Address to the Fintech Australia Summit, Melbourne

The Hon Scott Morrison MP

Treasurer of the Commonwealth of Australia
Introduction
It's great to be here today at the FinTech Australia's inaugural national summit, 'FinTech
Australia Collab/Collide 2016'.
Today I want to talk further about the collision and collaboration between regulation and
technology RegTech especially in financial services.
In a world of mounting cynicism and growing mistrust, our institutions must find ways to build
trust with their customers and the community.
In response to cases of corporate scandals, governments around the world have imposed ever
heavier compliance requirements on business, especially those in financial services.
There is of course an important role for increased compliance and we must ensure the strictest
governance and macro-prudential regulation of our financial institutions but we must always be
mindful in public policy of unintended consequences.
By automatically defaulting to increase the compliance burden on the financial sector, we need
to acknowledge that this also ultimately increases the cost burden on the consumer and the
economy.
And the costs on the financial sector have certainly increased.
According to industry estimates, financial institutions globally spend more than US$70 billion on
compliance annually and the costs for regulatory compliance and governance software across
the global industry are expected to approach US$120 billion by 2020, more than half of which
will occur in consulting and business services.
It is estimated that from the 2008 financial crisis through 2015, the annual volume of regulatory
publications, changes, and announcements increased a staggering 492 per cent.
Rising and excessive regulatory and compliance costs can act as a barrier to new entrants
which can deny competition and protect entrenched players as well as frustrating the
development of innovative solutions that can benefit consumers and our economy.
Together, these inefficiencies impact negatively on our productivity and curtail Australia's
economic growth, which in turn undermines our standard of living.
Also, when you look at the forest of regulation and compliance that currently exists you have to
wonder who is it really trying to help? Is it really seeking to protect and ensure a more informed
consumer, or simply tick boxes to indemnify the regulator or service provider?

As consumer expectations and commercial offerings are changing and advances in FinTech
place new pressures, our risk, regulation and compliance systems need to adapt and evolve.
Better utilising technology in regulation can help us better achieve our regulatory goals, avoid
the drag effects on productivity, competition and innovation and deliver lower costs and more
reliable protections for consumers and the economy. That's our RegTech mission.
Consumer Benefits of RegTech
When I launched the Turnbull Government's FinTech position paper, Backing Australian
FinTech, I set out the enormous potential benefits of new technology in our financial sector.
As we move through the implementation and progress of many of the issues and
recommendations contained in that paper, we are also identifying and trying to capture the
potential benefits of technological developments and innovation in regulation.
Already we are seeing our financial institutions, both start-ups and incumbents, applying
FinTech solutions such as cloud computing, blockchain, machine learning, Application
Programming Interfaces and innovations in cryptography to reduce costs and friction, enhance
security and enable new products and services.
At the same time as they support innovation in products and services, these digitised
transactions support greater audit capability, transparency in payments systems and security in
transactions by reducing risks that can actually help reduce some of the burden of regulation.
In the online and digitised world, de-risking and de-regulating an environment actually go hand
in hand.
In this digital and online environment RegTech can provide enhanced regulatory compliance by
building it into an organisation's key business practices and operations.
All financial institutions, including FinTech start-ups, need to realise that operational risk
includes poor conduct and lack of control and not just systems and processes.
Conduct risk is a key emerging area of focus and opportunity within financial institutions as the
very real costs of scandals and the compliance with regulatory responses impacts on tight
margins and low growth forecasts.
Banks especially need to integrate the disparate, often functional and sometimes ad hoc data
generated by or provided to the risk, audit or other areas of the business.
The regulatory technology of FinTech can combine compliance, risk, business strategy and
corporate culture objectives to drive performance.
With seamless integration of commercial and regulatory activities, compliance and risk
management have become part of the day-to-day business activities of our financial institutions.
This embedded RegTech capability of 'compliance by design' helps to drive down the overall
cost of compliance and improve the accuracy of risk assessments and commercial activities.

