Today, more tools, apps and plugins are using technology to create new ways of providing financial information and services. “Fintechs” (financial technology) are making use of robo advisers, crowd-funding, peer-to-peer lending, mobile payments, digital currencies to disrupt the traditional financial services markets. Whether Fintechs would need a credit licence to operate their financial services in Australia largely depends on whether their activities pertain to credit activities.
Generally, if you wish to provide financial services, ASIC requires that you have an Australian credit licence, or be permitted to engage in credit activities through an authorised representative. Fintechs that wish to engage in credit activities and deliver financial services are obligated to obtain a credit licence before providing any financial services to clients.
However, you can be exempt from holding a licence if you meet certain requirements.
What is credit activity?
Credit Activity is defined to include the following:
- Providing a credit under a credit contract;
- Being a lessor under a consumer lease;
- Benefiting from mortgages or guarantees relating to a credit contract; and
- Payment obligations of a credit provider, lessor, mortgagee or beneficiary of a guarantee.
If your Fintech engages in the above activities, then you will need to apply for a credit licence, and failing to do so may be subject to strict penalties.
When does the Code apply?
The Code applies to credit that is:
- Provided to a natural person or strata corporation;
- The Credit is provided wholly or predominantly (more than half) for:
- Personal, household or domestic purposes; or
- Residential property investment;
- Charged for, or may be charged for, by the credit provider; and
- Provided in the course of carrying on a business providing credit in Australia.
How do you apply for a credit licence?
To apply for a credit licence, you must complete apply through ASIC. Eligibility for a credit licence is not automatic, and your Fintech must meet the requirements for a credit licensee. These requirements include:
- Ensuring that your company will be compliant with the the general conduct obligations of credit licensees under the National Credit Act, which aim to ensure that you operate your credit business properly; and
- Being a fit and proper person to engage in credit activities.
Exemptions to holding a credit licence
Currently, ASIC provides some exemptions to Fintechs from holding a credit licence. This licence exemption is only available for services provided by Fintechs such as advising and dealing in certain products. The exemption does not extend to Fintechs issuing financial products or providing credit. However, Fintech start-ups may be eligible for this licensing exemption, if you wish to test-run particular services for a period of 12 months to a maximum of 100 retail clients.
What products are exempt from licensing requirements?
Certain products that are exempt from licensing requirements may include:
- A foreign exchange contract that settles immediately and is not regulated under the Corporations act;
- An electronic funds transfer, where there is no standing arrangement between the client and the person sending the funds, and it is not regulated under the Corporations Act; and
- Credit provided to business, for business purposes, is not regulated under the National Credit Act.
What happens after the testing period?
When the 12 month testing period ends, your company must cease operations unless:
- You have obtained an AFS or credit licence;
- You have entered into an arrangement to provide services on behalf of an AFS or credit licensee; or
- ASIC has provided individual relief extending your testing period.
When will the licence exemption not apply?
ASIC has provided that the licence exemption for Fintechs will not apply to:
- Complex products such as derivatives;
- Illiquid or arrangements are not easily reversible;
- Products with a long-term focus such as superannuation and life insurance; and
- Products that targeting vulnerable consumers such as consumer leases
Key Points on Fintech and Credit Licence
Fintechs must hold a license if they engage in providing services in relation to a type of credit or consumer pursuant to the National Credit Code. Unless your company satisfies the exemptions or has an authorised representative to provide credit services, you will need to apply for a credit licence with ASIC. Ultimately, if your company is testing a new product or service over a period of 12 months, you may be exempt from the licensing requirements.
Contact OpenLegal’s startup team if you would like to discuss the needs of your fintech.
Kristine is a legal intern at OpenLegal. She is a fifth year UTS law student nearing the final stages of her law degree. She has previously worked for a boutique law firm and volunteered as a paralegal with the Refugee Advice and Casework Services (RACS).
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
