Introduction

Following in the footsteps of Singapore, the Hong Kong Monetary Authority (HKMA) has launched a Fintech Supervisory Sandbox “…facilitate the pilot trials of Fintech and other technology initiatives” by its authorized institutions (i.e. banks). Details of the FSS are set out in the HKMA's circular.

The FSS allows banks to develop and test Fintech related technological innovations within a “sandbox” (i.e. controlled) environment. Within this environment, supervisory and regulatory restrictions are relaxed and flexible.

It is envisioned that Fintech products relating to mobile payment services, biometric authentication, blockchain, robotics and augmented reality will be developed within this environment and that testing such products within the FSS will allow authorized institutions to gather data and user feedback with a view to perfecting products for potential launch in the public sphere.

Authorized Institutions are asked to contact the HKMA directly about participating in the FSS.

 

Key Principles

In establishing the FSS, the HKMA has adopted 3 key principles:-

1. The FSS should not be used by authorized institutions as a means to bypass applicable supervisory requirements (e.g. security-related requirements for electronic banking services and the timing of independent assessment prior to launching new technology services);
2. The FSS is not limited to Fintech initiatives only. It is open to other technological initiatives sought to be developed and launched by authorized institutions; and
3. Within the FSS, authorized institutions are allowed to conduct trials of its products involving actual banking facilities, but only to a very limited number of participants. Such trials will not be subject to full compliance of HKMA’s regulatory/supervisory requirements, provided that:-

(a) Boundary
There must be in place clear definitions of the scope and phases of the trial (such as the size and types of customers involved, technologies and types of banking services covered), the timing and the termination arrangements.

(b) Customer Protection Measures
Adequate measures are in place to protect the interests of customers during the trial. These include a proper process for selecting customers who understand the associated risks and voluntarily join the trial, enhanced complaint handling procedures, a mechanism for timely and fair compensation of customers’ financial losses caused by any failures of the trial, and appropriate arrangements for customers to withdraw from the trial.

(c) Risk Management Controls
Reasonable compensating controls are implemented to mitigate the risks arising from less than full compliance with supervisory requirements, and to address the risks (including cyber-attacks and system disruptions) posed by the trial run to the AI’s production systems and customers who do not join the trial.

(d) Readiness and Monitoring
The systems and processes involved are ready for the trial (such as after going through reasonable testing and other rollout preparation). In addition, the trial is subject to close monitoring so that the authorized institutions can promptly identify and handle any significant problems or incidents that may arise (including matters about public and customer communications).

 

Hong Kong - major Fintech hub?

Whilst the establishment of the FSS is a significant development within the burgeoning Fintech community in Hong Kong and South East Asia as a whole, it remains to be seen how far this will go to assist Hong Kong in attempting to create and/or attract Fintech start-ups.

The Steering Group on Financial Technologies under Hong Kong's Financial Services and Treasury Bureau is of the view that Hong Kong, as an international finance hub, is an ideal platform to manage regional and even global markets for many industries and sectors due to its legal and financial regulatory system. These factors as well as Hong Kong’s close relationship with the Mainland through the Mainland and Hong Kong Closer Economic Partnership Arrangement (“CEPA”) signed in 2003 will, it is hoped, aid Hong Kong in attracting Fintech startups to Hong Kong.

The FSTB has, however, pointed out that a balance must be struck between market innovation and investor protection. This view point perhaps better explains why, as a result, the FSS is only open to authorized institutions only.