In their bid to boost the financial sector, regulators in Asia Pacific (APAC) have developed collaborative frameworks to encourage responsible innovation in fintech. Specifically, regulators in Hong Kong, Singapore, and Australia have shown a strong commitment to devoting more resources to:
- support emerging fintech companies;
- foster dialogue with the industry; and
- increase cross-border collaboration on fintech initiatives.
In this bulletin, which is the first of forthcoming bulletins that we will be issuing on fintech related developments, we highlight:
- recent regulatory developments in the APAC region; and
- priority areas which fintech players should consider focusing their efforts on.
WHAT IS FINTECH?
Financial technology, or “fintech” in short, is a catchall phrase for a revolution of new technologies which have been upending parts of the financial world. According to a report by Accenture, the value of global fintech investment in 2015 grew by 75% to US$22.3 billion, with fintech investment in the APAC region more than quadrupling in 2015 to US$4.3 billion. The APAC region is now the second biggest region for fintech investment after North America, accounting for 19% of global financing activity.
Faced with the challenges and opportunities of regulating disruptive technologies, APAC regulators have dealt with these challenges in different ways, with some common themes and approaches emerging in the region.
We summarise some of the key initiatives below.
A. Hong Kong
A report by Ernst and Young (EY) published in 24 February 2016 ranked Hong Kong’s fintech ecosystem the last amongst seven countries/regions. Although EY noted that Hong Kong had potential and had a market size close to Singapore and Australia, Hong Kong’s market was ‘relatively nascent’ and the ‘emerging community of fintechs focused on capital markets’.
That being said, the Hong Kong government and financial regulators have implemented various initiatives to increase the city’s attractiveness as a fintech hub:
- 2016-2017 Budget: Fintech is one of the areas of focus of the Budget speech delivered in February 2016 by the Financial Secretary of Hong Kong, Mr John Tsang. He announced a number of initiatives to implement the recommendations of the government’s Steering Group on Financial Technologies, which was established in April 2015. They include (among others):
- establishing a dedicated team under Invest Hong Kong to organise international events and provide assistance to fintech start-ups, investors and R&D institutions;
- setting aside a co-working space at the Cyberport for fintech activities and rolling out an incubation programme for 150 fintech start-ups;
- establishing dedicated fintech platforms at the financial regulators (see 2. below); and
- setting up a cybersecurity programme (the Hong Kong Monetary Authority (HKMA) announced the Cybersecurity Fortification Initiative in May 2016 – see our 6 June 2016 briefing for further details).
- Dedicated platforms at financial regulators: The HKMA, the Securities and Futures Commission (SFC) and the Office of the Commissioner of Insurance (OCI) have established dedicated fintech platforms to facilitate dialogue with the industry, namely the Fintech Facilitation Office, the Fintech Contact Point and the Fintech Liaison Team respectively. The SFC has also established a Fintech Advisory Group, which brings together senior members of its Risk and Strategy Unit as well as thought leaders from various industries to advise the SFC on its engagement with fintech businesses. Further details can be found in our 12 April 2016 briefing.
- Increased financial cooperation with China: On 13 June 2016, the Financial Services and the Treasury Bureau (FSTB) and Shanghai Municipal Government Financial Services Office signed an agreement on further financial cooperation – with fintech being one of the key areas of focus.
In terms of the approach to regulation, HKMA has stated that it will adopt a risk-based and technology-neutral approach, which will be based on the intrinsic characteristics of the financial activities or transactions, and the risks arising from them. FSTB has also provided some indication that the market may consider making reference to exemptions relating to professional investors under the existing regulatory framework for developing peer to peer (P2P) online lending and equity crowdfunding platforms targeting professional investors in Hong Kong.
Fintech has been primed as a key priority by the Singapore government, and there have been a series of initiatives undertaken by the Monetary Authority of Singapore (MAS) to nurture the fintech sector:
- Fintech Office: On 3 May 2016, MAS and the National Research Foundation established a fintech office to serve as a one-stop virtual entity for fintech businesses to seek advice on various fintech and technology-related government grants and schemes, and to promote Singapore as a fintech hub. This follows the establishment of a new Financial Technology & Innovation Group in MAS, which is responsible for regulatory policies and development strategies to facilitate the use of technology and innovation to better manage risks, enhance efficiency, and strengthen competitiveness in the financial sector. Most recently, MAS also set up an International Technology Advisory Panel which will advise MAS on international developments in fintech and how Singapore can harness new technologies to enhance the provision of financial services. The panel comprises chief innovation and science officers in major financial institutions, fintech business leaders, venture capitalists, and thought leaders in technology and innovation.
- Funding: MAS has committed S$225 million (approximately US$163 million) to create a Financial Sector Technology & Innovation (FSTI) scheme to be used for setting up innovation labs, catalysing the development of innovative solutions by financial institutions, and building industry-wide technology infrastructure for the delivery of new and integrated services.