RegTech can support an organisation's systems and processes and support the controls that
help mitigate these risks. So when successfully implemented, 'compliance by design' can
increase the confidence of regulators, consumers and the community in the activities and
behaviour of Australia's financial institutions.
Combined with the use of adaptive RegTech solutions such as Artificial Intelligence and
machine learning, financial services providers can reduce error and fraud and improve
consumer protections.
These systems can monitor trades in real time and even adaptively, learn behaviour patterns
and raise the alarm when individuals, and thereby the system, does something outside of the
protocols.
RegTech can help overcome what ASIC Deputy Chairman Peter Kell identified as the
'traditional' approaches to retail financial market regulation, which involved a heavy reliance on
the use of disclosure as a regulatory tool.
When a customer ticks the box confirming that they understand the terms and conditions of the
offer, we need to be really sure that they do understand what they're committing to.
Through 'compliance by design' financial systems and processes can have checks or proofpoints built in the system that would give real effect to these consumer protection measures and
in a much better way than what Deputy Chairman Kell has called the "anything goes as long as
you disclose" approach of the past.
For example, if a customer ticks "yes" to understanding the financial offering but then as an
applicant they make an obvious mistake in an online form, then an automated red flag would be
raised about their true level of understanding.
In this way the system can identify risks and have mitigation protocols to manage and reduce
those risks without resorting to producing larger amounts of disclose documents.
This is consistent with the Government's approach to compliment disclosure with other
consumer protection tools, such as through the financial product design and distribution
obligations recommended by the Financial System Inquiry.
This could also apply to the accuracy of information provided and/or entered.
Imagine the accuracy and certainty of an online application system where the customer or the
employer doesn't manually enter any financial data.
A recent UBS survey found that more than a quarter of Australian home buyers admit misstating
some information when submitting a home loan application.
The automated populating of recent and average salary data, with loan history, could remove
overestimating or incorrectly entered information of repayment capacity.

In this way the use of more sophisticated and adaptive RegTech can assist credit providers in
meeting their responsible lending obligations.
The National Consumer Credit Protection Act 2009 provides that holders of a credit licence must
make reasonable inquiries and conduct an assessment that the credit contract is not unsuitable
for the consumer.
The contract will be unsuitable where either it:
does not meet the consumer's requirements and objectives; or
where the consumer will be unable to meet their financial obligations under the loan, either at
all, or only with substantial hardship.
Certain steps that credit providers must take in meeting their responsible lending obligations
could be automated, such as checking a customer's existing financial situation and
automatically populating data, potentially providing for a more accurate, complete picture of a
consumer's circumstances.
In this way RegTech has the potential to reduce the human resource required to maintain
compliance through the automation of low-value processes, enabling verified complex data to
be accessed quickly, and formatted to aid analysis.
Using new technologies to solve regulatory and compliance burdens more effectively and
efficiently has the potential to create new efficiencies in the financial system because it will help
create a regulatory system in Australia which is more technologically advanced.
The automation of compliance with RegTech has the potential to overcome individual foibles
and human error in a way that provides the quantum leap in culture and compliance that our
regulators, customers, policy makers and the community are increasingly demanding.
Community Benefits of RegTech
RegTech offers to both enhance consumer confidence through a better customer experience
and promote more seamless compliance reporting through a more sustainable regulatory
technology landscape.
According to KPMG FinTech global co-lead, Ian Pollari:
"I think we'll see a lot more in that RegTech space. Because big banks have thrown bodies at
getting over the compliance burden, but that's not sustainable in a world where there's a lot of
pressure on returns and reducing costs."
Regulatory technology helps market participants and operators comply with regulations as
efficiently and effectively.
Advanced regulatory data analytics allows big data to be examined in new ways, leading to
more meaningful Management Information (MI) and insights into regulatory practices, rationale
and further enhancements.

