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Hong Kong Government approves sandbox initiatives by three financial regulators to facilitate FinTech development

Hong Kong Government approves sandbox initiatives by three financial regulators to facilitate FinTech development

Last week, the Hong Kong Government welcomed the unveiling of sandbox initiatives by three financial regulators to facilitate Hong Kong's FinTech development.

The Monetary Authority unveiled a plan to upgrade its FinTech Supervisory Sandbox (FSS), while the Securities & Futures Commission and the Insurance Authority announced the launch of the Regulatory and the Insurtech sandboxes.

Hong Kong Monetary Authority

The FinTech Supervisory Sandbox (FSS), launched by the HKMA in September 2016, allows banks and their partnering technology firms (Tech firms) to conduct pilot trials of their Fintech initiatives involving a limited number of participating customers without the need to achieve full compliance with the HKMA's supervisory requirements. This arrangement enables banks and Tech firms to gather data and user feedback so that they can make refinements to their new initiatives, thereby expediting the launch of new technology products, and reducing the development cost.

In the light of the experience obtained in operating the FSS, the HKMA will upgrade the FSS to an enhanced version. New features are being considered:

(i) a FinTech Supervisory Chatroom will be set up to provide supervisory feedback to banks and Tech firms at an early stage of the development of their FinTech products; and

(ii) tech firms may have access to the sandbox by seeking feedback from the Chatroom without necessarily going through a bank.

Banks and their partnering Tech firms that use the FSS are able to gather real-life data and user feedback on their new FinTech products or services more easily, so that they can make refinements to them as appropriate before the full launch. Hence, the FSS can facilitate banks and their partnering Tech firms to rollout FinTech initiatives earlier, at a lower cost and with better quality upon full product launch.

As of September 29 2017, 23 new technology products involving 9 banks have been tested in the FSS. Out of these cases, 11 pilot trials have been completed, and the products have subsequently been rolled out. Separately, banks have collaborated with Tech firms in 13 trial cases.

Securities & Futures Commission (SFC)

The SFC recognises that firms utilising innovative technologies and demonstrating a genuine and serious commitment to carry on regulated activities through the use of FinTech may increase the range and quality of products and services for investors and benefit the Hong Kong financial services industry.

Accordingly, the SFC launched the SFC Regulatory Sandbox to provide a confined regulatory environment for qualified firms to operate regulated activities under the Securities and Futures Ordinance (SFO) before FinTech is used on a fuller scale.

As the technology at the core of the regulated activity may be novel, for the sake of market integrity and better investor protection, the reliability of the delivery of such financial services as well as the firms’ internal control systems would need to be examined and monitored in a confined regulatory environment at the initial stage before the services can be expanded and provided to the wider public in Hong Kong. The Sandbox would enable qualified firms, through close dialogue with and supervision by the SFC under the licensing regime, to readily identify and address any risks or concerns relevant to their regulated activities.

The SFC emphasises 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.

Insurance Authority (IA)

The IA launched an Insurtech Sandbox to facilitate a pilot run of innovative Insurtech applications by authorised insurers to be applied in their business operations.

The IA observes that authorised insurers may have initiatives in applying innovative technologies in their business operations but may be uncertain if those initiatives can meet the supervisory requirements of the IA. With a view to promoting technology development for the insurance industry in Hong Kong, the IA considers it necessary to adopt some flexibility in the supervisory requirements.

The IA would consider an Insurtech initiative to be a pilot run under the Sandbox to collect sufficient data to demonstrate to the IA that such Insurtech application can broadly meet relevant supervisory requirements arising from its codes and guidelines and other regulatory practices.

Secretary for Financial Services & the Treasury James Lau said sandboxes provide a testing environment for FinTech innovation and help expedite the launch of new FinTech products.

"We welcome the move by our three regulators to introduce and upgrade sandboxes to promote innovation in the financial services industry.

"Their initiatives will certainly help reinforce Hong Kong's status as a vibrant FinTech hub."

Featured image by Mstyslav Chernov licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

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