Info 240 Asic

[Nina Zahra]

TheAustralian Government has introduced the enhanced regulatory sandbox. The enhanced regulatory sandbox (ERS) exemption allows natural persons and businesses to test certain innovative financial services or credit activities without first obtaining an Australian financial services (AFS) licence or Australian credit licence (credit licence). The ERS exemption aims to facilitate financial innovation in Australia and is available from 1 September 2020.

The enhanced regulatory sandbox supersedes the previous regulatory sandbox administered by ASIC. It allows testing of a broader range of financial services and credit activities for a longer duration (up to 24 months). We have provided a comparison between the ASIC sandbox and the enhanced regulatory sandbox (PDF 131 KB).

If you intend to use the enhanced regulatory sandbox, you must first complete and lodge a prescribed form with ASIC. Which form you use depends on whether you plan to test a financial service or credit activity:

The enhanced regulatory sandbox exempts the provider of an eligible financial product or service, or eligible credit activity, from the relevant licensing requirements for up to 24 months. The exemptions are provided under the Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2020 and/or the National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2020 (collectively, the ERS Regulations).

You can provide eligible financial services in relation to the eligible financial products listed in Table 1. The type of client (i.e. wholesale or retail) will determine the types of financial product for which you can provide financial services.

An officer will need to certify that all information you have provided in the notification is correct, complete and accurate. Additionally, each of your officers, controllers and significant decision makers will need to provide information on their fitness and propriety and attest to the information supplied about them.

For fitness and propriety, you must provide scanned copies of a national criminal history check (also called a police check) and a bankruptcy check, both no more than 12 months old. These checks can take time to obtain, so you must apply for them early.

We have 30 calendar days to assess your notification. We intend to write to you within this period to advise whether you are or are not able to rely on the ERS exemption. We will give you a statement of reasons if you cannot rely on the exemption.

You must notify ASIC if any of the events referred to in Condition 3 (other than those related to becoming an AFS licensee, credit licensee, authorised representative or credit representative) happen. You must notify ASIC in writing within 10 business days of the event happening.

Before the end of the exemption period, you must decide whether you will cease operations or apply for a licence or authorisation. In both cases, you must make arrangements to ensure your existing clients or credit consumers do not experience detriment or discontinuity of service.

If you decide to apply for a licence or authorisation, you must apply adequately in advance of the end of your testing period to allow ASIC enough time to decide on your application before the end of your exemption period. We recommend you allow six to nine months.

The exemption will cease if you lodge with ASIC a written notice to that effect. The cancellation takes effect on the day specified in the notice. You must not specify a day before you lodge the notice with ASIC.

We will not publicly release the details provided as part of your report, unless it is necessary (e.g. if Parliament requires release) or in the public interest for us to do so (e.g. in response to a freedom of interest request). The information provided will help us review the operation and effectiveness of the ERS exemption. It will also help us identify key risks and issues faced by testing businesses and consumers.

As an alternative to obtaining an AFS or credit licence, you may be able to provide financial services or engage in credit activities on behalf of a licensee as that licensee's representative. That licensee must have an authorisation to provide the financial services or credit activities that you intended to provide.

This option is only available to you if you are providing financial services or engaging in credit activities on behalf of the licensee. It is not suitable if you intend to provide the services or engage in the credit activities on your own behalf as a principal.

As a result, if you wished to provide these products, or services relating to these products, you might not need a licence from ASIC. However, the consumer protection laws in Division 2 of Part 2 of the ASIC Act still apply.

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.

While this information sheet focuses on sustainability-related products issued by funds, its principles may apply to other entities that offer or promote financial products that take into account sustainability-related considerations. Examples include companies listed on a securities exchange or entities issuing green bonds.

Greenwashing distorts relevant information that a current or prospective investor might require in order to make informed investment decisions. It can erode investor confidence in the market for sustainability-related products and poses a threat to a fair and efficient financial system.

There has been an increase in investor demand for, and the availability of, sustainability-related financial products in the Australian market. With this comes a growing risk of greenwashing and, as a result, investors being confused or misled.

It is therefore important that issuers comply with existing requirements when promoting or offering sustainability-related products. Such requirements include the prohibitions against misleading and deceptive statements and conduct, as well as disclosure obligations.

This is an evolving space and there have been significant developments recently in relation to disclosure standards for sustainability-related products. For example, in March 2022, the International Sustainability Standards Board published proposed standards on climate-related disclosures and general sustainability-related disclosures.

The Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) contain general prohibitions against a person making statements (or disseminating information) that are false or misleading, or engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service (e.g. sections 1041E, 1041G and 1041H of the Corporations Act, and sections 12DA and 12DB of the ASIC Act). You must comply with these prohibitions when offering or promoting sustainability-related products.

Particular risks of breaching the misleading statement prohibitions arise in relation to representations made about future matters that are not supported with reasonable grounds. For example, if you stated that you will achieve a certain carbon emissions target (such as net zero carbon emissions) by a particular date, this may amount to a representation about a future matter. Such a representation may be deemed to be misleading if you do not have reasonable grounds for making the representation (see section 769C of the Corporations Act and section 12BB of the ASIC Act).

When preparing a Product Disclosure Statement (PDS) for a sustainability-related product, you must comply with the disclosure obligations that apply to financial products, including sustainability-related products.

Some sustainability-related products may be subject to the shorter PDS regime. While there are reduced content requirements for PDSs under this regime, shorter PDSs must describe, in summary, the extent to which labour standards or environmental or ethical considerations are taken into account in selecting, retaining or realising investments relating to the product: see Schedules 10D(7), 10E(7) and 10F(7) of the Corporations Regulations 2001 (Corporations Regulations).

Financial product labels guide investors about what they will be investing in. Investors expect a product's label to align with the underlying investment strategy, including the approach to stewardship (if relevant), as well as with asset holdings.

It is fundamental, therefore, that the sustainability-related label of a product reflects the substance of the product itself. You risk being misleading if your fund's name includes sustainability-related terminology, but sustainability-related factors are not significant in the investment selection process.

Given the current lack of standardised labelling for sustainability-related products, you need to be particularly careful to ensure that product labels are not misleading. You should think carefully about using absolute terms in a product label.

A sustainability-related product is labelled 'No Gambling Fund'. However, under its terms, the product may 'invest in companies that earn less than 30% of their total revenue from gambling activities'.

The investment manager for 'Social Investing Fund' balances a number of different factors when considering an investment, including traditional financial metrics and social matters such as labour practices and gender targets. However, the sustainability-related considerations (i.e. the social matters) are not significant in the manager's investment decisions.

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