Like the world around us, our financial services and markets are being transformed by innovation. This presents both opportunities and risks for industry, and for regulators.
For industry to successfully realise any opportunity in a sustained way – and this especially applies to opportunities from financial innovation – they must not lose sight of the foundation of their success.
It is here where industry and regulators have a common interest – in seeing innovation that fosters investor and financial consumer trust and confidence.
For me, what makes digital disruption and our rapidly growing financial technology (FinTech) industry exciting is that it provides business with new ways of creating and sharing value with their customer. Disrupters are offering new forms of:
- intermediation – like crowdfunding and peer-to-peer lending which provide access to capital
- disintermediation – here, digital currencies come to mind, and
- services – such as ?robo? financial advice.
Sustainable success by both disrupters and incumbents involves providing a demand-driven offering that puts the customer?s interests at the core of what they do and embeds putting the customer first into their operations. For example:
- having a culture that targets products and services to the right customers, not just any customer, and
- putting the customer first, both when things are going well but also when they are not.
This is especially important because the business of financial services usually involves a relationship with customers over a medium or long term. These relationships must have an eye to the long-term best interests of the customer if they are to engender and maintain trust and confidence.
ASIC?s recent experience with emerging P2P lending models provides an interesting case study on innovation and product design. At a high level, P2P lending facilitates individuals and sometimes businesses borrowing from retail and wholesale investors through a platform. There is no bespoke regulatory regime for P2P lending in Australia. The different business models used for P2P lending will require different regulatory approvals. Many may be managed investment schemes, often with an associated credit facility that requires the operator to also hold an Australian credit licence – however, not all are. Some models may actually involve operating a financial market. This would require the platform operator to hold an Australian markets licence or be covered by an exemption.
If you are unsure what approvals or waivers from the law you need, we recommend talking to ASIC. Early engagement makes the process more efficient for you and for us. Our new innovation hub, which I will talk about later, may also help with this.
So once a P2P lender is up and running, what does it mean to be regulated by ASIC?
To pick up on some of the points I made earlier about investor and consumer trust and confidence, I?d like to talk about disclosure and transparency. As with any new type of financial product, ASIC is keen to ensure that retail investors have a proper understanding of P2P before they decide to invest in it.
Disclosure – whether legally mandated through a PDS or by other means – is an important part of helping investors understand what they are getting. It is essential that disclosure covers key risks and benefits in a balanced way, as well as explaining clearly how the P2P platform works.
Advertising is another area that ASIC is focusing on. Advertising can be very powerful in influencing investors and consumers. Advertising of P2P products, like any other financial product or service, must not be misleading or likely to mislead.
For example, promotional materials for a P2P product should not inappropriately compare the product to a traditional banking product. The risk that an investor takes on in a P2P product is far different to those in a banking product. This includes:
- credit risk from borrowers
- risk of losing their entire investment, and
- a risk of failure of the product provider.
To avoid being misleading, or potentially misleading, promotional material relating to P2P products should be clear, accurate and balanced. ASIC has published good practice guidance on advertising by product issuers and distributors in Regulatory Guide 234 Advertising financial products and advice services including credit: Good practice guidance (RG 234).