RegTech uses analytic tools to intelligently mine big data to maximise the potential benefits of
consumers going digital and the data they generate and use.
Digitalisation is nothing new, but the ever-increasing expectations of customers and their
speedy acceptance of digital tools is.
With mobile devices offering the same functionality as desktop computers, users expect to be
able to complete all their tasks in a single process.
If they need to prove who they are, they don't want to go back to finding paper copies of birth
certificates and going through the hassle of getting them verified.
We all want and expect in the modern age a simple process of verifying our identity online.
Today's customers are far more comfortable with the prospect of biometric forms of identification
and verification documents to create accounts, which they then access and use on mobile
devices.
In the United States, the Office of the Comptroller of the Currency is encouraging "responsible
innovation" as central to its mission to ensure financial institutions operate in a safe-and-sound
manner, provide fair access to financial services, treat customers fairly, and comply with
applicable laws and regulations.
Our regulatory system needs to stay up to date to ensure that we are covering off on
technological developments in financial services through associated advances in regulatory
technology.
A Stronger Financial System
The strength of our banking and financial system is not something you can take for granted or
allow to be used as a populist, political plaything. It is core to securing our economic resilience
in an uncertain global environment.
The Turnbull Government recognises that ensuring Australians retain faith in our financial
institutions and the decisions they are taking is central to ensuring the ongoing strength of our
banking and financial system.
That is why we have taken action through our conduct and ongoing response to the Murray
Financial System Inquiry. It is why we have strengthened the powers and resources of ASIC,
which has not just the investigative and reporting powers of a Royal Commission but also the
ability to prosecute and otherwise act against those responsible for malfeasance in the banking
and financial sector.
It is why the Ramsay Review will soon make recommendations to the Government for a more
accessible, streamlined system for consumers to have their cases heard and resolve disputes
with their banks and other financial service providers on a more level playing field.
It is why our major banks are now required to participate, at least annually, in public hearings of
the House of Representatives Standing Committee on Economics. As we saw in the first round

of hearings, this process provided an opportunity for the banks to recognise their broader
accountabilities, explain their decisions and practices, acknowledge where there have been
failures and explain what they are doing to restore community trust and faith and achieve culture
change in their profession.
A proactive RegTech agenda builds on these initiatives to strengthen our banking and financial
system and thereby increase our economic resilience.
According to the Institute of International Finance the following issues in compliance and
regulatory reporting could benefit from the development of RegTech solutions:
Provide greater risk data aggregation as required for capital and liquidity reporting, for RRP and
for stress testing.
Support improved modelling, scenario analysis and forecasting as required for stress testing
and risk management.
Address bottlenecks in monitoring payment transactions (particularly in real-time) that
complicates automated interpretation of transactions metadata to recognise money laundering
and terrorism financing.
Improved identification of clients and legal persons, as required by know-your-customer
regulations.
Greater monitoring of a financial institution's internal culture and behaviour and ensuring
compliance with customer protection processes.
Conducting regulatory tasks such as margins calculation, choice of trading venue, choice of
central counterparty, and assessing the impact of a transaction on their institution's exposures.
More automated identification of new regulations, interpretation of their implications and
allocation of the different compliance obligations to the responsible units across the
organisation.
All of these RegTech opportunities can help better manage, operational risk, trading risk, credit
risk, reputational risk, payment risk, fraud and crime prevention, and systemic risk.
Commercial Benefits of RegTech
RegTech also helps regulation add value for business.
At the blockchain summit in Melbourne this year one financial service provider observed;
"Compliance isn't just a nuisance that comes along afterwards and shuts down all the good and
exciting work you've done. Done properly, a strong GRC [governance, risk, compliance]
framework enables the delivery of disruptive technology, keeps you ahead of the competition,
and proves a differentiator in the market."
Through the ever evolving power of new technology and innovation, RegTech offers much more
than improved compliance, or even continuous reporting monitoring.
New and innovative RegTech systems can deliver insights that have the potential to significantly
improve services and reduce costs.
RegTech has the potential to deliver close to real-time insights, through deep learning and
artificial intelligence filters, into the functioning of the market.

