HKMA Regulatory Sandbox

The HKMA FSS was followed by the launch of the Securities and Futures Commission’s (SFC) Regulatory Sandbox in September 2017.  This will provide a confined regulatory environment for qualified firms to operate under the Securities and Futures Ordinance (Cap 571) (SFO).

General Principles Governing the FSS

The following principles have been set out for the HKMA FSS:

• The FSS is available to Fintech as well as other technology initiatives intended to be launched in Hong Kong by authorized institutions (AIs);
• Within the FSS, an AI is allowed to conduct a pilot trial of its initiatives involving actual banking services and a limited number of participating customers (such as staff members or focus groups of selected customers) without the need to achieve full compliance with the HKMA’s usual supervisory requirements during the trial period. However this is predicated on the understanding that the management of the AI will ensure that:
  • BoundaryThere are clear definitions about the scope and phases (if any) of the trial (such as the size and types of customers involved, technologies and types of banking services covered), the timing and the termination arrangements;
  • Customer Protection MeasuresAdequate measures are in place to protect the interests of the customers during the trial. These measures should in general include a proper process for selecting customers who understand the associated risks and voluntarily join the trial, enhanced complaint handling procedures, a mechanism for timely and fair compensation of customers’ financial losses caused by any failures of the trial and appropriate arrangements for customers to withdraw from the trial;
  • Risk Management ControlsReasonable compensating controls are implemented to mitigate the risks arising from less than full compliance with supervisory requirements, and to address the risks (including cyber attacks and system disruptions) posed by the trial run to the AI’s production systems and customers who do not join the trial; and
  • Readiness and MonitoringThe systems and processes involved are ready for the trial (such as after going through reasonable testing and other rollout preparation). In addition, the trial is subject to close monitoring so that the AI can promptly identify and handle any significant problems or incidents that may arise (including matters about public and customer communications); and
• The FSS should not be used by AIs as a means to bypass applicable supervisory requirements.

FSS Objectives

The stated aims of the FSS’ more flexible supervisory arrangement are to enable AIs to conduct live tests of their new Fintech and innovative technologies more swiftly and in advance of their formal launch; to enhance the ease with which AIs can gather real-life data and user feedback in a controlled environment; and to allow AIs to make refinements as appropriate.

HKMA to Discuss Supervisory Flexibility with Banks Individually

The HKMA does not intend to set out an exhaustive list of the supervisory requirements that may potentially be relaxed within the FSS, such as security-related requirements for electronic banking services and the timing of independent assessment prior to launching new technology services. AIs intending to access the FSS are advised to contact the HKMA early as discussions regarding the appropriate supervisory flexibility will be held on an individual basis. The HKMA has made clear its intentions to refine the FSS arrangement over time in light of implementation experience and industry development.

Non-AIs and the SFC Fintech Contact Point

The HKMA’s FSS is however limited to AIs. The activities of non-AIs which are regulated by the SFC must comply with the requirements of the Securities and Futures Ordinance, its subsidiary legislation and relevant Codes of Conduct. The SFC has however established a Fintech Contact Point and individuals and firms interested in starting or developing Fintech business may contact it at fintech@sfc.hk to discuss relevant regulatory implications.

Enhanced Fintech Sandbox

In September 2017, the HKMA announced the Enhanced Fintech Supervisory Sandbox 2.0, which comprises three features:

• a Fintech Supervisory Chatroom (Chatroom) will be established to provide quick feedback to banks and tech firms at an early stage of their Fintech projects;
• tech firms may be able to directly access the sandbox by seeking feedback from the Chatroom without necessarily going through a bank; and
• the sandboxes of the HKMA, the SFC and the Insurance Authority will be connected so that there will be one point of entry for pilot trials of cross-sector Fintech products.

The HKMA intends to launch the Enhanced Fintech Supervisory Sandbox 2.0 by the end of 2017.