27 January 2017
Speech - #2017001, 2017

G20 Conference on digitising finance, financial inclusion and financial literacy, Wiesbaden Germany

Check against delivery

It's a pleasure to be in Wiesbaden today, with a new G20 host at the helm and an exciting agenda before us.

I am very personally interested in the topic of digitalisation in the finance sector — one of the key priorities of Germany's 2017 G20 Presidency. And what this conference gives us is a chance to share the experiences we've each had on this front, and to explore the risks and, more importantly, the opportunities it presents.

The benefits of FinTech

Of course, financial technology — or FinTech — is transforming the world's financial systems and economies.

Consumers' preferences are already changing the way that many financial products and services are delivered, simultaneously utilising and requiring technological innovations to keep up with the demands of a rapidly changing world.

As governments and leaders we must also continue to evolve and adapt to keep pace let alone try and influence and take advantage of these developments.

We must ensure that our policies and actions harness and realise the full potential of FinTech —by removing barriers to these innovations and encouraging our citizens and businesses to embrace new financial products and services, while maintaining acceptable risk levels to ensure that confidence in our financial system is retained.

From Australia's perspective, we see huge benefits — huge opportunities — emerging in this space.

On one level, it offers consumers and businesses the chance to benefit from new services and products, and provide greater choice through increased competition and efficiency across all areas of the financial system.

And at another level, it opens new doors for start-ups and small businesses — the backbone of many of our economies — and gives them a fighting chance against larger competitors. In Australia, we are seeing this in two ways – with some start-ups successfully targeting specific market segments, while others are working with existing players.

That's why we say it is both 'Fintegration' — the integration of FinTech — for the existing players, as well as the innovative start-ups and new entrants who must drive FinTech.

So let me quickly unpack some of the benefits.

For a start, new credit models and access to a wider range of data can offer new forms of financing — such as peer-to-peer lending, crowd-sourced funding, and invoice and online supply chain finance.

These are particularly crucial for our small enterprises which, as we all know, can face challenges securing finance.

Then there are payments — an area where FinTech can play a role creating greater efficiencies and lowering costs.

Right now, the Government and Australian businesses are investigating models in line with our G20 commitment to reduce the global average cost of sending remittances. And small businesses can also benefit from greater integration of e-invoicing and payment services.

For countries where bank accounts are less common, payments are also being transformed through new technologies in the form of mobile money. These innovations have the ability to open access to financial services across the full range of differing economies.

Lastly, the automation of services can result in lower costs and an increase in people using a particular service.

One of the prime examples is robo-advice, which has the potential to offer financial advice to a wider cross‑section of the community. In Australia, businesses are beginning to integrate robo-advice into the retirement savings system to help people engage and prepare more fully for retirement.

But that is not where the opportunities end.

FinTech is about more than digitising money — it's also about monetising digital data. In other words, how can we create and capture the value-add from the massive amount of data that's becoming available in a more digital world.

This is something that one Australian FinTech firm, Data Republic, has taken a leading role in promoting, creating a platform that allows organisations to list, exchange and collaborate on data-exchange projects in a secure environment.

And it's also an area that the Australian Government is keenly aware of.

A recent inquiry highlighted the enormous untapped potential of Australia's data and flagged areas of reform — including giving customers more control over data, and opening access to anonymous government-held data to capture benefits, as we've seen in the UK and Canada.

RegTech

With that said, another key potential benefit we see from advances in technology in finance and banking is in regulatory technology for financial services, or 'RegTech'.

In a world of mounting cynicism and growing mistrust, our institutions must find ways to build trust with their customers and the community.

The past 10 years have posed substantial challenges for the financial sector and governments to respond to, particularly as the causes of the financial crisis and subsequent corporate scandals have been discovered.

And what we've seen are governments around the world responding by raising the bar for behaviour and risk management.

However, a side effect is the heavier compliance requirements on business, especially those in financial services.

According to industry estimates, financial institutions globally spend more than US$70 billion on compliance annually, and the costs for regulatory compliance and governance software across the global industry are expected to approach US$120 billion by 2020 — more than half of which will occur in consulting and business services.

For these reasons, it is time for governments to consider how to implement regulation in lower cost ways through the use of RegTech. The benefits of these new technologies are relevant to government and financial regulators – and we cannot afford to ignore the technological innovations being embraced by the financial sector.

As consumer expectations and commercial offerings are changing and advances in FinTech place new pressures, our risk, regulation and compliance systems need to adapt and evolve.

By better utilising technology in regulation we can better achieve our regulatory goals, avoiding the negative effects on productivity, competition and innovation, and delivering lower costs and more reliable protections for consumers and the economy.

In Australia, that is our RegTech mission.

In the online and digitised world, de-risking and de-regulating an environment can actually go hand in hand.

In this digital and online environment, RegTech can provide enhanced regulatory compliance by building it into an organisation's key business practices and operations.

The regulatory technology of FinTech can combine compliance, risk, business strategy and corporate culture objectives to drive performance.

The embedded RegTech capability of 'compliance by design' helps to drive down the overall cost of compliance and improve the accuracy of risk assessments and commercial activities.

