BlueNotes Debate: do regulators stymie or stimulate innovation and start-ups?

" In Australia we can become a bit obsessed with regulation."
Jan McCahey, Global Regulatory Leader, PWC

In a roundtable in conjunction with PwC, BlueNotes managing editor Andrew Cornell discussed the issue with PWC Global regulatory leader Jan McCahey, ASIC Commissioner John Price and Loc8.com MD David Hodges.

In this, the first of a two-part series, we began by asking if existing regulation practices provided hurdles to the innovation agenda.

Jan McCahey: In Australia we can become a bit obsessed with regulation. It means we look to do things that fit into a regulatory regime, as opposed from looking at the bigger picture and what we’re trying to achieve, and worrying about some of the regulatory matters later.

John Price: When we look at fintech you’ve got to consider the whole ecosystem - policy and regulation is one part of that. But there are other aspects: what is the talent available to the business? What access to capital do these businesses have? What is the consumer demand for these particular products?

The UK Treasury has released a comparison between seven major jurisdictions - the UK, California, New York, Singapore, Germany, Australia and Hong Kong - and in Australia, policy and regulation matters are listed as just behind the UK and Singapore. However, Australia ranks fifth in terms of talent, fifth in terms of capital and last in terms of demand.

So while I think regulation can have a very important role, there are other hurdles in the Australian market also worth considering.

Andrew Cornell: That consumer demand, are we talking investors, consumers, end-users?

JP: We’re talking institutional demand, retail investor demand, and demand right across the board in fintech.

David Hodges: I think what we lack to a certain extent is not the regulatory approach – my start-up hasn’t experienced any concerns or issues on the regulatory front. Instead our challenges have been more about our country’s innovation fabric.

That fabric is in places like Ireland, Hong Kong and Silicon Valley, where demand is driven by consumers but also by start-ups buying from and being involved with one another. But Australian companies are not great at buying from Australian companies.

That’s certainly an experience we’ve had at Loc8.com. At a large financial and organisational level, buying from small Australian companies with great ideas and great technology is a real hurdle to overcome.

It’s been a challenge for us as a business – instead of being able to easily connect with start-ups with great ideas, it’s often easier to get the big names, the big corporate names on the books which hasn’t necessary been the right thing for the innovation of the technology and the creation of new technology.

AC: Why is that?

DH: I don’t think Australian companies immediately look offshore but nor do I think there’s an appetite in Australia for many large organisations, enterprise organisations, to preference Australian technology and preference Australian small businesses.

As a culture we don’t buy from ourselves well. I don’t necessarily think it’s a market size; we have 23 million people – that’s enough people to drive demand and we’re very good technology users across the country.

It’s important for local start-ups to know Australian companies will be open to buying from them even though they are a small company. I don’t think we’ve created a great environment for that to happen in Australia.

Young people need to see more examples of their ideas being taken up by Australian companies.

JM: First, let me point out I don’t think all of our country’s innovation is going to come from young people. In fact I think research shows many people operating in a very successful way in the start-up world are older people who have had some experience in business and are doing something different.

While the example of ‘two kids in a garage’ captures the public’s imagination, it is not the reality. 

But I agree with David’s point there are a lot of young people with ideas and fresh thinking who are not being nurtured by people with experience or there are not enough examples of young and experienced people working together.

I was recently talking to the doyenne of the collaboration economy, Rachel Botsman, and I mentioned I knew there were some academics undertaking a PhD to consider what regulation was needed for the collaboration economy.

Her immediate response was “that’s exactly what we don’t need - people studying up on how to regulate the sharing economy”. 

In my experience, we sometimes lurch into pro-regulator mode without first seeing how some of these things work and then wondering what regulation we need, if any.

Often aspects of the economy can very successfully self-regulate – and this self-regulation also contributes to engendering trust and confidence.

JP: Regulators have a role beyond just thinking about what the rules might be. ASIC announced an ‘innovation hub’ in March last year with a focus around engaging with fintech start-ups because, unlike incumbents in financial services, they don’t typically have the experience, resources and history of dealing with someone like ASIC. It can be perceived as an upfront hurdle.

So leaving aside for the moment the question about rules, we think there is real benefit in ASIC helping fintech start-ups access some of our senior executives.

We have a simple online form where people can ask us for informal assistance and we’ll help them in relation to questions they might have about their business model.

We have also set aside a section on our website to help people navigate through the various regulatory rules.

