HKMA launch supervisory sandbox and fintech innovation hub

Introduction

The HKMA yesterday launched two new initiatives to assist the development by financial institutions of Fintech and related technologies and confirmed its commitment to innovation provided that consumer and investor protection is not compromised.

The HKMA has issued a circular to authorised institutions (ie banks regulated by the HKMA), stating that they will adopt greater flexibility in the application of the supervisory regime within a Fintech Supervisory Sandbox (FSS). Additionally, the HKMA has established a Fintech Innovation Hub (the Hub) to enable Fintech businesses to conduct proof of concept trials in a controlled environment.

In his speech yesterday launching the FSS and the Hub, Norman Chan, Chief Executive of the HKMA, reiterated the regulator's “technology neutral” approach to regulatory supervision. The HKMA, rightly, considers that adoption of new technology must be done in a way that ensures the protection of consumers and investors. This remains a key theme of regulators around the world in their promotion of Fintech, including the Financial Conduct Authority in the UK. How that is achieved in practice, however, still varies significantly between the regulatory regimes.

Fintech Supervisory Sandbox

In summary, the FSS will enable existing authorised institutions (AIs) to carry out controlled trials of new technology with real customers and the HKMA will relax certain supervisory requirements in relation to such trials. It should be stressed that this sandbox is only available to existing authorised institutions and will not operate to allow start-ups to provide banking services to consumers without formal licensing from the HKMA. 

The HKMA has set out certain requirements in relation to the operation of the FSS. These are:

1. Boundaries: AIs will need to set out a clear scope and phases for the trial including the timetable and termination arrangements;
2. Customer protection measures: The HKMA continues its theme of ensuring appropriate customer protection by requiring the trials to have a process for selecting suitable customers and including a mechanism for customer compensation for any trial failures;
3. Risk management controls: AIs will be required to implement suitable risk management controls to compensate for the relaxation of the supervisory requirements;
4. Readiness and monitoring: The system must be “ready” for the trial (ie, having had appropriate testing – perhaps in the Hub (see below)) and the trial must be closely monitored to deal with problems and incidents.

The HKMA has not specified a list of the supervisory requirements which will be relaxed, but have given examples such as the security related requirements for electronic banking and the timing for independent assessments of new technology. 

The establishment of a sandbox to aid Fintech development in Hong Kong is certainly welcome. Fintech innovators may be disappointed that this is only available to AIs who are already licensed by the HKMA, but this approach accords with the view (espoused in the Report of the Steering Group on Fintech published earlier this year) that innovators in Hong Kong are focused on delivering solutions to financial institutions rather than directly to consumers. It seems that the government would like regulatory assistance to focus on innovation within existing licenced operators. The opportunity for entrepreneurs here, of course, is to work with existing AIs to develop the new technology. This will work well with the growth of accelerator programs being established and run by AIs and will enable innovators to test their products within the umbrella of an existing licensed business. Whether entrepreneurs will be prepared to share their technology and/or control of their ideas with AIs at an early stage to enable this to take place remains to be seen.

Fintech Innovation Hub

The HKMA has also announced the opening of a facility to support research and adoption of Fintech. This facility is offered in partnership with the Hong Kong Applied Science and Technology Research Insitute (ASTRI). The Hub is the HKMA’s self-styled “neutral ground” for the Fintech industry in Hong Kong. The intention is for industry participants ranging from banks and startups to payment service providers and the HKMA itself to brainstorm ideas and evaluate Fintech solutions. Computing power will also be made available. 

The details of the set-up and resource prioritisation are still to be finalised, but the circular from the HKMA envisages that the Hub will support activities such as:

1. testing solutions which require cross industry participation or collaboration such as blockchain
2. demonstrating Fintech solutions to the industry, investors and the HKMA, particularly where such demonstrations require substantial computer resources
3. maintaining dialogue between the industry and the HKMA, particularly where this can be done in the context of demonstrating potential technology
4. enabling the HKMA to explore the use of new technology to discharge their duties, for example the testing of regtech solutions, and
5. organising industry training.

The facilitation by a key regulator for the Fintech sector of a central meeting point which also provides computing power in a segregated network is an encouraging development for innovators. The Hub will allow testing of new technology and, most importantly, will enable start-ups to enter a dialogue with the regulator at an early stage of development. This will undoubtedly help the HKMA understand the proposed technologies better and therefore to be proportionate in its supervisory oversight. 

The intention of the HKMA to look at regtech solutions at the Hub is very welcome. This is an area about which much is said but for which it is generally agreed that development is challenging given the need to have buy-in from industry and regulators.

It is also encouraging that the stated goal of facilities such as this are to increase industry collaboration. For the adoption of some significant technologies, particularly regtech, the agreement on industry standards is vital and if the Hub can help to do that, it would be a game-changing development.

Summary

These new initiatives launched by the HKMA emphasise the government’s desire for Hong Kong to maintain its strong financial services sector and to keep pace with Fintech facilitation in the region. Some commentators will no doubt argue that these initiatives do not go far enough to keep Hong Kong ahead of Singapore in the Fintech race, but enabling technological development through existing regulated banks will help ensure consumers are suitably protected and will therefore maintain Hong Kong’s position as a strong and stable regulatory regime.