view we have, in some respects, failed to support financial services businesses through effective regulation and government support. I think that reflects the absence of a true strategic approach to policy for the sector as a whole. Issues (which I think could be easily resolved) include:
- NZ has three AML/CFT regulators. That means that financial services businesses can have more than one regulator (though they can follow a bureaucratic process to move to one regulator). The AML/CFT law was itself poorly drafted in part and all guidance materials have to be filtered through three regulators, which affects speed and usefulness.
- The FMA supports innovation and is helpful to start-up businesses but that’s not always obvious to new (and existing) businesses. This suggests that a visible innovation hub of some type is needed at the FMA (and the Reserve Bank also), if only to co-ordinate provision of existing resources at FMA that support innovation.
- NZ, like other countries, has been forced to comply with the United States’ very complex Foreign Account Tax Compliance Act (“FATCA”) regime, which affects most financial services businesses in NZ. The IRD is responsible for its implementation and has written 200+ pages of very detailed guidance – this provides little practical help to smaller businesses to clarify if FATCA applies and on how to comply.
- Other regulatory regimes have not been amended (or were only belatedly amended) to support crowdfunding and P2P lending (reflecting in part the different approaches to and attitudes of various regulators to FinTech initiatives). There have been on-going issues with the application of the Credit Contracts and Consumer Finance Act 2003 to P2P lending and the Takeovers Panel only provided an exemption from the Takeovers Code for small companies (the sort that typically crowdfund) in late 2016, 2½ years after the crowdfunding law came into force.
- Some FinTech businesses pay significant government fees and levies just to operate e.g. when increases come into force in 2017 total fees and levies payable by a crowdfunding platform in the first year of operation will increase from about $8,500 (excl. GST) to about $15,000 (excl. GST) (that includes the minimum one-off licensing fee and broker/custodian levies). While user-pays is probably the appropriate model for the sector generally it reduces incentives for businesses and innovators to embrace FinTech.