On Sept. 6, the Hong Kong Monetary Authority (the HKMA) announced two initiatives targeted at raising Hong Kong’s profile as a fintech hub: the setting up of the Fintech Innovation Hub (the Hub) and the Fintech Supervisory Sandbox (the Sandbox).
Fintech Innovation Hub
In collaboration with the Hong Kong Applied Science and Technology Research Institute (ASTRI), the HKMA will launch the HKMA-ASTRI Fintech Innovation Hub to support the research and adoption of fintech global solutions in Hong Kong.
The Hub is intended to enable various stakeholders within the fintech industry, such as banks, payment-services providers, fintech startups and the HKMA, to explore, experiment and innovate in the development of industry-wide fintech solutions.
ASTRI’s technical teams and IT infrastructure will support the Hub. The following are key activities the Hub will support:
- coordinating trials of fintech solutions that require a degree of interoperability and interconnectedness among multiple parties
- providing network support and computing resources to fintech startups, research entities and banks to conduct demonstrations of their proof of concept and research results
- enabling stakeholders to inform the HKMA of new technologies and to allow the HKMA to provide input or feedback at an early stage
- facilitating the adoption of emerging technologies to enhance the HKMA’s efficiency and efficacy in discharging its regulatory duties
- organizing training sessions for the fintech industry
The HKMA is finalizing the Hub’s setup and mode of operation with details to be announced.
Fintech Supervisory Sandbox
The Sandbox initiative aims to create a safe space where banks can test innovative products, services, business models and delivery mechanisms with actual customers without immediately incurring all the normal regulatory consequences of engaging in such activities.
Unlike similar schemes in the UK and Singapore, the Sandbox is targeted only at banks regulated by the HKMA, not fintech startups or other unregulated entities. Within the Sandbox, banks can try out their new fintech products without the need to achieve full compliance with the HKMA’s usual supervisory requirements.
The HKMA has indicated that it does not intend to stipulate an exhaustive list of supervisory requirements that may be relaxed within the Sandbox but will assess the relaxation of certain requirements on a case-by-case basis in consultation with the applicant bank. With the HKMA’s approval, banks can introduce such services without full compliance of certain security-related e-banking requirements and deferment of the usual prelaunch independent assessment for new technologies by third-party consultants.
Banks can roll out trials of fintech initiatives involving actual banking services to a limited number of customers (such as staff members or a selected group of customers), subject to the following safeguards:
- Adequate customer protection measures are in place, such as ensuring that customers understand the risks and voluntarily give their consent to participate and ensuring proper handling of customer complaints and avenues to compensate for any loss suffered by customers.
- Proper risk management controls are in place to address any contagion risks causing disruptions to other bank services beyond the Sandbox.
- The scope and phases of the trial are clearly defined with reasonable testing and monitoring at each stage of the trial to ensure prompt identification and rectification of any issue.
Banks interested in participating in the Sandbox are required to contact the HKMA. This initiative will enable banks to gather real-life data and user feedback in a controlled environment and to make suitable refinements to their products before the full launch.
The Monetary Authority of Singapore issued a consultation paper in June setting out its approach to a very similar regulatory sandbox initiative. However, the audience targeted included not only banks but technology and professional services firms that are partnering with financial institutions. For details, please see the relevant Sidley Update here.
As the competition among cities such as London, New York, Singapore and Hong Kong in establishing themselves as hubs for fintech industry intensifies, the Hub and the Sandbox demonstrate the HKMA’s commitment to facilitate the healthy development of the fintech ecosystem in Hong Kong. The two initiatives are complementary – the Hub is aimed at both large and small institutions enabling fintech products’ research and development, while the Sandbox is aimed at facilitating banks’ adoption of such products in an appropriately supervised environment. The HKMA hopes to strike a fine balance between encouraging fintech innovation, on one hand, and ensuring that the consequences of any failure are contained and the overall soundness of the financial system is maintained.