Discussions focused on the latest regulatory developments impacting the FinTech sector, and the key legal and cybersecurity issues, as well as other challenges and opportunities that overseas investors face in China.
Similar to global developments, Asia’s FinTech sector is transforming and evolving, with an increasing share of FinTech investment to the region, second to North America. Across Asia, companies and financial institutions are developing innovative FinTech products that are disrupting traditional financial services, presenting both opportunities and risks.
FinTech developments and trends
Ian Wood, partner and head of the firm’s corporate & commercial practice in Asia commented that local governments are competing to foster the most attractive environment for FinTech innovators. He added: “With their strong financial services talent pool and with access to some of the world's fastest growing markets, there are real rewards for the Asian jurisdictions that get this right. We expect growth to be focused on business to business FinTech services initially, as the regulators develop the regulatory framework to enable easier deployment of FinTech services and products to consumers”.
However, opportunities may be missed if regulations are not adapted to enable consumers to have access to FinTech products and services. He continued: “The regulatory regime in Hong Kong is reasonably complex and it can be difficult to determine which regulations apply to FinTech services. Coupled with high compliance costs, this can deter entrepreneurs from entering the market. The lack of a regulatory framework directed specifically at the FinTech sector in Hong Kong will undoubtedly result in challenges for innovative businesses and could undermine the development and competitiveness of the sector against peer regional markets, such as Singapore.”
With the current focus by governments on the sector, Wood added that regulators are likely to be more flexible in the application of the rules: “We have already seen a number of jurisdictions such as Hong Kong and Singapore establishing committees to determine ways to develop the industry. Seeing both regulators and market participants working together in this way is very encouraging for the future”.
Challenges for overseas investors in China
China’s FinTech sector has seen fast growth over the past few years and is expected to reach a scale of business at US$1,140 billion by 2020, [1] and over 500 million users by the end of 2016.[2]
China’s FinTech landscape is well developed, with a proliferation of consumer-facing products. Compared with Hong Kong and Singapore, FinTech businesses on the Mainland have not been subject to a lot of regulations, and products such as peer-to-peer (P2P) lending have grown quickly. Yet this has had its own cost, as P2P frauds have cost end-users dearly.
Dequan Davis Wang, partner and country head of Simmons & Simmons in China spoke about the key concerns for overseas investors in China: “Chinese Fintech players benefited hugely from the world’s largest consumer market, to a certain extent isolated from global competition. Some of China’s tech giants greatly outweigh their international peers, and some in the market are concerned that the big players in China are too powerful to allow smaller innovative start-ups or foreign peers to compete.”
“The other big challenge for overseas investors is regulatory restrictions. Internet businesses are regarded as telecom value added services in China which requires ICP licences from the Ministry of Industry and Information Technology or its provincial branches. In addition, financial regulators have been playing catch up with the market. The theme from the last few years of deregulation and promotion has now changed to more regulation, partially caused by the recent scandals in the P2P lending market.”
*Regulatory and cybersecurity issues in China’s FinTech space
*Xun Yang, of counsel based in the firm’s office in China said that FinTech in China has huge potential: “China’s e-commerce businesses continue to grow, forming a solid ground for Fintech businesses, and FinTech in turn plays a central role in facilitating this sector of the economy. FinTech also fills in the gap where traditional banks are unable to serve, such as soliciting funds from and providing funds to small business. FinTech wins customers from traditional banks by its convenience and flexibility.
However, cybersecurity and data protection are key issues impacting FinTech. Major cybersecurity breaches have been well documented, such as the Ctrip incident. In fact, cybersecurity problems have been widespread. In 2013, 74 per cent of internet users suffered from a cybersecurity incident or data leakage.” [3]
Yang pointed out that regulators, institutions and end-users are increasingly aware of cybersecurity risks, and taking action: “During the last few years, China has been developing its data protection rules, which are not very different from European standards and have additional requirements which European countries do not have.”
In addition, for the purpose of protecting cybersecurity and business continuity, China has imposed statutory requirements regarding the selection of IT devices, software and technology for use in finance businesses, as well as network structure. According to Yang, “these requirements, to certain degree, restrict the digitalisation and revolutionisation of the finance business. However, cybersecurity concerns also present an opportunity for operators who have a positive reputation, as they can win consumer trust and business.”
[1] Statista.
[2] China Internet Intelligence Centre.
[3] China Internet User Security Report, 2013, from the China Internet Information Centre.
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Notes to editors:
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5. In response to growing demand in this area, Simmons & Simmons has established an International FinTech team made up of expert lawyers from across all practice areas within the firm to provide a full-service offering to clients operating in the FinTech sector. The team members are recognised as leaders in their fields and have extensive experience of advising businesses in both the financial services and technology industries.