Building castles in Fintech sandboxes - Australia and Singapore to co-operate with potential for Hong Kong
The fintech revolution is here, but what have regulators done to ensure they keep up with rapid change?
14 December 2018
Fintech is the term du jour describing the technology ecosystem focusing on financial services. Not surprisingly, governments are hastening to position their economies to take advantage of the financial services digital revolution.
"For the short-term, corporate investment in fintech will likely take center stage as corporates pursue longer term objectives associated with the perceived value that fintech can provide to their own organizations."
Well-known fintech advancements include cyptocurrency (eg Bitcoin), crowdfunding , robo-advice and P2P and micro-lending platforms. While offering exciting opportunities, the proliferation of such digital disruption has given rise to challenges for international regulators to respond to whilst nurturing growth, and at the same time protecting users from potential risks.
Greg Medcraft (Chairman of the Australian Securities and Investments Commission (ASIC)) has stated that "Often disruptive businesses have innovative business models that may not fit neatly within existing regulatory frameworks or policy... over recent years, there has been significant growth in the number and severity of cyber attacks around the world."
In June 2016, ASIC and the Monetary Authority of Singapore (MAS) entered into a cooperation agreement to assist Australian and Singaporean fintech businesses to expand into each other's markets by creating dedicated teams to provide advice, support and approvals in relation to regulatory matters.
Specifically the ASIC/MAS agreement states that ASIC and the MAS "undertake to consider participating in joint innovation projects on the application of key technologies such as digital and mobile payments, blockchain and distributed ledgers, big data, flexible platforms, and other areas of new technologies."
The key substance of the agreement is that ASIC's Innovation Hub created in 2015 and the MAS' and SG-Innovate's Fintech Office created in 2016 will cross-refer approved fintech businesses that would like to expand to the other jurisdiction.
The obvious aim of these measures is to reduce regulatory uncertainty and potentially time to market. More broadly, it is geared to facilitate effective regulation in this developing space, which is critical to promote competition and consumer confidence.
The agreement also provides that ASIC and the MAS undertake to confidentially share information about innovations regarding fintech in their respective markets where appropriate, including in relation to emerging market trends and regulatory issues. As fintech is characterised by prodigious evolution without the degree of traditional constraint imposed by geographical borders, this feature of the agreement is designed to help regulators keep pace.
We expect that Hong Kong, Australia and Singapore's closest fintech national rival, will enter into similar agreements in the near future. The Hong Kong Monetary Authority (HKMA) established the Fintech Facilitation Office (FFO) in March 2016 and the FFO launched the HKMA-ASTRI Fintech Innovation Hub on 6 September 2016 (in collaboration with the Hong Kong Applied Science and Technology Research Institute). These are similar to the aforementioned Innovation Hub and Fintech Office.
Building castles in the Aussie sandbox
ASIC proposes to implement a limited industry-wide regulatory sandbox to allow start-ups to test certain financial services for six months without holding a financial services licence.
Start-ups face difficulties with accessing capital, which exacerbates their ability to go to market and attract experienced responsible managers. The sandbox is designed to allow businesses to test their business models before incurring significant compliance costs and increase competition by removing barriers to entry into the financial services market.
Proposed requirements to qualify for the regulatory sandbox exemption include
- the testing business must have a recognised sponsor;
- the service being limited to 100 retail clients;
- allowing up to AU$10,000 investment per retail client in listed securities, deposits and simple managed investment schemes;
- a cap on total investments from wholesale clients of AU$5 million;
- having adequate compensation arrangements for retail clients; and
- the testing business must not be an existing licensee.
ASIC expects to finalise its regulatory guidance in December 2016.
The MAS has been actively introducing fintech related initiatives in line with its commitment to the creation of a Smart Financial Centre.
These include the formation of a new Fintech & Innovation Group within the MAS' organisational structure from August 2015, the launch of the new Fintech Office in May 2016 to serve as a one-stop virtual entity for all fintech matters and to promote Singapore as a fintech hub, and the announcement by the MAS of the inaugural Singapore Fintech Festival which is to be held in November 2016 in partnership with the Association of Banks in Singapore.
In the 2016 budget it was also announced that the Standards, Productivity and Innovation Board (SPRING) will offer a new Automation Support Package to help firms scale-up their automation efforts. It is anticipated that the Automation Support Package will provide support of over SGD400 million over the next three years.
Like Australia, the MAS has recently proposed a regulatory sandbox for both financial institutions and non-financial institutions to experiment with innovative fintech solutions. In connection with this, the MAS has released a consultation paper on proposed guidelines for the "regulatory sandbox" that aims to set out the objectives and principles of the regulatory sandbox, provide guidance on the application process, and articulate the possible ways in which the MAS can provide regulatory support to interested firms.
Latest moves in Hong Kong
The objective of the HKMA-ASTRI Fintech Innovation Hub is to establish a neutral ground where various fintech industry stakeholders can collaborate to innovate. Industry players can get together at this facility to brainstorm innovative ideas, try out and evaluate new fintech solutions, conduct proof-of-concept trails, and gain an early understanding of the general applicability of creative solutions for banking and payment services..
The HKMA also launched a Fintech Supervisory Sandbox (FSS) for fintech and related initiatives of authorized institutions (AIs) (e.g. licensed banks). Within the FSS, an AI can conduct pilot trials of its initiatives involving actual banking services and a limited number of customers without fully complying with the usual HKMA requirements.
The degree of supervisory flexibility for each individual AI is to be determined by the HKMA on a case-by-case basis and AIs intending to access the FSS are advised to get in touch with the HKMA early.
More details can be found in our client briefing which is available here.