The Institute of International Finance has identified a number of areas in compliance and regulatory reporting that could benefit from the development of RegTech solutions – areas such as monitoring payments transactions, automation of trading financial markets, know-your-client requirements and risk data aggregation.

Adopting these newer technologies has flow on effects for the organisations themselves in helping to manage and understand their own operational, trading, credit, payment and reputational risk.

But there are also benefits for financial regulators and policy makers –improved data capture and analysis should enable better intelligence and supervision of risks in the sector.

In Australia, the Australian Transaction Reports and Analysis Centre (AUSTRAC), our financial intelligence agency, is developing ways to work more collaboratively with industry and is developing RegTech initiatives to deliver more effective and efficient compliance outcomes.

FinTech in Australia

That brings me to the next point I wanted to make today, which is what Australia is doing at a policy and regulatory level to promote FinTech.

The Australian Government recognises the potential to realise a range of benefits for the economy — not least promoting greater competition in the banking industry and access to finance for consumers and smaller businesses.

The Government wants FinTech in Australia to grow — to grow big, to thrive and to deliver benefits for consumers and the economy.

And you can see that goal, that vision, reflected in the actions we have taken over the last year or so.

Let me take you through some of those actions.

Firstly, we've taken a practical approach by setting up a FinTech Advisory Group consisting of private sector FinTech representatives.

This group helps to identify areas of potential future reform, and ensures that the industry's priorities are considered when implementing government policies.

Secondly, we're taking a leading approach, a great example of which is our 'regulatory sandbox'.

Australia has taken a differing approach to other countries on this initiative – implementing an open access approach that allows all eligible FinTech firms to test a new service in the marketplace without a licence and without an application process — all that's required is for eligible businesses to notify Australia's corporate regulator. We think this is a world-leading 'regulatory sandbox' approach.

What's more, firms that are not immediately eligible or who are seeking more tailored regulatory arrangements also have the capacity to use the sandbox by applying to the regulator as is done in 'regulatory sandboxes' elsewhere.

Our regulators are also firmly committed to facilitating greater innovation. So, for instance, our corporate regulator's 'innovation hub' provides informal assistance to FinTech start-ups to connect with the various regulators and navigate the regulatory system when they are looking for a licence. In this way the 'innovation hub' acts as a first point of contact for start-ups and can engage with other regulators, as needed.

And it is delivering. To date, it has assisted more than 100 entities and granted 24 new licences almost twice as fast as those that didn't engage with the hub. The hub has helped a range of businesses, including those in marketplace lending, crowd-funding and robo-advice.

The good results from this approach have led our financial intelligence agency to also establish a dedicated contact point for start-up firms. These initiatives are about helping new entrants demystify the requirements of financial regulations so they can better understand and manage risks.

Assisting in a different way, an initiative by the Reserve Bank of Australia and industry to create a new payments platform will help facilitate real-time retail payments.

It will, in short, provide a new way for businesses and consumers to interact, with a built-in flexible addressing service meaning you could potentially pay someone based on their email address — or an alternative unique identifier such as a mobile phone number.

Furthermore, regulatory settings are also being evaluated to reduce barriers to entry and regulatory arbitrage.

To give you an example, the emergence of digital currencies is prompting reforms to the goods and services tax in Australia, and to the anti-money laundering and counterterrorism financing legislation so they keep pace with the changes in payment developments and offerings.

And, finally, we are responding to the need for start-ups and entrepreneurs to access funding. As part of our Government's National Innovation and Science Agenda, additional tax concessions for early stage investment in these firms have been available since 1 July2016 ‑ including a 10 per cent tax offset for capital invested in new Early Stage Venture Capital Limited Partnerships, a 20 per cent tax offset for investing in qualifying early stage innovation companies, and a 10 year capital gains tax exemption for shares held in qualifying early stage innovation companies.

We are also making it easier for start-ups and entrepreneurs to access a larger pool of investors through the introduction of a crowd-sourced equity funding framework.

We are also keen that our government be an exemplar to industry of the benefits of these new technologies, and are reviewing government procurement processes so start-ups can get involved.

A new paradigm

So there are huge opportunities, and they make this an exciting time — for consumers, for businesses, and for all of us gathered here today.

We're experiencing a paradigm shift. We're seeing things in a new way, we're doing things in a new way, and the only way is forward.

But with opportunities come fresh challenges and risk. They require an open mind; they demand flexibility. And we must always remain critically engaged.

That is how Australia is approaching blockchain technology — something, it should be said, we're strongly pursuing.

Blockchain technology and other distributed ledger technologies — or DLTs — have the potential to re-engineer transactions, deliver greater efficiency and security, and promote greater data sharing.

Much of the current work on blockchain in Australia and elsewhere can be seen as securing and adapting a public and open source technology to meet the requirements of a digitalised financial system.

In fact, the Australian Stock Exchange is an international pioneer in exploring the potential use of blockchain.

