Government backs Enhance Regulatory Sandbox overhaul

The Federal Government has backed an overhaul of Australia's regulatory sandbox framework, agreeing to repeal the legislation underpinning the Enhance Regulatory Sandbox (ERS) and replace it with a more flexible model designed to support financial innovation.

The government has accepted all recommendations directed to it from an independent review of the ERS, while supporting recommendations directed to ASIC and industry. The changes are intended to reduce unnecessary regulatory burden while maintaining consumer protection, market integrity and financial sustainability.

The ERS was introduced in 2020, allowing individuals and businesses to test certain innovative financial and credit services without holding an AFSL or credit licence.

The independent review, led by Maha El Dimachki, examined the design, operation and effectiveness of the regime. Its final report was handed down in May and tabled in parliament in July.

Speaking to Financial Standard, FinTech Australia chief executive officer Rehan D'Almeida commented on the likely impact of the changes on Australia's fintech sector, including its capacity to innovate and attract investment.

"The targeted sandboxes will improve how fast fintechs are able to experiment, iterate and launch in market," said D'Almeida.

"The test will now be implementation. Australia needs timely legislation and guidance, proportionate regulation, and programs that allow startups and established firms to test, commercialise and scale new services with confidence."

Under the government's response, the current ERS legislation and regulations will be repealed through a future legislation prioritisation process, allowing ASIC to develop a replacement framework using its existing relief powers.

Treasury said the renewed sandbox should be better integrated with ASIC's licensing, supervision and innovation functions, providing participants with clearer regulatory pathways while helping the regulator build knowledge of emerging technologies and business models.

On the significance of the reforms for Australia's fintech ecosystem and the need for any further measures, D'Almeida commented on its positive impact yet acknowledged that Australia has a long way to go.

"This is a positive step and enabling more innovation through thematic sandboxes will help fintechs to iterate and go-to-market faster," D'Almeida said.

"However, this remains a challenging economic and policy environment, and there is much more that needs to be done to incentivise investors and founders to stay and build their companies in Australia. Beyond the sandbox review, there are a large amount of reforms that need to be actioned including payments, digital assets, CDR, scams, AML/CTF and CCR. We have a long way to go."

It also supports ASIC considering thematic sandboxes integrating specific sectors and technologies, including potential digital financial market infrastructure arrangements.

As part of the reforms, Treasury will establish a public-private financial innovation committee comprising regulators, industry representatives and independent members.

The committee will help identify and prioritise high-value areas for innovation, consider the case thematic sandboxes and improve coordination between government, regulators and industry.

Treasury has also agreed to release a broader financial innovation strategy, aimed at setting Australia's ambition for innovation and coordinating work across areas including payments modernisation, Digital ID, tokenisation, the Consumer Data Right and responsible AI adoption.

The reforms form part of the government's broader productivity and financial innovation agenda.