New regulatory technology can change culture and behaviours to improve compliance and
productivity. It can potentially identify problems in advance to avoid negative incidents,
misdemeanours and poor performance which harms the market and consumers.
Machine learning can help compliance algorithms become more powerful over time so that
instead of relying on pre-programmed indicators of non-compliant behaviour, the RegTech
system self-adjusts and the predictive capability improves through use, evolving from the
obvious to the truest predictors of risk.
A financial institution or regulator can analyse previous breaches and use this learning to predict
potential risk but also have the regulatory technology evolve and adapt.
In this way RegTech programs have the potential to not just apply regulations but to interpret
them and anticipate changes and events.
Analytics could be harnessed to forecast firm-specific operational and regulatory risks, or
prepare for known events.
Robotics can further automate the control of other IT processes including machine learning,
data flow and storage to enhance speed and efficiency, and minimise human error.
Some FinTech start-ups are looking at how new regulations could be formulated in machinereadable code so that new rules can be updated automatically.
So there is good reason for us to be excited and optimistic at the potential for RegTech to align
the interests of financial institutions, including FinTech disrupters and large banks, and
regulators.
Policy support for RegTech
The Turnbull Government wants to offer home-grown and offshore FinTech innovators an
opportunity to develop and refine new products and services in the Australian market through a
regulatory system that allows them to be frictionless through their scale journey while still
becoming regulatory match fit for deployment into domestic and global markets.
The upcoming New Payments Platform from the Reserve Bank of Australia and the banking and
payment industry will enable funds to be processed in near real-time speed, even between
different financial institutions.
It will introduce a data rich transaction format, allowing parties to pass-on more information
about the transactions, and even to include contracts or supporting documents with the
transaction.
The ATO meanwhile will introduce a Single Touch Payroll Initiative which will require larger
employers (with 20 or more employees) to report payroll and superannuation to the ATO at the
time payments are made to employees and funds streamlining the reporting process.

ASIC is working with consumer groups and the FinTech industry to create a meaningful and
world-leading regulatory sandbox that strengthens our international competitiveness, fosters
new innovative enterprises and delivers appropriate consumer protections.
I expect the regulatory sandbox operational by the end of this year.
In Australia RegTech applications are being developed in areas including data aggregation, risk
modelling, scenario analysis and forecasting, payment transactions monitoring and identification
of clients.
Local RegTech startups include WordFlow, which is helping companies with complex online
documents like prospectuses and product disclosure statements.
Designed to manage supply chain risks, startup SimpleKYC aims to simplify and consolidate the
client onboarding process and the heavy compliance requirements placed on businesses in this
area by regulators.
RedMarker uses machine learning models to power its real-time compliance platform.
Artemis is already being used by a range of Australian Financial Services Licensees.
The Holy Grail is when we start to actually write regulation and legislation in code. Imagine the
productivity gains and compliance savings of instantaneous certified compliance.
Open access data
One of the most important changes we need to make to realise our ambitions in these areas is
to embrace open access data.
Providing financial sector customers with better access to data about their own financial affairs
puts them in the driving seat. It will empower them to seek more tailored financial advice, find
better financial deals and ultimately can be expected to lead them to make better decisions for
their circumstances.
This approach to data is becoming more common. For example in August this year the UK's
Competition and Markets Authority (CMA) announced 'open banking' reforms.
These reforms:
require banks to make customers' financial data easily available to third parties through an
information exchange standard (with the customer's permission), for better price and product
comparisons;
foster greater transparency around fees and products so that customers can make informed
decisions about the fees they pay; and
make it easier to switch providers, through regular prompts reminding customers to check they
are getting the best deal and a better functioning switching service for bank accounts.
I am supportive of these reforms. I want Australians to be in a position to make better decisions.

