Hong Kong Towards a Leading Global FinTech Hub

88 89 Part II: Key Observations, Policy Implications and Recommended Actions for Hong Kong Opportunity 3 Observation: Since 2016, the HKMA, the IA and the SFC have established regulatory sandboxes in Hong Kong. Following London and Singapore, Hong Kong is among the first global financial centers to establish regulatory sandbox programs. Objective: To expand Hong Kong’s influence and impact on regional fintech development, to attract more talent and investment to the city’s fintech ecosystem, and to maintain a vibrant and two-way environment (inward and outward of the city) for the sandbox users. Recommended action: Transform Hong Kong into a regional fintech sandbox by attracting local and regional participants to trial their fintech products and solutions in Hong Kong’s sandbox environment. Following London and Singapore, Hong Kong is among the first global financial centers to establish regulatory sandbox programs. Since 2016, the HKMA, the IA, and the SFC have established regulatory sandboxes in Hong Kong. Announced in the 2020-21 Budget, the HKMA considered enhancing its fintech supervisory sandbox system by providing “through-train” vetting and funding arrangements, and offering a faster track for fintech companies to launch their products. 296 We note that Hong Kong has already cultivated a conducive environment for fintech companies to continue to grow and scale up across other businesses. The existing sandbox programs organized by the three regulatory bodies have played an important role in supporting innovation and development for Hong Kong fintech businesses. However, other jurisdictions continue to review and modify their fintech sandbox initiatives. For example, the UK’s Chancellor of the Exchequer announced in April 2021 that the UK government planned to create a new “scale box” and permanent “digital sandbox” to encourage fintech collaboration. 297 Meanwhile, the Singapore government launched the Sandbox Express in 2019, allowing eligible fintech companies to begin market testing within 21 days of applying to the Monetary Authority of Singapore (MAS). 298 Although the financial and fintech sectors in Hong Kong welcome the regulatory sandbox programs, some surveyed reflected the difficulty in obtaining valuable data, and a lack of professional, technical and legal support when they participated in the sandbox. Some mentioned being discouraged to adopting a sandbox if they had products that were not compliant with the Personal Data (Privacy) Ordinance (PDPO), and were at very high risk to test their fintech products. 299 300 As of April 2021, there were 214 fintech initiatives 296. The 2021-22 budget. | Financial Technology (2021). | https://www.budget.gov.hk/2021/eng/budget33.html 297. Gov.UK.| Ambitious plans to boost UK fintech and financial services set out by Chancellor (Apr 2021). | https:// www.gov.uk/government/news/ambitious-plans-to-boost-uk-fintech-and-financial-services-set-out-by- chancellor 298. Monetary Authority of Singapore. | MAS Launches Sandbox Express for Faster Market Testing of Innovative Financial Services (Aug 2019). | https://www.mas.gov.sg/news/media-releases/2019/mas-launches-sandbox- express-for-faster-market-testing-of-innovative-financial-services 299. Interview with The Advisory Board of the Fintech Research Project, dated 9 April 2021. 300. Office of the Privacy Commissioner for Personal Data, Hong Kong. | The Personal Data (Privacy) Ordinance. | https://www.pcpd.org.hk/english/data_privacy_law/ordinance_at_a_Glance/ordinance.html piloted in the Fintech Supervisory Sandbox (FSS). Three- quarters of the initiatives were led by banks to collaborate with their partnering technology firms. 301 The direct involvement of other financial service sectors and small fintech companies in the sandbox have to be validated and further reviewed. In view of Hong Kong’s unique economic position, Hong Kong is serving both as a gateway for international companies to enter the Mainland China market and as a perfect launch pad for local and Chinese fintech companies to expand globally. We believe that Hong Kong has great potential to transform itself into a regional fintech sandbox by attracting both local and regional participants to test their fintech products and solutions. With a receptive and progressive regulatory framework, fintech start-ups and technology companies would be more likely to regard Hong Kong as an ideal testing ground for their innovative products and services. The Hong Kong government could further evaluate whether the sandbox initiative is still market-leading and relevant for all stakeholders, including smaller banks and commercial companies. If adopted, a higher fault-tolerance regulatory framework, higher transparency and openness, and a business-focused scenario in the sandbox would encourage more smaller banks and companies in the financial sector to participate. 302 We suggest that Hong Kong’s regulatory sandbox should be adapted and modified to transform what are mainly local sandbox programs into regional sandbox programs. Regional sandbox programs would not only expand Hong Kong’s influence and impact on regional fintech development, but would also help the scale up to an international level, while attracting more talent and investment to the city’s fintech ecosystem. Local fintech businesses could more easily expand overseas after testing their systems in Hong Kong’s regional sandbox. Furthermore, overseas entrepreneurs could also be encouraged to evaluate their products in Hong Kong’s sandboxes to simultaneously facilitate two-way development. We envision that: 301. Hong Kong Monetary Authority. | Fintech Supervisory Sandbox (FSS). | https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/ fintech/fintech-supervisory-sandbox-fss/ 302. Interview with The Advisory Board of the Fintech Research Project, dated 9 April 2021. • The Committee (see Opportunity 1 above) could coordinate with the financial regulators (namely HKMA, SFC and IA) that manage existing sandbox programs to modify and update their respective guidelines to transform their sandbox programs into regional sandboxes; • The Committee could collaborate with the fintech community to outline the design, operation and technical support needed for the regional sandbox programs; • Simultaneous local and regional promotion plans would encourage more local and regional financial institutions and commercial enterprises to select Hong Kong sandboxes to develop and evaluate their fintech solutions; • Extending application eligibility to other Hong Kong and regional industries such as professional and business services would enhance the development of innovative fintech products and solutions; • An open environment with a toned-down regulatory environment would enable a broader range of innovative products and solutions to be developed and evaluated; • Increased technical support (e.g. data formatting, data analysis) and consultation services (e.g. legal and compliance advice) could be provided for sandbox participants; • Sandbox participants are able to access a co-working space provided by Cyberport and HKSTP; • An updated evaluation process to include regional sandbox programs. For example, regular communication with participants and potential participants, collecting their feedback on the sandbox; • Public access to information about sandbox activities on the website/database set up by the Committee , to maintain high transparency for regional sandboxes. Information may include information such as: the numbers of applications for the sandbox; the success rate of sandbox applications; application guidelines; sector and job nature of companies; participants’ comments after using the sandbox service; the average duration for approval; the approval process; extension possibilities; and official responses to comments made by sandbox participants.