On 13 November 2015, the Hong Kong Legislative Council passed the Clearing and Settlement Systems (Amendment) Bill 2015, introducing a new regulatory framework for stored value facilities ("SVF") and retail payment systems ("RPS").
Both types of payment service will be administered under the Payment Systems and Stored Value Facilities Ordinance (the "Ordinance").
The Ordinance represents a significant step forward for Hong Kong's regulation of mobile payments, eliminating a regulatory gap that previously existed in relation to non-card based SVF. Subject to limited exemptions, all multi-purpose SVFs, whether card-based or not, must now be licensed in Hong Kong.
A one year transition period for existing issuers of SVF obtaining a licence will expire 12 November, 2016.
The Ordinance will separately bring mandatory regulation to card schemes (which until now have been operating under a voluntary code of practice) as designated RPS. Other significant RPS will also be regulated under the new regime.
Explanatory note on licensing for SVF
The Hong Kong Monetary Authority (the "HKMA") has issued an Explanatory Note on Licensing for Stored Value Facilities (the "SVF Guidance Note"), which sets out the scope of the licensing regime as well as licensing criteria and particulars of the licensing process. The SVF Guidance Note may be found at: http://www.hkma.gov.hk/media/eng/doc/keyfunctions/finanical-infrastructure/infrastructure/retail-paymentinitiatives/Explanatory_note_on_licensing_for_SVF.pdf.
Who needs a SVF licence?
SVF are broadly defined under the Ordinance as facilities that may be used for storing the value of a pre-paid amount of money that may be used for paying for goods or services or for making peer to peer transfers.
The regime would cover device-based multi-purpose stored value products that store value in smartcards, NFC-equipped mobile devices, and wearable technology such as watches and will also cover non-device-based SVF that store value on mobile and internet-based accounts.
Both issuers and facilitators of SVF are required to be licensed. Facilitators are defined to be those who provide SVF issuers with valuable consideration supporting the issuer's undertakings to make payments through the SVF. The practical distinction here is that some SVF issuers may simply be providing issuer services (for example, the use of cards, BIN numbers and other banking facilities) to enable the operation of a SVF by a facilitator.
Who does not need a SVF licence?
There are a number of exemptions to the SVF regime that might be available in specific circumstances:
Banks licensed under the Banking Ordinance are deemed to be licensed to issue or facilitate SVF. The HKMA has indicated that separate guidance will be issued to licensed banks operating SVF.
Single purpose SVF
Where a SVF may only be used to purchase goods or services from the issuer, the SVF is a single-purpose SVF to which the licensing regime does not apply. Gift vouchers, store loyalty points schemes, cash reward schemes and other forms of stored value that may only be spent with the merchant issuing the facility will fall into this exemption.
Single premises – limited multiple purpose SVF
There is also an exemption for SVF that relate only to premises occupied by the issuer. These SVF may be accepted by merchants other than the issuer who also occupy those premises, provided that the float for the facility does not exceed $1,000,000. This exemption would apply in relation to department stores having in-store kiosks used by third party merchants.
Multiple premises – single purpose SVF
SVF by issuers who have an agreement with a business to accept payment through the SVF in multiple premises operated by that business are also exempt where float does not exceed $1,000,000. This exemption is intended to cover social club shops and restaurants and other organisations that may occupy multiple premises.
Bonus points scheme SVF
A further extension of the exemption for limited purpose SVF applies to air miles programs and similar schemes under which persons other than the issuer agree to accept value from the SVF in exchange for goods and services (but do not pay money to contribute to the value stored in the SVF).
Digital products SVF
There is also an important exemption for SVF that enable the purchase of goods or services delivered to and used through electronic devices, with payments being executed through that device, provided that the issuer in this instance does not just act as an intermediary between the user of the SVF and the provider of the goods or services. This exemption is meant to capture online distributors of digital content, such as ringtones, music, video, games, ebooks and software.
The HKMA may in its discretion exempt a SVF from the licensing regime if it concludes that the risks to consumers and Hong Kong's financial system are immaterial. In these circumstances, the HKMA may make its exemption conditional, such as by imposing a float limitation or a limit on the number of users.
It is therefore possible that smaller SVF start-ups may enjoy some relief from the full weight of the new SVF regime, but it is clear that a determination by the HKMA is required rather than the exemption being a matter of self-assessment. The SVF Guidance Note emphasises that the HKMA may impose reporting requirements as a condition of exemption, suggesting that any exemption under this heading would establish a watching brief for the exempted SVF.
It is not clear at this stage how expansive this discretionary exemption will be. In its Legislative Council paper, the Bills Committee concluded that this exemption would likely allow for unlicensed SFV for use in close proximity to the issuer's premises or for the purchase of a limited range of goods and services by a limited group of people, such as petrol station cards or university campus cards.
