Growth of Fintech and Insuretech Sandboxes
The HKMA has set out seven initiatives in effort to bolster the Fintech industry on 29 September 2017 and to prepare Hong Kong to “…move into a New Era of Smart Banking.”
1. HKMA’s 7 initiatives
The initiatives to be launched by the HKMA include:
- Faster Payment System (FPS)
- Enhanced Fintech Supervisory Sandbox (“FSS”) 2.0
- Promotion of Virtual Banking
- Banking Made Easy initiative
- Open Application Programming Interface (API)
- Closer cross-border collaboration
- Enhanced research and talent development
Of the 7 initiatives, perhaps the expansion of the FSS is most noteworthy.
FSS 2.0 will have three new features: (i) a Fintech Supervisory Chatroom will be set up to provide speedy feedback to banks and tech firms at an early stage of their Fintech projects; (ii) tech firms may have direct access to the sandbox by seeking feedback from the Chatroom without necessarily going through a bank; (iii) the sandboxes of the HKMA, the Securities and Futures Commission and the Insurance Authority will be linked up so that there will be a single point of entry for pilot trials of cross-sector fintech products. The FSS 2.0 will be launched by the end of 2017.
Further details of the initiatives will be announced by the HKMA in due course.
2. SFC’s Regulatory Sandbox
The SFC’s regulatory sandbox will provide a confined regulatory environment for qualified firms (as defined below) to conduct regulated activities utilising financial technologies.
The sandbox aims to enable qualified firms, through close dialogue with and supervision by the SFC, to identify and address any risks or concerns associated with their regulated activities before their services can be provided to the wider public in Hong Kong.
By limiting the sandbox to qualified firms only, the SFC will closely monitor such firms and has emphasized the paramount importance of the integrity of the market and investors’ interests, and will not compromise regulatory requirements which are key to investor protection. For instance, a qualified firm operating in the Sandbox must be fit and proper and must comply with the applicable financial resources requirements (“FRR”). These requirements are not onerous and, in practice, the required financial resources are necessary for operating a credible business.
The SFC’s regulatory sandbox’s features are as follows:-
The Sandbox is available to both licensed corporations and start-up firms that intend to carry on a regulated activity under the SFO. The qualified firm must be fit and proper, utilise innovative technologies and be able to demonstrate a genuine and serious commitment to carry on regulated activities through the use of Fintech. The establishment or activities of these firms should also increase the range and quality of products and services for investors and benefit the Hong Kong financial services industry (“qualified firms”).
Under the SFO, no person shall carry on a business in a regulated activity unless the person is licensed by the SFC to conduct such regulated activity. Accordingly, a qualified firm must be licensed (in the case of a start-up, it will need to apply for and obtain the appropriate licence) and comply with the applicable requirements (including FRR).
(2) Licensing conditions:
In order to minimise risks to investors during the period when a qualified firm operates in the Sandbox, the SFC may impose licensing conditions.
Such licensing conditions may include limiting the types of clients which the firm may serve or the maximum exposure of each client, so as to limit the scope and boundary of the firm’s business in regulated activities. Licensing conditions may in some cases require the firm to put in place appropriate compensation schemes for investors, or to submit to periodic supervisory audits by the SFC.
(3) Closer monitoring and supervision by the SFC:
Qualified firms may be placed under closer monitoring and supervision by the SFC when they operate in the Sandbox. In such cases, the SFC may engage in more intensive dialogue with firms and may highlight compliance areas where they can further improve their internal controls and risk management.
This will benefit qualified firms and the investing public by enabling such firms to refine their business models and address any risks or concerns arising from the conduct of the regulated activities at the initial stage.
(4) Investor protection measures:
Qualified firms are expected to have adequate investor protection measures in place to address actual or potential risks or concerns identified when they operate in the Sandbox. For instance, qualified firms should notify their clients that they are operating in the Sandbox and provide full disclosure of the potential risks and any available compensation arrangements.
Once a qualified firm has demonstrated that its technology is reliable and fit for purpose, and its internal control procedures have adequately addressed the risks identified, the firm may apply to the SFC for removal or variation of some or all of the licensing conditions imposed, so that it may conduct regulated activities and be subject to supervision by the SFC on the same basis as licensed corporations which operate outside the Sandbox.
If the SFC considers that a qualified firm operating in the Sandbox is not fit and proper to remain licensed (for example, because its internal controls fail to meet the regulatory requirements), its licence may be revoked.
3. The Insurance Authority’s Sandbox
The Insurance Authority (“IA”) has launched 2 pilot initiatives, namely, Insuretech (i.e. the use of technologies in the insurance industry) Sandbox and Fast Track, to promote the development and the application of new technologies in the insurance sector of Hong Kong.
Insurtech Sandbox helps authorized insurers experiment with new Insurtech and other technology applications without the need to achieve full compliance with the IA's usual regulatory requirements. Under the Sandbox initiative, pilot trials of Insurtech applications will be conducted in a controlled environment with sufficient safeguards for policy holders. Insurers can gain real market data and collect user feedback before their formal launch in the market.
Fast Track is a pilot scheme with a dedicated queue for new authorization applications from insurers using solely digital distribution channels. Fast Track will expedite the authorization process by giving the IA an opportunity to review proposed digital distribution channels at an early stage.
Insurers that apply under Fast Track must have an innovative and robust model using digital distribution to provide benefits to policy holders in product development, delivery, customer service and cost efficiency.
Whilst the creation and expansion of sandboxes by regulators is a welcome sign, entry into such sandboxes is being restricted with a view towards protecting the general public.
For more information on sandboxes and other Fintech-related matters, please contact:-