- Regulatory sandbox: MAS has introduced a regulatory sandbox approach to allow financial institutions to launch their innovative products or services within controlled boundaries. MAS has stated that financial institutions will be able to seek MAS’ guidance and concurrence on the boundary conditions, such as the time period and customer protection requirements.
- Cross-border collaboration: On 11 May 2016, MAS announced a new fintech bridge between UK and Singapore, to help UK firms and investors access the Asian market and attract Singapore companies to the UK. MAS and the Australian Securities and Investments Commission also signed an Innovation Functions Co-operation Agreement on 16 June 2016 to enable fintech companies in Singapore and Australia to establish initial discussions in each other’s market faster and receive advice on required licences, thus helping to reduce regulatory uncertainty and time to market. It is anticipated that more bridges with other regulators are expected to be launched, and regulators will be able to refer fintech firms to their counterparts across the globe, which presents an opportunity to scale the use of technology to improve financial services.
- Fintech festival: MAS will also be organising a weeklong event from 14 to 18 November 2016 in partnership with the Association of Banks in Singapore. The fintech festival will bring together startups, investors, financial institutions and government agencies.
With regard to regulatory approach, the Managing Director of MAS, Mr Ravi Menon, outlined in his 2 April 2016 speech at the Singapore Forum that MAS will apply a differentiated approach to different technologies and their applications. This means that MAS will adopt a risk based approach, applying a materiality and proportionality test.
In his speech, Mr Menon gave the example that P2P lending platforms will not be regulated as long as they do not take deposits, but if the platforms became too large and started posing macro-prudential concerns, MAS would consider regulating them. This is consistent with the risk-based approach that MAS applies for the supervision of financial institutions.
Australia has adopted a principles-based prudential framework, without bias to particular technologies or business models.
On 8 June 2016, the Australian Securities and Investments Commission (ASIC) released a consultation paper on proposed further measures to facilitate innovation in financial services, including a regulatory sandbox licensing exemption.
Building on its experience through its Innovation Hub, ASIC has identified some barriers faced by new fintech businesses seeking to enter the financial services market. These barriers include speed to market and meeting the organisational competence requirements of a licensee.
In seeking to address these barriers, ASIC is proposing to:
- provide examples on how it exercises its discretion under existing policy to assess the organisational competence of a licence applicant;
- modify ASIC’s policy on organisational competence of a licensee to allow some limited-in-scale, heavily automated businesses to rely, in part, on compliance sign-off from a professional third party to meet their competence requirements; and
- implement a limited industry-wide licensing exemption to allow start-ups to test certain financial services for six months (the ‘regulatory sandbox’ exemption).
In China, following the collapse of some P2P lending platforms, regulators have taken several measures to tighten regulations:
- In July 2015, various Chinese authorities including the People’s Bank of China (PBOC), the China Banking Regulatory Commission (CBRC) and the China Securities Regulatory Commission (CSRC) jointly released the “Guiding Opinion on Promotion of Healthy Development of Internet Finance”, which sets out guidelines applicable to internet payments, internet insurance, online lending, crowd funding and online sales of funds;
- In December 2015, CBRC also issued a draft regulation proposing that P2P platforms be regulated by a registration system with CBRC, and that service providers be restricted from carrying out certain types of activities, including related-party transactions, pledging of collateral, and principal guarantees; and
- In the same month, PBOC introduced regulations on ‘non-bank providers of online payment services’, which place emphasis on the authentication of customers’ identities by payment service providers, which must develop customer risk screening and management systems alongside risk reserves.
PRIORITY AREAS FOR FINTECH PLAYERS
The dynamic fintech ecosystem means that fintech players are likely to find that the services they seek to offer to the market expose them to a myriad of regulations and guidelines. As discussed above, technology is advancing at a rapid pace, and regulators do not develop or apply a one-size-fits-all approach to fintech companies – nor would this be appropriate.
As a matter of priority, fintech players should:
- consider which jurisdiction offers the best conditions for growth – for example, if spending time in a regulatory sandbox would offer greater certainty in the long run, then one should consider establishing operations in Australia or Singapore;
- engage with regulators as far as practicable – regardless of whether one is a fintech startup or an incumbent financial institution seeking to acquire startups or integrate fintech into current business models, APAC regulators have expressed a strong interest in understanding the impact of new technologies and, in particular, what regulatory changes may be needed to strike a balance between fostering innovation and protecting consumers from unreasonable risk; and
- invest in robust IT systems to address data privacy and cybersecurity risks – fintech players which can demonstrate that they have strong systems in place to manage these risks and to implement advanced threat intelligence and incident response plans will not only give regulators comfort; they will more likely be attractive to investors such as large financial institutions, who will need to assess the risks arising from the integration of a fintech startup into their company.
The opportunity for parties to contribute to a dynamic and flourishing fintech ecosystem through greater collaboration and engagement with each other should not be understated. However, it remains a competition for each country to become the fintech hub of the world, and we look forward to updating you on further regulatory developments down the track.