Financial services companies which give third-party sign-offs on the competence of financial technology start-ups may be exposing themselves to risk of prosecution in the event of failure.
That is the assessment of financial service lawyer, Adrian Verdnik who said the Australian Securities and Investments Commission’s (ASIC’s) consultation paper on facilitating innovation in financial services proposes allowing fintech start-ups to rely on third party sign-off to meet their competence obligation but does not clarify whether the third party would be exposed to liability.
Verdnik, a partner at Hall and Wilcox, noted ASIC’s Consultation Paper 260 said if an organisation approved a start-up as being competent in providing financial services when, in fact, they were not, they could be exposed to prosecution under the Corporations Act for effectively lodging a misleading document with the corporate regulator.
“If they’re going to be potentially liable if a start-up business fails and there are some investor losses, and one of these organisations has sponsored, approved or certified the start-up, and investors take action, who are they going to take action against? Because they take action against the sponsoring organisation,” Verdnik said.
“If those organisations are subject to liability, presumably that’s going to be relevant to their PI [professional indemnity] insurance and the cost that they provide their services.”
Verdnik also wondered whether third parties that sponsored start-ups would be prepared to risk liability and the costs associated with that.
“Again, not-for-profit [industry associations] will not be in a position, I would’ve thought, to provide these financial services under their own insurance arrangements if there’s potential for liability for them,” he said.
ASIC suggested in the paper that not-for-profit industry associations and other Government-recognised entities could become sandbox sponsors of the start-ups.
Verdnik was also interested to see what kinds of financial products the entities would be allowed to provide advice on.
“You’d expect that more complex products and what ASIC considers to be high risk products like over-the-counter derivatives would be excluded and those are the kinds of things start-ups are quite commonly interested in providing solutions,” he said.