The Government understands the importance of a move towards unified open aggregated
financial data standards in order to legitimise the current practices employed by FinTech
innovators and give Australians better ways to understand, manage and maximise their
finances.
In Australia, guidelines have not kept pace with practices by innovators, particularly those that
rely on big data.
There are a number of FinTech companies already using aggregated financial data to power
their innovations.
These companies cut across many parts of the FinTech ecosystem, including personal finance,
banking, loans, wealth and advice solutions and accounting.
There is ambiguity around legitimacy and the standards by which they currently access
customer financial data, especially where a user's banking credentials are required.
There is a need to reform the code and implement a strict standard to protect Australian
customers while allowing them the benefit of technology innovations.
I have no doubt the empowered financial consumer of the future will be able to access their own
financial data simply, efficiently and in ways that enable them to understand their full financial
picture so they can make more informed financial decisions.
The innovators of today are bringing these consumers valuable ways to understand, manage
and maximise their finances.
They also enable people to compare, negotiate and quickly take up better-fit financial products
and services. Standardised, equitable and open access to data is fundamental to the delivery of
many of these services.
In March I tasked the Productivity Commission (PC) to look at the benefits and costs of making
public and private datasets more available, and examining options for collection, sharing and
release of Australian data.
The PC's draft report was released yesterday and suggests there is enormous untapped
potential in Australia's data. The PC notes that the financial sector is currently riding a wave of
innovation and change driven by digital technology and new sources of data, which is being
capitalised on by new and innovative FinTech companies. For this to continue and for Australia
to establish itself as a global FinTech leader we need to let the data flow.
The draft report supports such an approach but importantly the Commission recommends
putting the consumer in the driver's seat. What better way to ensure that open data policies are
about improving outcomes for consumers.
The draft recommendations give individuals more control over data about themselves; enable
broader access to datasets of national interest; and create a culture in which non-personal and
non-confidential data is released by default.

The PC is on the right track. Their work provides a credible path to position Australia as a world
leader in fostering a data driven economy.
I know many of you have already provided submissions that informed the draft report and I
would encourage all of you to take a look at the PC's work and provide them with further
feedback to inform their final report, which will in turn inform the Government's future policy
work.
Conclusion
We are now in one of the most exciting phases in the development of FinTech since the
inception of e-banking.
Realising our FinTech potential will transform our economy, not just in the financial services
sector, but by providing the tools our economy needs to continue our successful transition from
the mining investment boom to a more diversified economy. This is how we can deliver higher
real wages and improved living standards for all Australians.
That is why development of FinTech is a key component of our national plan for jobs and why
we are committed to financial technology and are excited about what you are doing and trying to
achieve.
It is also why we are providing $200,000 to FinTech Australia to promote Australia internationally
as a FinTech destination.
As the peak industry organisation that is bringing together Australia's FinTech community,
including through this summit, and successfully advocating on the industry's behalf, FinTech
Australia is very well placed to promote Australian FinTech with a national voice overseas.
This funding will assist in promoting the Australian FinTech sector to international FinTech talent
and investors, and will provide an avenue to connect Australian FinTech businesses with
opportunities overseas.
In this context we cannot allow our financial regulatory framework to act as a handbrake to this
innovation. Excessively stringent rules and obligations result in less business, less competition
and ultimately worse outcomes for consumers.
RegTech can equip us to avoid these outcomes.
It enables a close to real-time and proportionate regulatory regime that identifies and addresses
risk while also facilitating far more efficient regulatory compliance.
It has the potential to improve the customer experience, reduce the incidence of error and fraud,
both on the part of the financial institution and that of the customer.
It helps to drive down the cost of compliance by simplifying and standardising compliance
processes that reduce the need for manual and duplicate checks.

And it can reinforce necessary culture change and improve corporate behaviour through
enhanced monitoring and reduced risk points in financial systems and processes.
Thank you for your attention.