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FinTech - a shark's tale

FinTech is gathering pace across Asia, reflecting the global trend.

Who is ready?

FinTech is the convergence of financial services and technological innovation, allowing operational efficiencies for institutions and consumer convenience for customers. Innovations include enhanced software, more streamlined processes and hardware; comparison sites, non-traditional financial providers (such as crowd-funding) and mobile technology offer greater convenience.

In the Asia-Pacific region, Hong Kong, Singapore and Sydney have put themselves forward as potential Asia-Pacific FinTech hubs. Hong Kong, for example, as an important international financial centre with a highly developed financial services market and a sophisticated IT environment, together with the huge geographical advantage of having mainland China on its doorstep, lends itself to a potentially strong FinTech offering. The Hong Kong market needs to be allowed to grow by using FinTech without compromising the integrity and quality of the market.

Issues and risks in the Hong Kong market for participants

There are clearly areas of overlap, but the issues and risks set out below need to be viewed as a combination of technology and compliance issues rather than as isolated concepts.

Compliance must keep pace with commercial needs

Banks must remain competitive in terms of meeting funding needs of customers and allowing customers easy access to products and services. Training and resources will be needed to ensure that operational, legal and regulatory risks are addressed for any innovative processes and new business lines. The risks are likely to be higher in a retail or SME context. Having employees with crossover skills would help. People with specialist skills will have to be recruited if start-ups and financial institutions are to take advantage of FinTech opportunities. A significant crossover of skills is needed between the technology side (ie how products and services are designed and delivered) and compliance, to avoid technology processes and fixes leading to breaches, or compliance issues stifling innovation.

Supportive regulatory environment

There needs to be a sufficiently supportive regulatory environment to encourage investment in the sector. Financial institutions need to sound reasonably certain and flexible as regulatory environments before they invest in internal innovations and third-party entrepreneurial start-ups. Regulators are already learning about the impact of FinTech funding techniques on the market as a whole, which will help ensure a proportionate response to regulation. The Hong Kong Securities and Futures Commission (SFC) launched its FinTech Contact Point to encourage industry dialogue. Its FinTech Advisory Group will focus on the trends, opportunities, risks and regulatory implications of FinTech developments.

Relevant issues include: 

  • Funding start-up operations are proving to be increasingly adaptable in relation to funding, no longer simply reliant upon traditional funding techniques, but turning to government assistance (for example the Singaporean SPRING SEEDS and business angel programmes) and/or alternative funding models (such as crowd-funding). 
  • Quality control of market entrants: to avoid a potentially inferior quality offering (damaging to a country's brand) while not filtering out possible star entrants. 
  • How far currently unregulated activities could potentially be disruptive to the traditional markets or otherwise have a significant impact on the operations of the Hong Kong markets. 
  • The incoming recovery and resolution regime in Hong Kong has adopted the approach of extending regulatory reach (directly or indirectly) through authorised institutions to group companies and outsources. Currently unregulated FinTech entities could be directly or indirectly regulated as "secondary" players, subject to appropriate balance being kept in terms of the market's competitive position. 
  • Whether the offering of FinTech-based products and services triggers certain prospectus requirements or marketing restrictions (eg where innovative arrangements are regarded as the marketing of securities) requires careful handling by regulators and the potentially regulated. 
  • Data privacy risks (both domestic and cross-border) continue to pose problems for market participants, both for financial institutions (who must protect customers' interests) and FinTech service providers (who are typically contractually bound to assist in ensuring confidentiality and data protection). Anti-money laundering, terrorist financing and bank secrecy are all relevant to this issue, given the importance of data management and transfer to FinTech products and services. Significant reputational risks arise for financial institutions given high-profile failures in this context over recent years and the appetite of privacy regulators to pursue wrongdoers. Again, this is probably more of an issue in a retail context.

Overall, there seems to be a strong desire within major Asian jurisdictions to embrace FinTech for the benefit and indeed sustainability of those jurisdictions, combined with the need for a new generation of market players able to balance the technology against client risks in the light of the evolution of FinTech products and services.

Legal and Regulatory Risk Note