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Revving up FinTech: HKMA launches new regulatory sandbox

Introduction

Financial technology (“FinTech”) has created a number of pressures in the market. Market participants push to be the next “big thing” and get ahead in a busy market place while also trying to navigate compliance with laws that weren’t necessarily drafted with emerging technologies in mind.

On the other hand, regulators, charged with responsibility for promoting the stability of the financial system and ensuring compliance with applicable legislative standards, must respond to the emergence of FinTech and balance regulatory objectives with emerging economies.

HKMA announces launch of supervisory “sandbox”

In response to these pressures, the Hong Kong Monetary Authority (“HKMA”) has announced the launch of a “Fintech Supervisory Sandbox” (“HKMA Sandbox”). The HKMA is the regulator of authorised institutions (“AIs”) in Hong Kong with responsibilities that include promoting the stability and integrity of the financial system and helping to maintain Hong Kong’s status as an international financial centre. The HKMA Sandbox is intended to allow AIs to develop FinTech initiatives in a real life trial setting before being formally launched.

The HKMA has recognised:

the need for a supervisory arrangement with greater flexibility to enable AIs to conduct more timely live tests of these initiatives before their formal launch.”

What do AIs currently need to do?

AIs are under a range of legislative obligations supplemented by supervisory policies and guidance issued by the HKMA. In implementing a new FinTech initiative, an AI must ensure that it is consistent with its prudential obligations. Relevant considerations may include:

  • how the FinTech initiative sits with the AI’s risk management systems and processes;
  • technology-specific risks including business continuity planning, e-banking and other technology risk considerations; and
  • the application of general compliance standards in an alternative setting. For example, meeting anti-money laundering and counter-terrorist financing obligations and treating customer information in accordance with applicable standards of privacy and confidentiality.

How will the HKMA Sandbox operate in practice?

The HKMA Sandbox will allow AIs to conduct a “pilot” trial of proposed initiatives. This will allow the AI to provide actual banking services to real customers within a controlled trial group. The HKMA has suggested that customers may include staff members or a focus group of selected customers. The trial would operate:

without the need to achieve full compliance with the HKMA’s usual supervisory requirements during the trial period.”

This is subject to some caveats. To benefit from the HKMA Sandbox, the management of the AI must ensure that the trial operates:

  • within clear boundaries;
  • that there are adequate measures in place to protect customers;
  • that there are reasonable compensating controls in place to mitigate risk; and
  • that the systems and processes are ready for roll out of the trial and are monitored through its course.

Crucially, the HKMA Sandbox is not available on a “blanket” basis. The HKMA expects to discuss proposals directly with AIs to confirm the appropriate supervisory flexibility to be applied in the circumstances.

What this means for the Hong Kong market?

The introduction of the HKMA Sandbox should be welcomed as it indicates an engagement with the development of FinTech and recognition that the current regulatory regime may not work appropriately when layered over fast developing technology.

However, the HKMA Sandbox is currently confined to the HKMA, meaning that it only applies to the supervisory framework applying to AIs. As seen in previous updates, the HKMA and Securities and Futures Commission have both dedicated resources to address FinTech development and work continues to ensure that FinTech is appropriately nurtured in Hong Kong while supported by a robust regulatory regime.

What else is happening?

Concurrently, there are a range of initiatives being introduced to help make Hong Kong a more hospitable place for FinTech players beyond the banking industry. Some of the key reforms relate to account opening, including the HKMA’s recent “De-risking and Financial Inclusion” paper (available here), which is a start.

Watch this space.

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