The Hong Kong Monetary Authority (HKMA) has launched a Fintech Supervisory Sandbox (Sandbox) to allow banks to test innovative Fintech products and initiatives within a live, controlled environment, before they are fully compliant.

Unlike similar schemes introduced by regulators in other Asia-Pacific financial centres, HKMA’s model is only available to Hong Kong authorised institutions (AIs), and not to start-ups and other unlicensed businesses. This is consistent with HKMA’s aim to focus on technologies that are increasingly being implemented or explored by the banking industry globally, such as mobile centred services, robotics, biometrics and blockchain/distributed ledger technology. The HKMA also recognises the need for the arrangements to provide genuine flexibility to AIs to test and refine new products quickly, through the use of real-life data and user feedback.

The authority hasn't prescribed a specific application process or a precise list of the supervisory requirements that it is potentially willing to relax for the duration of the testing period. Within the Sandbox, AIs will be allowed to conduct trials which involve actual banking services and a defined group of participating customers, provided that certain fundamental measures and controls are put in place, including:

  • Customer protection measures including an informed and voluntary participation process, mechanisms to deal with complaints and withdrawals, and provisions for compensation for financial loss as a result of failures within the trial
  • Appropriate risk management controls to mitigate and address cyber security, system disruptions and other risks posed to the AI’s operations and customers outside the scope of the trial
  • Clearly defined scope, duration and termination arrangements of the trial. The relevant systems and processes need to be ready, and close monitoring during the trial will be expected to ensure timely identification of issues and prompt resolution, such as those involving customer communications

Access to the Sandbox will be assessed by HKMA on an individual basis.

A closer look at the Sandbox

The HKMA’s Sandbox is an important development for Hong Kong’s banking and Fintech sectors. With the HKMA’s approval, AIs can experiment with new FinTech pilot products and services without requiring a third-party assessment. The HKMA too, will no doubt benefit from its supervisory role in the development of these new technologies, through a greater understanding of how new business models and delivery mechanisms might operate within the existing regulatory framework.

While currently not open to every business interested in experimenting with innovative technology, the HKMA’s decision to focus on AIs, at least in the initial stage, has its advantages. The legal certainty of eligibility, and the avoidance of time-consuming self-assessments to determine whether licensing exemptions will apply, simplifies things considerably. One of the challenges facing start-ups in other jurisdictions trialling regulatory sandboxes, is the need to scale up rapidly upon exiting, as this will typically depend on whether the business can fully comply with the relevant legal and regulatory requirements including applying for the relevant licence. As AIs already satisfy the usual licensing, AML and capital maintenance requirements, they should be well positioned to formally deploy successful business models relatively shortly after exiting the Sandbox.