It is possible that an offshore SVF will not be subject to the licensing regime. There are two criteria for determining the applicability of the licensing regime:
- Is the SVF issued in Hong Kong? The act of "issuing" a SVF is non-exhaustively defined to include the "operation of the facility by the issuer", suggesting that if an issuer has material business operations in Hong Kong relating to the SVF then the SVF will be caught by the Hong Kong regime.
- Is advertising or any invitation to the public published in Hong Kong? The act of advertising or issuing any invitation to the public in relation to a SVF in Hong Kong also requires a licence.
The SVF Guidance Note includes a non-exhaustive list of considerations that the HKMA would look at in determining whether or not an SVF is effectively onshore or not, including the nature and targeting of advertising, the presence of "add value" facilities in Hong Kong, the presence of customer contact and service facilities in Hong Kong, the use of Hong Kong banking facilities and the uptake in Hong Kong by merchants accepting payment through the SVF. It is even possible that linking by third parties to the issuer's web page could trigger a finding of establishment in Hong Kong.
Who qualifies to hold a SVF licence?
The Ordinance provides that the HKMA may issue an SVF licence when it is satisfied that all the minimum criteria applicable in relation to the applicant are fulfilled:
- the applicant is a company formed and registered in Hong Kong;
- the principal business of the applicant is the issuance of the SVF;
- the applicant's paid-up share capital is no less than HK$25,000,000 or its other financial resources are equivalent to or exceed to such amount;
- each chief executive, director and controller of the applicant must be a "fit and proper" person, and the senior management team and key personnel responsible for financial management, control and risk management, compliance and internal audit of the applicant should be based in Hong Kong;
- there must be appropriate risk management policies and procedures for the operation of the SVF business, including for the purposes of protecting customer data and guarding against fraud and cyber threats;
- there must be adequate and appropriate controls for managing money laundering and terrorist financing risks;
- there must be adequate risk management policies and procedures for managing the float as a segregated pool of funds with sufficient funds for redemption of the stored value;
- the applicant must redeem in full the total of the stored value as soon as practicable upon user's request;
- the SFV scheme must have operating rules that are prudent, sound and properly maintained; and
- the applicant must comply with other obligations, including payment of licence fees and reporting to the HKMA.
Operating a SVF without an appropriate licence will be punishable by a fine of up to HK$ 1 million and 5 years' imprisonment.
How to apply?
The HKMA has announced that it will allow a one-year period from 13 November 2015 (the "Transition Period") for existing issuers of SVF to apply for a SVF licence from the HKMA. Both new and existing issuers are encouraged to make their applications as soon as possible.
The SVF Guidance Note outlines the HKMA's approach to administering licence applications. Applicants are encouraged to consult with and discuss their plans with the HKMA prior to making an application. The HKMA may consult with applicants' home regulators in other jurisdictions, where applicable.
Appendix B to the SVF Guidance Note lists the documents that the HKMA expects to receive as part of the application. This documentation includes corporate constitutional documents, audited financial statements for each institutional controller, a report on paid-up capital certified by an external auditor, information required to assess whether or not the senior management is "fit and proper", copies of policies and risk assessment reports concerning anti-money laundering and anti-terrorist financing controls and float investment, a 3 year business plan, a copy of the SVF's operating rules and copies of terms and conditions with users and related parties. In addition, applicants are required to obtain and submit independent assessment reports relating to corporate governance and risk management, float management, antimoney laundering and anti-terrorist financing, technology risk management, payment security management and business continuity management.
The HKMA, upon receipt of the application form and supporting documents, may seek additional information from the applicant as is necessary for the purpose of making its decision. Further, the SVF licence may be granted subject to conditions as the HKMA deems fit, which may include (1) imposing a higher capital requirement; (2) restrictions on the SVF business; (3) requirements on the protection of the float or SVF deposits; (4) requirements to cease the SVF; (5) requirements to disclose information relating to the SVF business; and (6) restrictions as to the maximum amount of value that may be stored in the facility.
The arrival of Hong Kong's new regulatory regime for SVF and RPS represents an important update to the regulatory landscape for payments in Hong Kong.
Given the popular uptake of mobile commerce and banking in the region, it is important to set clear rules for businesses operating in this space. Ideally a balance will be achieved between accommodating and encouraging fintech innovation and managing consumer protection and anti-money laundering regulatory concerns. The regulatory requirements under the SVF regime represent something less than the full weight of regulation under the Banking Ordinance, but at the same time appear to be a much higher standard of compliance than the current money service operator ("MSO") regime administered by the Customs and Excise Department. It remains to be seen how the HKMA will administer the exemptions in practice, but it seems clear that the possibility of operating SVF outside of the new regime will now be very limited.
The clock is now ticking on applications for new SVF licences and interested parties are encouraged to apply as soon as possible, beginning with a consultation with the HKMA. The paperwork required in support of licence applications is voluminous and the HKMA has been clear that there will be no further grace period for existing issuers once the one year Transition Period expires.