Trends And Predictions On The Hong Kong Fintech Market

Updated: Feb 18

The inexorable rise of Fintech in Hong Kong, the wider region and globally means it is now on everyone’s agenda - from banks, to regulators, to government. This Q&A highlights the key regulatory focal points, what’s on the agenda in the coming 12 months and how Fintech activities are evolving in Hong Kong as a consequence.

What legislative and regulatory provisions govern the fintech space in your jurisdiction and who enforces these?

Hong Kong has three main supervisory bodies which oversee each of the banking, securities and insurance sectors, respectively. While there is no express legislation or regulation that specifically governs the FinTech space or applies specifically to FinTech companies, the sector-specific laws relating to the banking, securities, insurance, money service and stored value facilities industries will apply depending on the type of activities the FinTech carries on in Hong Kong.

The regulatory framework in Hong Kong is largely activities-based. The applicable regulatory and legislative framework depends primarily on the activities carried out by the relevant FinTech company and whether those activities amount to a “regulated activity” in Hong Kong. In other words, the nature of these activities will determine whether the FinTech in question falls within the regulatory purview of:

  • the Securities and Futures Commission (SFC) – the SFC regulates the securities and futures sector in accordance with the Securities and Futures Ordinance (SFO) and subsidiary legislation. The SFC has taken the lead in issuing guidance on the trading and asset management of virtual assets;

  • the Hong Kong Monetary Authority (HKMA) – the HKMA regulates the banking sector in accordance with the Banking Ordinance and subsidiary legislation, as well as the stored value facilities sector pursuant to the Payment Systems and Stored Value Facilities Ordinance and subsidiary legislation; and

  • the Insurance Authority (IA) – the IA regulates the insurance sector in accordance with the Insurance Ordinance and subsidiary legislation.

We have also recently seen an uptick in payment services start-ups – for the licensing of money service operators (MSO) in Hong Kong, the Customs & Excise Department is the relevant authority. Please note that there are plans underway to regulate certain virtual asset service providers, with a public consultation process currently underway.

How are the regulators adapting to fintech?

Different regulators have adapted at different speeds to FinTech and this has largely been dictated by the emergence of new products or technology within a particular sector e.g. the emergence of cryptocurrencies, initial coin offerings and related trading exchanges have resulted in the introduction of specific regulations governing virtual asset exchanges and fund distribution activities relating to virtual assets.

Overall, the growth of the FinTech sector has pushed regulators to put FinTech at the forefront of their regulatory agendas – this means a renewed focus on ensuring that the regulatory framework continues to provide investor protection. The regulatory framework in Hong Kong aims to be technology-agnostic, and there is a desire from regulators to avoid legislating for specific technologies, and to deter innovative FinTech startups from Hong Kong. A good example of this is the introduction of the “opt-in” licensing regime for virtual asset trading platforms in 2019 by the SFC – this licence can be “opted-in” by an exchange by offering to trade in at least one token that qualifies as a “security” under Hong Kong’s securities legislation. The rollout of the virtual banking licences by the HKMA is another example of how FinTech is changing not only the way in which traditional banking services are being offered, but also how regulators are adapting.

A separate trend we observed is regulators implementing their own digital transformation programmes. For example, the HKMA set up a new “Digitalisation Office” to help its long term strategic goal of becoming a more data driven regulator. The various digitisation initiatives will help the HKMA execute their banking supervision function more effectively by collecting more granular data from banks. Other FinTech initiatives in the pipeline for the HKMA include the introduction of a Commercial Data Interchange to assist the exchange of data in SME financing.

Are there specific regulatory provisions that have recently changed or been put in place through Fintech’s use of key technologies such as AI, Distributed ledger technology and cloud computing for example?

There are no specific regulatory provisions which target the use of key technologies such as AI or DLT as regulation in Hong Kong is generally technology agnostic.

With that being said, regulators have been cognisant of the adoption of these types of technologies by licensed entities which has the potential to increase risks for investors in Hong Kong. The HKMA has responded to the adoption of FinTech within the banking sector through the issuance of specific circulars on the use of these types of technologies and requiring licensed banks to comply with overarching “principles” put forward by the HKMA e.g. on risk management etc. – this approach has generally been well received as it reduces the risk of overregulating which can stifle innovation within the industry.

In the securities sector, the SFC has, for example, set out detail requirements for licensed corporations (LCs) to use external cloud storage providers (EDSPs) for keeping regulatory records to ensure proper exercise of its statutory powers under the Securities and Futures Ordinance, and expectations for the mitigation of cyber and operational risks when electronic data storage is outsourced.

How are fintech companies exposed to data protection and AML regulations in your jurisdiction?

Hong Kong adopts a technology-neutral and principles-based approach to address data related considerations in FinTech development such as privacy, transparency and security of the collection, handling and use of personal data. The six data protection principles are contained in the Personal Data (Privacy) Ordinance (Cap. 486). The Office of the Privacy Commissioner for Personal Data (PCPD) has also provided guidance on the best practices for FinTech firms and enterprises to implement these principles. Further, data ethics are recognised as a long-term overarching solution to personal data protection – the HKMA has encouraged all authorized institutions including FinTech companies to adopt and implement the ethical accountability framework for the collection and use of personal data.