The ASX has been testing the use of a blockchain-based technology as a replacement for its post-trade clearing and settlement system in the cash equity market. While a final decision is some time away – and will be influenced by commercial considerations – I understand the findings to date have been encouraging, and throughout the process the ASX has worked closely with regulators to identify and address risks and regulatory requirements.

On another front, right now Data61 — part of our national science agency — is investigating how blockchain can be used by both industry and the government right across the economy. This work recognises that while blockchain has its origins in finance transactions, this is not the only area where it could have potential.

As well as finance, Data61 is looking into uses such as logistics and supply chains, to test use cases of blockchain for real world applications.

And on a larger scale, Standards Australia — with support from the Government — is leading the international development of blockchain standards as the secretariat for the ISO on distributed ledger standards. Standards Australia has nominated Mr Craig Dunn, the chair of Australia's FinTech Advisory Group, as the Chair for the ISO Blockchain Standards Committee.

The ISO Blockchain committee will look at areas such as interoperability between systems, privacy and auditing, and will work with people across the globe — including many of you here — to produce these standards over the years ahead.

Risks and challenges

So we're welcoming the opportunities of blockchain technology and FinTech more generally. But we're also tempering our excitement through consultation, oversight and remaining critically engaged.

That is something we must all bear in mind as we continue to experience the profound impacts of a truly digital world. Change brings benefits at the price of uncertainty and it is important that we monitor the effects of new technology and consider the pressures of adjustment through the transition period.

Now while I'm on the subject of risks and challenges, I also want to mention a couple of other areas before I finish.

The first is concerns about privacy, which are prompted by the greater availability and use of data, and how that data is stored.

These are understandable. But as Australia's Productivity Commission recently noted, it's important that new technologies do not become a victim of fear.

Yes, there are undeniable risks in enabling data to become more widely available. But the risk of harm needs to be assessed based on the likelihood and the scale of potential damage.

After that happens, risk assessment and mitigation processes should be put in place for the release and sharing of data, as well as collection and storage.

Another problem area is the consumer protection issues raised by new forms of financing and allowing the testing of new services.

It is something to be aware of but, that said, the reforms being pursued in Australia seek to balance these without limiting the opportunities of FinTech.

For instance, limits on the amount consumers can invest apply in our regulatory sandbox and in our new crowd-funding framework. The crowd-funding framework also requires consumers to use a licenced platform to make their investments. Additionally, under our regulatory sandbox the regulator retains the ability to review use of the sandbox.

This is the challenge of achieving 'principle-based' versus 'rule-based' regulation. Principle-based regulation allows us to focus on achieving the regulatory outcome that matters to us, rather than focusing on compliance with prescriptive rules. Regulators and financial firms can too often fall into the trap of trying to specify a rule that may then limit possibilities or close off adoption of new technologies or business models. But as the current pace of change demonstrates, these approaches can quickly become obsolete and hinder innovation.

We need to acknowledge the dynamic nature of FinTech and the limitations of governments and regulators to be prescriptive in such a fast moving environment.

Before I close, and as this is one of the first G20 gatherings since Prime Minister May outlined the UK's priorities for negotiating its withdrawal from the EU, it would be remiss of me not to say something on Brexit.

Let me first say that Australia will continue to support and promote global free trade.

Our collective support will be important as the EU and UK work through how to reconfigure their trading and investment relationship.

We must recognise that a punitive or restrictive set of new arrangements will have far greater and more lasting implications than the immediate reaction to the poll result itself.

Any reduction in financial system efficiency and liquidity within and between the EU and UK would have implications well beyond Europe.

Within an open single market the UK has developed into a major trading hub for euro-denominated transactions.

According to the Bank for International Settlements, for instance, the UK accounts for 75 per cent of global trades in euro-denominated interest rate derivatives.

Restricting the location of euro transactions could impose additional risks and increase costs for EU and global market participants.

We must all encourage the relevant parties to explore how the market can continue to operate efficiently and how the UK can continue to support that outcome.

The UK is a sound and strongly regulated system.

It is still well placed to provide what the European Central Bank refer to as the "broadly appropriate guarantees for the supervision and oversight" of activities such as euro-denominated clearing and settlement.

With goodwill and mutual commitment the EU and UK can develop a strong new post-Brexit framework for these and other issues such as financial "passports".

These passports are important for the continued delivery of existing and new financial services and products across the EU by UK institutions.

Negotiators have to recognise the mutual benefits that come from cooperative and open financial arrangements and that the UK will continue to play an important role in the EU financial system.

Concluding remarks

To finish, let me say again how great it is to be here — and to be speaking about FinTech - a topic for which I have a great deal of passion.

The Australian Government is a firm believer in the benefits of innovation overall and the potential of FinTech in the financial system.

We see the talent that's out there, and we know that supporting this industry to grow and thrive is of critical importance.

If we do this, we can create a modern and stronger financial system.

As I said at the beginning, FinTech is the way of the future. There is, without doubt, a paradigm shift taking place.

But while we cannot go backwards, the success of FinTech is not guaranteed.

It is important that all of us work together, across borders, to help build this industry so that it can deliver for consumers, for businesses and for our respective economies.

That is what this moment, this opportunity, demands of us.

Thanks very much.