The Australian Government has revamped its FinTech regulatory sandbox providing a broader exemption to the requirement to hold an Australian Financial Services Licence (AFSL) under the Corporations Act 2001 (Cth).  Under the new regulations, which will take effect on 1 September 2020,[1] companies can test new financial services relating to certain financial products for up to 24 months without holding an AFSL. This will provide companies with the ability to test their concept in the marketplace without going through the more onerous AFSL application process or appointment as an authorised representative of an AFSL holder, which can significantly delay product launch.

According to the Explanatory Statement, the regulatory sandbox is designed to support innovation in the design and delivery of new financial services that will benefit consumers and businesses. Although the sandbox provides exemptions for a wide range of financial products and services, in this article we will specifically explore the availability of the exemption for InsurTechs and what InsurTechs should consider when deciding whether to rely on the exemption when it becomes available.

What does the enhanced sandbox do?

In Australia, the undertaking of risk as an insurer and the distribution of insurance products are both regulated activities. The new licensing exemption provides an avenue for companies to test new and innovative eligible financial services in relation to distribution of insurance products without needing an AFSL or appointment as an authorised representative of an AFSL holder.

The Australian Securities and Investments Commission (ASIC) has been administering a regulatory sandbox since 2016, providing exemptions under the ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175. However, under the concept validation exemption, the scope of the exemption for insurance is limited to personal property and home contents insurance with a maximum sum insured of $50,000. The company must also not have more than 100 retail clients.

From 1 September 2020, the licensing exemption will apply more broadly to insurance. Companies relying on the exemption can provide eligible financial services for any type of general insurance or life risk insurance products other than consumer credit insurance. For insurance, ‘eligible financial services’ include providing financial product advice, applying for or acquiring a financial product or arranging for the issuing, varying or disposing of a financial product. It remains to be seen whether claims handling will be included as an ‘eligible financial service’ when this becomes a regulated activity.

Who is eligible to rely on the new exemptions?

There are a number of conditions applicable. However, the two main criteria are the person relying on the exemption must show the service meets both the public benefit test and the innovation test.

Under the public benefit test, the person relying on the exemption needs to justify why the exemption for the particular financial service will result, or be likely to result, in a benefit to the public that will outweigh the detriment to the public that will result or be likely to result from exempting that service.

Under the innovation test, the person relying on the exemption needs to justify why the financial service is new, or is a new adaptation or improvement of another financial service.

What does this mean for InsurTechs?

InsurTechs are potentially able to test otherwise regulated concepts without requiring an AFSL. Accordingly, the exemption may significantly reduce the runway and regulatory barriers to a product launch for both InsurTechs launching for the first time and those expanding to Australia from other jurisdictions. However, there are some limitations.

As presently drafted, the distribution of innovative insurance products may not qualify under the exemption unless there is also something new in the way the product is distributed. For example, usage based insurance where the premium payable is linked to real-time tracking is potentially comprised of both an innovative insurance product and an innovative way of arranging the insurance.

InsurTechs intending to rely on the exemption should carefully consider whether they meet these tests. For example, an insurance product per se is not a ‘financial service’ (it is a financial product), but the distribution of insurance and related financial product advice may be a ‘financial service’. The innovation test applies to the ‘financial service’.

Furthermore, InsurTechs adopting a ‘managing general agent’ or ‘coverholder’ structure may not be able to rely on the exemption for the issuing of insurance products, as this is not an ‘eligible financial service’ under the exemption regulations. Alternative arrangements may be required.

A person cannot rely on the exemption if they are authorised to provide the eligible financial service under an AFSL, are an authorised representative of an AFSL holder, are a related body corporate of an AFSL holder or authorised representative, are an operator of a financial market, or a natural person who is not an Australian citizen or Australian permanent resident. ASIC must also have no reason to believe the person or body corporate would not meet the fit and proper test for an AFSL.

The enhanced regulatory sandbox is not the only exemption from licensing requirements.  InsurTechs should consider the options available, as the regulatory sandbox is not a ‘one size fits all’ approach. For some InsurTech business models, it may be preferable to launch under the authorisation of an AFSL holder.

Applying for the exemption and compliance considerations

In order to rely on the exemption, which commences on 1 September 2020, InsurTechs must submit a formal notice to ASIC in the prescribed form. If ASIC does not oppose the application, the exemption commences after 30 days. An InsurTech can rely on the exemption for up to 24 months, and on multiple occasions, provided the subsequent reliance is for a different financial service and financial product. A constraint of the sandbox is that the maximum amount of gross written premium that can arise is $5 million, an aggregate exposure cap applicable to the exempt entity across all testing periods.

Importantly, some consumer protection provisions of the Corporations Act 2001 (Cth) continue to apply for entities relying on the new licensing exemption. This includes having an internal dispute resolution process, being a member of the Australian Financial Complaints Authority, holding adequate professional indemnity insurance, complying with client money obligations and product disclosure obligations. An entity must also notify clients if it is relying on the exemption.

However, not all InsurTechs may be eligible to rely on the exemption.  Reliance on the exemption is a temporary measure and comes with strict compliance requirements. To provide financial services after the testing period, the InsurTech must be authorised under an AFSL or rely on other exemptions under the Corporations Act 2001 (Cth). It may also be preferable to be authorised under an AFSL rather than rely on the exemption in some cases as this allows greater flexibility in the types of financial services provided and provides a pathway to scale up through the ability to appoint representatives.

For more information, and to discuss whether you might be eligible, feel free to get in touch with the authors.

Check out our InsurTech 101 Glossary of Common Insurance Terms on our Insurance Regulatory Hub.

[1] Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2020 (Cth).