HKMA launches FinTech Innovation Hub & FinTech Regulatory Sandbox

FinTech BRG 2

At the Treasury Markets Summit 2016, Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority (HKMA) delivered a keynote speech on building Hong Kong as a “Brand” for financial services.

As you might imagine, technology and FinTech were central themes with Chan announcing the launch of both a FinTech Innovation Hub & a FinTech Regulatory Sandbox.

Technological Advancement and Financial Services

Chan highlighted changes in financial services stating “while very few people would dispute the convenience and speed in which new technology can offer in financial services, there is an important catch that no regulators should and could overlook; the issue is whether the new technology is safe enough for the consumers and investors”.

From his perspective, there are two aspects to safety: the operational dimension and the investor protection dimension. In essence, he does not believe that the use of new technology fundamentally alters the nature of financial transactions and as such, is adamant that the public should not be expected to accept less consumer or investor protection.

Notwithstanding this, Chan recognises that overly rigid or conservative regulations may stifle new technology and innovation. In response, the HKMA is adopting a risk-based and technology neutral approach and Chan highlighted the setting up of their “FinTech Facilitation Office” (FFO) earlier this year as a sign of its intent; the first major initiative from the FFO is their “Cybersecurity Fortification Initiative”.

To complement the FFO, Chan announced two new initiatives:

FinTech Innovation Hub:

HKMA will collaborate with the Applied Science and Technology Research Institute (ASTRI) to set up the “FinTech Innovation Hub” to conduct proof of concept trials for products and services through the use of new technologies in a controlled environment (separated from internal systems).

Chan believes the Hub, as a neutral testing ground, will be ideal for two types of activities:

  1. industry players can test new FinTech solutions which involve the collaboration of multiple parties and are intended to be commonly adopted in the industry e.g. biometric authentication
  2. HKMA itself can explore with innovators options and possibilities of using new technologies, such as Big Data Analytics and other “regtech” initiatives, to achieve its objectives more effectively without creating undue risks or burden for its internal systems or databases

FinTech Supervisory Sandbox

To further support the development of FinTech in the banking sector, the HKMA’s is launching a “FinTech Supervisory Sandbox”.  This Sandbox will facilitate banks to conduct testing and trial of newly developed technologies and applications on a pilot basis.

“Within the Sandbox, banks can try out their new FinTech products without the need to achieve full compliance with the usual supervisory requirements. This will enable banks to gather real-life data and user feedback on their FinTech products or services more easily and in a controlled environment, so that they can make suitable refinements to their products before the full launch”.

Observations

The HKMA move to set up a Sandbox follows the path already chosen by the UK, Australia and other jurisdictions. Countries such as France have indicated their preference for a gradual adjustment of regulatory intensity whereas the OCC is clearly pro collaboration between incumbents and FinTechs as a means of ensuring customers avail of financial services from regulated entities.

Irrespective, the key issue is that Regulators, in response to national interests, are taking a proactive stance to help their respective markets gain a bigger foothold in the FinTech sector. In some ways, that’s the easy part.

The real challenge is, in parallel, ensuring consumer protection and market integrity. Ultimately, what a firm does, not what it is, should determine the regulatory requirements.

To quote John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco: “It’s important that we have a level playing field, regardless of how institutions prefer to describe themselves or what kind of charter they hold. As a matter of principle, if it walks like a duck and quacks like a duck, it should be regulated like a duck”.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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