The regulation of FinTech companies dealing with virtual assets has been a key regulatory priority for the SFC as there are significant money laundering and combating terrorism financing risks associated with virtual assets. An important recent development in Hong Kong’s AML regulations is the Financial Services and Treasury Bureau’s proposal in November 2020 to amend Hong Kong’s anti-money laundering legislation by issuing a consultation paper with the aim to bring exchanges that offer virtual assets that are not securities within the regulatory remit of the SFC. Hong Kong’s current regulatory framework for virtual asset trading platforms is on an opt-in basis, and is only available to exchanges that offer trading in at least one token that qualifies as a security under the Hong Kong securities regime. As a result, exchanges that offered only payment cryptocurrencies such as bitcoin were not covered. The proposal is designed to close the existing regulatory gap and to align Hong Kong’s position with the recommendations issued in 2019 by the Financial Action Task Force in relation to virtual asset service providers.

Which aspect of the fintech industry and specifically which services stand out in your jurisdiction?

Hong Kong is one of the first markets in the region to have fully digital banks – since 2019, the HKMA has granted eight virtual banking licences. While these virtual banks have had a slow start due to the pandemic, their presence within the banking sector has undoubtedly challenged incumbent banks to consider adapting their service offering to remain competitive. The rate of adoption of FinTech within the banking sector, including the introduction of virtual banks, has allowed Hong Kong to take the lead within the Asian region in the shift to Smart Banking.

Hong Kong is also well placed in the virtual assets sector as compared to other jurisdictions where virtual assets activities may even be banned. As a result of the SFC’s decision to extend its supervision to certain virtual asset exchanges has meant the sector benefits from the clarified regulatory stance as a whole. In addition, the SFC has set out regulatory standards in relation to fund managers that manage virtual asset portfolios and in relation to the distribution of virtual asset funds.

How are FinTech companies most commonly structured and financed in your jurisdiction?

FinTech companies in Hong Kong are most commonly structured as private companies limited by shares. These companies have their own legal identity and, save in exceptional circumstances, the owners’ liability for the debts of the company is limited.

As the business grows, or branches into new areas, the owners may decide to restructure the group, perhaps putting in place a single or double tier holding company structure, which could be incorporated in Hong Kong or, more likely, in an offshore jurisdiction, with individual Hong Kong operating subsidiaries for each business line. By doing this, each business line is ring-fenced, so that its success or failure does not impact other business lines, and operationally autonomous. It is also a very flexible structure enabling a future disposal of some or all of the business to occur either as a group or as individual companies, in each case in the most tax efficient manner possible.

Whilst many FinTech companies start out or become joint ventures between founders on the one hand and financial or strategic investors on the other, in most cases the private company limited by share structure is retained.

These companies may be funded by debt or equity, or a combination of both. Often when they are backed by a financial investor, such as a private equity fund, the sponsor’s equity investment will take the form of convertible instruments or convertible preference shares, which give the investor some downside protection in the form of a liquidation preference and priority in the payment of dividends in the short to medium term, but also the ability to convert into ordinary shares to maximise upside potential in the medium to longer term, assuming the FinTech company prospers.

In addition, Hong Kong FinTech companies have access to various government-backed schemes such as the Innovation and Technology Fund and the Hong Kong Science and Technology Parks’ incubation programmes.

How do they fit in the overall financial services ecosystem?

The integration of FinTech in the financial services sector is evident in all aspects of the ecosystem – cutting across how products and services are delivered to customers, to using FinTech to enable the sharing of data between banks and non-banking service providers (open banking). We have seen banks and financial institutions partner with FinTech companies to develop and roll-out technology platforms across areas such as wealth management and insurance and products to solve a specific business problem and to deliver efficiencies. We expect this trend of outsourcing, white-labelling, and/or joint ventures between financial institutions and FinTech companies to continue for some time.

Are there any trade associations or interest groups for the FinTech sector?

As the FinTech sector has grown in recent years, so has the number of groups which support and promote the community. Some focus on FinTech only, or even specific aspects of FinTech, while others cover FinTech as part of a broader remit.

The FinTech Association of Hong Kong, for example, is an independent, not-for-profit association representing Hong Kong’s FinTech community globally. Its stated purpose is threefold - to advocate for the development of proportionate and effective regulation while attracting greater investment and talent into Hong Kong FinTech, to collaborate with organisations who share similar goals and complementary business models, and to work with industry experts to educate the community. Key to its value proposition is the work of its 8 committees, which promote networking, knowledge-sharing and the development of principles of best practice. These committees cover areas such as AI, Blockchain, digital banking and payments, and cybersecurity.

Other groups which focus on specific aspects of FinTech include, for example, the Hong Kong Blockchain Society (HKBCS) which works with the public and private sector, as well as academia, to promote blockchain development, and The Bitcoin Association of Hong Kong, which caters for those interested in Bitcoin, other cryptocurrencies and their related technologies. However, the list of similar such associations and interest groups is extensive.

