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Hong Kong Fintech Firms to Play in the Sandbox

  • Hong Kong
  • Financial services and markets regulation
  • Technology
  • Financial institutions - Digital Financial Services

29-09-2017

This morning, the Securities and Futures Commission (“SFC”) issued a circular announcing the establishment of a regulatory “sandbox” in Hong Kong. The sandbox will be open to licensed corporations and start-up firms who intend to carry on regulated activities in Hong Kong. Firms must, it goes without saying, be fit and proper and demonstrate a genuine commitment to carrying out regulated Fintech-related activities. Firms should note that it will be a requirement to obtain the applicable license from the SFC before regulated activities are undertaken.

The SFC recognise that Fintech initiatives and technologies may benefit the Hong Kong financial services markets, particularly in improving the range and quality of services and products for end investors. Nevertheless, the SFC clearly indicates that the sandbox will not be an opportunity for firms to operate in these new frontiers with impunity. The circular makes it clear that the SFC will carefully screen applicants, may require compliance with licensing conditions, and is likely to closely monitor participant firms, including through regular dialogue and scrutiny of business models and operations.

Practically, participant firms will also need to clearly disclose to any clients the fact that they are operating within the sandbox, along with proper notification of risks and any available compensation arrangements.

Once the SFC is satisfied that a firm’s technology is reliable and fit for purpose, and it has implemented appropriately robust internal control procedures, the firm may apply for removal or variation of any licensing conditions, and thereby apply to operate in the same manner as regulated firms which are outside the sandbox. If the SFC is not satisfied as to the fitness and probity of the firm, it may revoke the firm’s license.

In establishing a regulatory sandbox for Fintech firms, the SFC follows closely in the footsteps of the Hong Kong Monetary Authority and various international financial services hubs, including the United Kingdom and Singapore, both of which have well-established sandboxes. The ultimate goal of most sandboxes is to provide firms with a space in which to experiment and develop financial services technologies, and which has lower barriers to entry than would apply outside of the sandbox environment. Some sandboxes include the opportunity to obtain “no enforcement action” letters, and to test new ideas and technologies with real consumers in a slightly less rigid regulatory environment. It remains to be seen whether the SFC will take a similar approach, however, the circular does not give any indication that the regulatory requirements will be loosened for applicant firms, and instead appears to focus on the opportunity the sandbox will bring for firms to demonstrate the reliability and appropriateness of their Fintech related investment opportunities.

The SFC appear to wish to limit the number of firms participating in the sandbox - the circular expressly states that the SFC’s expectation is that the “great majority” of firms looking to obtain an SFC license for Fintech related activities will not need to enter the sandbox. Nevertheless, the SFC have clearly demonstrated a commitment to exploring Fintech opportunities, and it remains to be seen how firms – particularly start-ups, often the focus of much sandbox-related commentary – respond to the SFC’s overtures.

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