A key federal government initiative designed to boost financial technology has backfired, with an independent review revealing that industry groups view the scheme as a "bridge to nowhere".
The Enhanced Regulatory Sandbox (ERS) allows tech start-ups and entrepreneurs to test new financial products on real customers for up to two years without needing a full corporate licence.
Under the scheme, managed by the Australian Securities and Investments Commission (ASIC), firms must prove their idea is novel and offers public value, and cap customer exposure at $5 million.
However, an evaluation led by independent reviewer Maha El Dimachki found the program failed to deliver real-world outcomes.
Out of 103 applications submitted since the program began, ASIC accepted only 19 companies.
Of the 16 businesses that have since left the sandbox, 12 shut down entirely and just one successfully gained a full financial licence.
The report laid the blame for these low success rates on rigid legislation.
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By locking the sandbox rules directly into primary law, politicians unintentionally tied the regulator's hands, leaving ASIC unable to adapt the rules for emerging tech like artificial intelligence.
The review also revealed ASIC did not actively monitor or supervise sandbox participants as they technically operated without a licence.
ASIC submissions said the agency lacked the legal tools and capacity to oversee unlicensed firms, and assigned a team of just four staff members to manage its entire national Innovation Hub.
Responding to the review's findings, an ASIC spokesperson said the agency wanted to support innovation to boost productivity and economic growth.
The corporate regulator's role was "to make sure that innovation happens safely, with the wellbeing of end consumers at the forefront of everyone's mind," the spokesperson said.
"ASIC works constructively with industry to help them better access and engage with ASIC and support fintech growth. Our work to support responsible innovation continues and we will have more to update in the coming months."
This policy failure unfolded alongside broader friction between start-ups and Canberra over federal tax policy.
The May 2026 budget originally scrapped the 50 per cent capital gains tax discount for start-ups, prompting fierce industry warnings that the move would drive local entrepreneurs overseas.
After intense lobby efforts, the government backed down in June 2026, carving out a special tax concession to protect early-stage firms.
To fix the regulatory sandbox, the review recommended that Parliament scrap the existing legislation altogether, urging the government to hand discretionary powers back to public servants so regulators could tailor flexible exemptions for start-ups on a case-by-case basis.
A Treasury spokesperson said the government was considering the independent recommendations and would provide a formal response later in 2026.
The government remained committed to advancing financial innovation and payments reform, pointing to recent budget support for new regulatory sandboxes targeting tokenised assets, strengthened regulator-industry cooperation and a new strategic plan for the payments system, the Treasury spokesperson said.
