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Three legal tips for Australian fintech startups for FY19

Three legal tips for Australian fintech startups

From how to get IPO-ready to the legal matters to consider when thinking about capital raising, KPMG Enterprise's startup experts share their advice for founders.

Amanda Price

Head of High Growth Ventures

KPMG Australia


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Young professionals in discussion

At High Growth Ventures, KPMG’s dedicated startup team, we have the privilege of meeting with Australian startups every day.

These startups are created to address and resolve a problem or optimise a system for their target market, and the Australian startup ecosystem has extraordinary depth and diversity. But another pattern is clear: no matter how strong the startup’s potential, the founder is often time-poor and solely product-focused, meaning they simply don’t have the time to consider how best to navigate Australia’s complex legal and regulatory framework.

As a startup gains market traction or receives significant Series A investment, and the wheels of growth really start to spin, that startup’s journey can then be hindered – or even cut short – by a half-baked legal structure or the absence of a coherent regulatory strategy.

This risk is particularly pronounced in highly-regulated sectors, like fintech, where innovative new entrants are challenging established financial services players in a convoluted and volatile regulatory environment. In these circumstances, it can be difficult for an emerging fintech to strike the right balance between innovation, competition, and regulatory proficiency.

In one recent example of what can happen when things go wrong, the millennial superannuation fund, Spaceship (launched in 2017 after raising funds from Atlassian’s Mike Cannon-Brookes and other notable investors) was fined $12,600 by ASIC over misleading claims in its marketing.

To assist emerging fintechs with facing this challenge, we’ve set out three key tips below:

1. Consider whether your services need to be covered by a license:

Fintech startups that intend to offer financial products or credit products to Australian clients need to consider their licensing requirements:

  • Financial services providers
    If you are offering a financial product to wholesale or retail clients in Australia, you will generally be deemed to be carrying on a financial services business within the meaning of the Corporations Act, which requires an Australian financial services (AFS) license, unless you qualify for an exemption. For more information on this, check out ASIC Regulatory Guide 121: Doing Financial Services Business in Australia.
    For most early stage fintech startups, obtaining and maintaining an AFS licence and the associated compliance burden is simply not a realistic option. Entering into a Corporate Authorised Representative (CAR) Agreement with an existing AFS licensee who has the correct authorisations for your financial services and financial products (for an ongoing fee) is most likely your best bet – at least until you can afford an AFS licence of your own.
  • Credit product providers
    If you are engaging in credit activities that relate to a type of credit or consumer lease to which the National Credit Code applies, you will generally need an Australian Credit License (ACL), unless you qualify for an exemption. For more information on this, check out ASIC Regulatory Guide 203: Do I need a credit licence? and ASIC Information Sheet 97: Guidance for small credit businesses.
    As a fintech in this space, your best option in the short term is most likely entering into a Credit Representative Agreement (CRA) with an existing ACL holder (for an ongoing fee) who has the correct authorisations for your credit activities.

2. Consider whether you might have AML/CTF obligations:

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) imposes obligations on entities that provide ‘designated services’ with a geographic connection to Australia. As a fintech startup, you should review Table 1 (section 6, AML/CTF Act), which prescribes financial services activities that are designated services under the AML/CTF Act, to consider whether you might be required to register with AUSTRAC as a reporting entity. For more information on this, check out AUSTRAC’s Definitions and examples of common designated services. Importantly:

a. any fintech structured as a ‘managed investment scheme’, is likely to be providing a ‘designated service’ under the AML/CTF Act

b. if you’re a fintech that either issues above-the-threshold stored value cards (SVCs) and/or increases the value stored in connection with above-the-threshold SVCs, you’re likely to have reporting obligations under the AML/CTF Act

c. if you’re a digital currency buff, amendments to the AML/CTF Act came into force on 3 April 2018 that require digital currency exchange providers to register with AUSTRAC and comply with AML/CTF obligations.

3. Avoid misleading and deceptive conduct (including in promotional materials):

As a fintech startup, it is important to understand that Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) contains a general prohibition on a business — in trade or commerce — engaging in conduct that is misleading or likely to mislead (s12DA of the ASIC Act), as well as a series of prohibitions on specific forms of misleading conduct. Innocent misstatements, negligent misrepresentation, and deliberate deceit may all contravene the prohibition. A range of enforcement and redress powers are available to ASIC in response to an infringement of the prohibition on misleading or deceptive conduct, including: redress for non-parties and non-punitive orders, damages, substantiation notices, injunctions, public warning notices, undertakings, and compensatory orders. Before you issue anything to the public, make sure you comb over it with a critical eye!

These are just some of the tips you should observe if you’re an up-and-coming fintech in the Australian market. It’s important to recognise that they are not exhaustive, nor are they a substitute for legal advice.

If you’re uncertain about any of the above or need some advice on how to get your startup off the ground reach out to me or one of my colleagues in the KPMG Enterprise High Growth Ventures team. If we can’t answer your question, we’ll put you in touch with someone who can.

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