Groups such as The Hong Kong Financial Services Development Council and ASIFMA (Asia Securities Industry & Financial Markets Association), in pursuing their mission to support and promote the financial services industry of Hong Kong generally, regularly deal with issues related to FinTech.

Are there specific government incentives in place to encourage the development of local talent and to help Fintech companies recruit?

Yes. The Hong Kong Government has established a number of schemes for the purpose of developing local talent with a view to strengthening Hong Kong’s status as a FinTech hub for the region. A few of the more notable schemes are discussed briefly below:

  • the HKMA’s Fintech Career Accelerator Scheme (FCAS) was launched in 2016 to expand the FinTech talent pool in Hong Kong. The scheme comprises graduate programmes, summer internship programmes for students and gap year placement programmes.

  • the FinTech Anti-epidemic Scheme for Talent Development (FAST Scheme) was established in 2020 as part of the government’s response to the COVID-19 crisis to provide financial assistance to local companies engaged in the FinTech sector to create new jobs. The scheme has a quota of 1,000 new roles with a total subsidy of up to HK$120 million.

  • the Research Talent Hub for Incubatees and I&T Tenants of the HKSTPC and the Cyberport (RTH-SPC) provides incubatees and innovation and technology tenants of the Hong Kong Science and Technology Parks Corporation (HKSTPC) and the Hong Kong Cyberport Management Company Limited (Cyberport) with funding support for the recruitment of research talents to conduct research and development work.

  • the STEM Internship Scheme encourages STEM (science, technology, engineering and mathematics) students to gain innovation and technology related work experience during their studies and to foster their interest in pursuing a career in I&T after graduation.

  • the RTH-ITF Research Talent Hub for ITF Projects (RTH-ITF) aims to provide funding support for organisations/companies undertaking research and development projects funded by the Innovation and Technology Fund (ITF) to engage research talent to conduct R&D work.

  • the Research Talent Hub for Technology Companies conducting R&D Activities in Hong Kong (RTH-TC) aims to provide funding support for technology companies conducting or planning to conduct research and development activities in Hong Kong to engage research talents to conduct R&D work.

How do you see the fintech industry in your jurisdiction over the next 12 months?

We expect the FinTech industry to grow significantly in the next 12 months. As a result of the pandemic, traditional processes are being replaced by online operations – customer behaviours have also shifted and we expect this to be one of the main drivers for growth within the industry. The pandemic has created new opportunities for FinTech businesses to demonstrate their abilities to be sufficiently resilient or even thrive and overcome the commercial and technical obstacles in the current environment.

FinTech remains as a strategic priority post-COVID-19 for banks and financial institutions with the aim to digitalize as far as possible. We have observed that FinTech businesses are more likely to be chosen as a strategic or collaborative business partner by banks and financial institutions if they are able to deliver immediate benefits such as cost savings and efficiencies rather than long-term benefits and investments. FinTech solutions that fit in with the “new normal” like the need to work remotely are frontrunners to succeed in the current environment.

We also expect an increasing level of M&A activities of smaller to mid-size FinTech businesses, reflecting the need for consolidation and to scale the benefit of being part of a larger organization.

For further information, please contact:

Etelka Bogardi

Partner, Norton Rose Fulbright Hong Kong

+852 3405 2578

Etelka Bogardi is a financial services regulatory lawyer based in Hong Kong.

She leads Norton Rose Fulbright’s FinTech practice in North Asia and is the Asia lead of the firm's Global Payments Practice.

She has been actively involved in the FinTech space since 2013, when she advised the first Bitcoin exchange operating in Hong Kong on their licensing and regulatory position. She continued to participate in the development of Hong Kong’s FinTech ecosystem during her tenure as Senior Counsel to the Hong Kong Monetary Authority before joining Norton Rose Fulbright in 2017. Etelka currently sits on the FinTech working group of the Asia Securities Industry & Financial Markets Association (ASIFMA) and recently contributed to the ASIFMA best practice guide for digital asset exchanges. She provides frequent commentary to the press on FinTech issues. Etelka was invited to speak at Hong Kong FinTech week for the past two years.

In 2020, Etelka was named one of the global “45 under 45” banking regulation professionals by Global Banking Regulation Review. She is also ranked by Chambers in China Financial Services: Non-contentious Regulatory, by Legal 500 as a next generation partner in Hong Kong TMT, and by Who’s Who Legal 2021 as a thought leader in GBRR and a recommended global leader in Banking - Regulatory.

James Parker

Partner, Norton Rose Fulbright Hong Kong

+852 3405 2590

James Parker is a corporate lawyer based in Hong Kong.

He has acted on a wide range of corporate finance transactions and has considerable experience advising financial institutions, FinTech start-ups, cryptocurrency exchange, family offices and wealthy individuals on their strategic investments, mergers and acquisitions, joint ventures and restructurings in the FinTech spaces. Most recently, he has advised a Hong Kong FinTech start-up on its proposed joint venture, a B2B trading start-up on its structuring, an investor on debt and equity restructuring transactions in relation to its investment in a digital wallet and trading platform and a cryptocurrency exchange on its proposed investment into a cryptocurrency trading app.

James is active in sharing his insights and provides commentary to the press in relation to Asia M&A market and key sectors.

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