Launch of the SFC Regulatory Sandbox and the HKMA Fintech Supervisory Sandbox
8 November 2017
Following the HKMA’s launch of the Fintech Supervisory Sandbox (FSS) one year ago, the SFC announced the launch of the SFC Regulatory Sandbox (SRS) on 29 September 2017 to provide a confined regulatory environment for qualified firms to operate regulated activities under the Securities and Futures Ordinance (“SFO”). The HKMA also announced a number of initiatives to move Hong Kong into a “New Era of Smart Banking” on the same day.
Launch of SRS
The purpose of the SRS is to maintain market integrity and investor protection by examining and monitoring the qualified firms’ internal control systems and the reliability of the delivery of such financial services in a confined regulatory environment at the initial stage. The main features of the SRS are:
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). 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.
- Licensing Conditions
SFC may impose certain licensing conditions, for example limiting the types of clients which the qualified firm may serve or the maximum exposure of each client (to limit the scope and boundary of the firm’s business), require the firm to put in place appropriate compensation schemes for investors, or to submit to periodic supervisory audits by the SFC.
- Closer monitoring and supervision by the SFC
The SFC may have more intensive dialogue with qualified firms, which the topics may include focusing on compliance areas where the firms can improve their internal controls and risk management.
- Investor protection measures
A qualified firm should have sufficient investor protection measures in place. For example, the firm should let clients know that they are operating in SRS and fully disclose the potential risks and any available compensation arrangements.
Once a qualified firm has shown that the technology is fit and reliable and it has sufficient internal control procedures, the firm may apply for removal or variation of of the licensing conditions imposed. However, the SFC may revoke a firm’s license if they believe the firm is not fit and proper to remain licensed.
A New Era of Smart Banking
Further to the launch of FSS in September 2016, the HKMA has announced the following initiatives on 29 September 2017:
- Faster Payment System (FPS)
Scheduled to be launched in next September, banks and Stored Value Facilities (SVF) operators can participate in the FPS, which supports the use of mobile phone numbers or email addresses for payments in Hong Kong dollar and Renminbi anytime and anywhere.
- Enhanced FSS 2.0
By the end of 2017, FSS 2.0 will be launched with three new features:
- Fintech Supervisory Chatroom which will provide prompt feedback to banks and tech firms at an early stage of their Fintech projects
- Direct access to the sandbox for tech firms so they can seek feedback from the Chatroom without necessarily going through a bank
- The sandboxes of the HKMA, the SFC and the Insurance Authority will be linked up to be a single point of entry for pilot trials of cross-sector fintech products
- Promotion of Virtual Banking
The HKMA will consult the industry to review and amend the Guide to Authorisation of Virtual Banks issued in 2000.
- Banking Made Easy Initiative
The HKMA will set up a new task force to minimise regulatory frictions in customers’ digital experience, e.g. remote onboarding, online finance and online wealth management.
- Open Application Programme Interface (API)
A policy framework on Open API will be drafted and finalised by the end of 2017 to facilitate the development and wider adoption of API by the banking sector.
- Close Cross-Border Collaboration
Latest initiatives being pursued include cooperation with the Office of Financial Development Service of the Shenzhen Municipal Government, and the development of a Distributed Ledger Technology (DLT) platform to digitalise banks’ trade finance processes in Hong Kong, with potential connectivity with Singapore’s trade platform.
- Enhanced research and talent development
The HKMA will step up collaboration with the Hong Kong Applied Science and Technology Research Institute, Science Park and Cyberport to promote new technology and nurture fintech talents.
In addition to the SFC consultations on cybersecurity and robo-advice, and the agreements the SFC has signed with other regulators for fintech, the above circulars from the SFC and HKMA shows that the regulators in Hong Kong is taking measures to stay update with the development in fintech globally.
Bovill can assist you in applying the SFC license and review your internal control procedures to ensure compliance with the SFC requirements. We can also help you to keep track with the development of fintech-related regulations in Hong Kong and globally.