‘A good first step’: Fintech Australia responds to Council of Financial Regulators report on de-banking

A review into how to tackle the ongoing problem of de-banking in the fintech sector by the Council of Financial Regulators has returned with four key recommendations for the Australian government which industry lobby group Fintech Australia describes as “a good first step” on issue.

In March, the former Coalition government asked the council, AUSTRAC, the ACCC and the Dept of Home Affairs to offer advice on policy options around de-banking in relation to fintech firms, digital currency exchanges (DCEs) and money transfer providers. A working group, led by the Treasury, with representatives from each agency, put together the response after consulting with industry

The Council of Financial Regulators (CFR) released the 12-page report, titled Potential Policy Responses to De-banking in Australia, this week.

The four most important recommendations are:

1: That voluntary data collection on de-banking be undertaken by the big four banks, after which a formal phase of data collection will be considered, subject to appropriate resources for relevant agencies.

2: That all banks implement five related measures to improve transparency and fairness in relation to de-banking. These measures will apply to all instances of de-banking.

3: That the big four banks be informed of the government’s expectation that they publish guidance applicable to the DCE, FinTech and remittance sectors regarding their risk tolerance and their requirements to bank these sectors.

4: The government is considering funding targeted education, outreach and mentoring for the FinTech, DCE and remittance sectors. If the government is interested in working for skills development, participating agencies can advise on implementation options.

De-banking is where a financial institution withdraws its services, often at short notice and without explanation to a customer. The issue is widespread in the fintech sector and has happened to some of the country’s largest and most successful fintech unicorns.

Not adequately addressed

The CFR policy document said de-banking is a global challenge driven by a number of interrelated reasons, including anti-money laundering and counter-terrorism financing (AML/CTF) laws, sanctions compliance, profitability and reputational risk.

“Few affected countries have been able to deal adequately with the issue of de-banking,” the paper said.

“The systematic de-banking of legitimate businesses across entire sectors can have a significant impact on affected businesses and increase their risk profile by forcing them to operate outside the legal framework and transact exclusively in cash.”

Treasurer Jim Chalmers said the government welcomed the CFR’s follow-up paper and would respond to its recommendations “in due course”.

“The government is committed to promoting innovation and competition in the financial sector and will continue to work with affected customers,” he said.

“[De-banking] can have a devastating impact on businesses and individuals. It can also put a damper on competition and innovation in emerging sectors of the economy.”

Simple measures

Fintech Australia GM Rehan D’Almedia said de-banking continues to be a significant problem undermining the entire fintech industry.

“Some of Australia’s most innovative financial technology companies have been wound up suddenly and without reason or explanation in recent years,” he said.

“The policy responses to de-banking recommended by the Council of Financial Regulators are a good first step. Improvements to data collection, guidance and transparency will begin to illustrate the enormity of the de-banking problem and provide some certainty.

“Transparency and fairness measures are a positive step, but must be implemented in a mandatory and enforceable manner to be effective. These measures should also be coupled with an external dispute resolution scheme that holds banks accountable and allows for appeals.”

D’Almedia said his organization wants the recommendations implemented as a priority.

“Many of these are simple measures that can be quickly adopted and implemented by the banks,” he said.

But one area where the lobby group’s view differs from the CFR is an independent Due Diligence Scheme (DDS), which is recommended in the ACCC’s 2019 Foreign Currency Conversion Services Inquiry report.

The CFR paper said the major banks have indicated that the proposed DDS is unlikely to affect their decision to bank a customer given that certification under the DDS will not provide protection from regulatory action.

“Ultimately, the participating agencies believe that a DDS would not succeed without the banks’ emphasis on certification,” the FCR paper said, while the agencies involved do not support the idea.

“While FinTech Australia supports further consideration of an independent Due Diligence Scheme, we will work with our major banks to support the development of the proposed guidance for fintechs, advising on the required information and compliance standards expected to be met to maintain a banking relationship, D’Almedia said.