We’ve set up a digital finance advisory committee to guide us in terms of where we might want to go as a regulator. Importantly none of this work involves changing the regulatory rules.

The market response to all of this has been very, very positive. So I’ve got two points to make. The first is trust and confidence is very important if you are going to create consumer demand and sensible regulation does have a role in creating trust and confidence.

Secondly, there is a lot of work regulators can do apart from just looking at the rules and that’s one of the reasons why we wanted to get out on the front foot and set up an innovation hub.

AC: When do you decide it’s time to step in more formally rather than just play an advisory role?

JP: We have a principles-based regime, so rather than having hard and fast rules saying you need to do x, y, z, it says things like “if you’ve got a licence to provide financial services you need to have adequate organisational resources”.

That approach provides a level of flexibility for us to change as the market evolves and it also allows us to step in when it looks like issues are becoming problematic.

A simple example of how that applies relates to technology. If you look at the laws around financial products and financial services, the way they are written, everything needs to be provided to clients as a default in paper form.

Last year we changed that default position so companies can provide information to clients electronically unless the client asks for it in paper form.

That decision alone will save businesses hundreds of millions of dollars every year. That’s an example of the sort of flexibility the Australian regulatory regime has.

AC: David, do you get the sense ASIC is flexible in practice?

DH: Yes, I do and I have that sense with the ATO for that matter. But what I would like to emphasise here is innovation only works where there is a community physically located somewhere. 

That physical location needs all of the infrastructure and fabric to drive it, which is everything from trust, to mentoring, to risk appetite, to appropriate regulatory response.

It doesn’t matter whether it’s young people with ideas or older people with ideas, for me it comes down to regulators working hard to make information accessible and also playing a role in bringing different groups of people together, such as the inexperienced with those who have made mistakes.

JM: I agree mentorship is an issue because lots of start-ups haven’t got a lot of money, so they can’t afford to pay for advice. To be honest, I think we as a country aren’t in the habit of offering advice for free.

I think it is an Australian cultural thing. One of the enablers of innovation (whether it’s in San Francisco or elsewhere) is communities fostering a lot of ‘meetings of the minds’ where the experienced and the inexperienced get to know each other and talk about issues and challenges and so forth.

DH: And the key to that is its informality. The community is driving it, and that’s the success of it.

JM: Yes, I agree. It’s got to be something like a drink on Thursday at five o’clock and everybody goes and if they can’t come one week, that’s OK, because you don’t necessarily want the same people turning up all the time.

AC: John, is there any role for a regulator here?

JP: If you look at ASIC’s statutory obligations really you can boil it down to two things: our role is to enforce the law. But secondly also to facilitate the financial system.

So I believe we do have an important role around stakeholder engagement. The other challenge in Australia is for whatever reason we have a very risk-adverse culture.

The business community needs to think of risk not only in terms of the risk of failure but the opportunity cost of doing nothing because that is a risk in itself.

DH: I agree, but the opportunity cost is a more difficult concept to get across. It’s easy to say to someone “don’t do that you are risking your $A100” rather than something like “you might lose $A100 but if we don’t try we will lose $A1,000 over a decade”.

JP: There is a lot of really interesting research now about how long companies will remain on the S&P 500 or NASDAQ.

The period has gone from many decades to a number of years if you’re lucky, and to me that emphasises the need for businesses to embrace change and to really think carefully about taking risks. Unless you change and adapt it seems to me life is very hard.

DH: What we do have is a lack of talent. We’ve have a talent hole in Australia in the area of technology. In the space I’m in there are a lot of people out there but it’s very difficult to find talented people.

We really struggle finding top quality people with deep expertise. For whatever reason, people are coming forward, often in their early and mid-20’s, but without advanced skillsets including troubleshooting.

AC: Could some of the skills shortage be addressed if people in their 50’s were hired? Is there an ageist societal problem there?

DH: Funny you say that because I’m a big believer in hiring working mothers coming back part-time. I think part-time work is actually the key to the whole process.

I think there are a lot of organisations out there, including some in the tech space doing it quite well, but there are many organisations that don’t drive a family first culture.

It’s got to be ok not to be at work at nine and not to be at work at five.  The focus has to move to output and getting the job done.

In my experience, you get an employee who works four days a week and you always get five days’ work out of them. The employee values that last day so much they take more ownership and by taking ownership it drives a better outcome focussed culture.

Louise Halliwell is Director, Public Policy & Regulatory Affairs at PWC

This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The views expressed in this document are the views of the individual author and are not to be seen as the views of PwC.