The Enhanced Regulatory Sandbox

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The Enhanced Regulatory Sandbox (ERS), is an initiative introduced by the Australian Government that serves as a testing space for new Fintech business models that have not yet been regulated.
What are the main aims and objectives?

The main aims and objectives of the Enhanced Regulatory Sandbox (ERS) in Australia are to facilitate financial innovation and improve market disclosure. The ERS provides a safe environment for natural persons and businesses to test innovative financial services or credit activities without needing to obtain a license. It aims to stimulate the development of new fintech business models which can then be regulated appropriately. The sandbox also aims to manage the risks associated with financial innovation, with limits on the value of services that can be provided to retail clients and requirements for compliance with disclosure and conduct rules.

How does the program work?

The ERS works by allowing businesses and individuals to test novel financial services or credit activities for up to 24 months without the need for obtaining either an Australian Financial Service license or Australian Credit license.

One of the key features of the ERS is its expanded scope compared to Australia’s previous regulatory sandbox. It accommodates a broader range of financial services and credit activities, thus increasing the potential for participation. For instance, a fintech startup could test an innovative peer-to-peer lending model within the ERS without needing a specific license for the entire testing period.

To qualify, participants must be an unlicensed Australian business or locally registered unlicensed foreign company. They must pass a public benefit test which requires applicants to provide an explanation of the potential benefits that their service will bring the public. Similarly, they must pass an innovation test where applicants are required to explain how their new activity is an innovation or improvement on existing services.

The types of financial products covered by the ERS varies for wholesale and retail clients with wholesale clients being covered for financial services that deals, advises on or issues financial products with the exception of any of its derivatives.

By contrast retail clients are covered for the following services:

  • Deposit products (ADI issued)
  • Non-cash payment products (ADI issued)
  • General insurance (excluding consumer credit insurance)
  • Life insurance
  • Superannuation products
  • Interests in simple managed investment schemes
  • Commonwealth debentures, stocks and bonds
  • Securities (shares and bonds) listed on the official list of a prescribed financial market or an approved foreign market
  • Crowd-sourced equity securities
  • Issuing credit, or providing credit advice or intermediary services
  • Issuing general or life insurance as an agent of the insurer
  • Issuing a non-cash payment facility
  • Providing a crowd-funding service
There is also an AUD 10,000 (approx. $6,400) individual limit on the value of the financial services that can be provided to retail clients. An AUD 5 million (approx. $3.2 million) aggregate exposure limit applies to all financial services and credit activities offered to all clients in a business.
What is the overall cost?

There is no available information about the running costs of the ERS. However, research by the World Bank Group and the Consultative Group to Assist the Poor (CGAP) found the regulatory sandboxes can cost over $1 million to run once human resources and salaries are factored in. 

How was it implemented?

The ERS was introduced in 2020 and is run by the Australian Securities and Investments Commission (ASIC). The previous ASIC Fintech regulatory sandbox was superseded by the Enhanced Regulatory Sandbox under the Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2020 and the National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2020.

What impact has been measured?

The ERS has been used by 15 Fintech Companies to date, however, there is no further information available about the success of these innovations and the wider impact these companies have had on the Fintech Sector. By contrast the previous sandbox received only 7 participants in the space of four years.

What lessons can be learned?

It's important to note that the current ERS model has been criticized as inadequate, with suggestions being made for a shift towards an authorization-based design. This is indicative of the ongoing evolution of the ERS in response to the needs of the fintech sector.

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom