22 March, 2016
Hong Kong must embrace the revolution in financial technology or risk losing its status as one of foremost centres for financial services in the world, an expert has said.
Technology law expert Paul Haswell of Pinsent Masons, who is based in Hong Kong, said there is a recognition among law makers, regulators and industry of the importance of financial technology.
A major emphasis of the recent Budget speech given by Hong Kong's financial secretary John Tsang Chun-wah (108-page / 5.38MB PDF) was on how Hong Kong's government intends to support financial technology businesses.
"Hong Kong needs to, and knows it needs to, embrace fintech to remain the major global financial services hub it is," Haswell said. "Financial technology is an enabler of so many new opportunities for businesses, both incumbents in financial markets and new digital disruptors, to operate more efficiently and offer better convenience to customers. It is important that Hong Kong keeps pace with other financial service centres, such as London, and delivers an environment in which new financial technology companies can thrive."
Haswell said that there are existing initiatives and traits specific to Hong Kong that make it an attractive place for financial technology companies to develop their business.
"Hong Kong is known for its entrepreneurial culture and financial technology is viewed as being a real business opportunity for innovators," Haswell said. As one of the traditional big financial capitals in the world, Hong Kong provides plenty of opportunity for financial technology to gain traction in the local market. The success enjoyed by peer-to-peer (P2P) lending platform WeLend shows the potential for other financial technology businesses to develop and grow in Hong Kong."
"There are two main technology incubators in Hong Kong – the Science and Technology Park and Cyberport. The main focus of the Cyberport initiative has shifted over the past year from supporting the development of mobile apps to helping start-ups develop new fintech products and services, from easy payment or online trading platforms to harnessing the technology behind bitcoin and P2P lending. We can expect to see further growth in the development of Hong Kong's fintech scene," he said.
In his Budget speech John Tsang Chun-wah referenced predictions that global investments in financial technology will rise to US$46 billion by 2020, almost four times what it was in 2014. He said a government-commissioned group had made a series of recommendations for "creating a conducive environment and encouraging financial institutions and professionals from around the world to drive the development and application of fintech in Hong Kong" that he would "actively follow up".
Among the initiatives Hong Kong's financial secretary announced was funding for financial technology start-ups and financial institutions. Cyberport will "roll out a designated programme to provide support to 150 fintech start-ups over the next five years" and arrange training in financial technology at overseas universities for 300 university students in Hong Kong to enhance "career prospects in the sector".
Tsang Chun-wah said Hong Kong's government would also "set up a dedicated team under the Invest Hong Kong (InvestHK) to organise international events and facilitate start-ups, investors and R&D institutions to establish their presence in Hong Kong".
Hong Kong will also get behind businesses looking to "explore the application of 'blockchain' technology in the financial services industry, with a view to developing its potential to reduce suspicious transactions and bring down transaction costs", he said.
Tsang Chun-wah said that financial regulators in Hong Kong would create "dedicated platforms" as a forum for businesses to liaise with them on financial technology issues. This would "ensure that the market will balance between market demand and investors’ understanding and tolerance of risk when introducing innovative financial products and services", he said.
Since his speech, the Securities and Futures Commission in Hong Kong has created a 'Fintech Contact Point' as a dedicated channel for businesses to use to engage with it on financial technology issues. The regulator has also set up an advisory group on financial technology which will "focus on the opportunities, risks and regulatory implications of developments related to fintech".
In a statement the SFC said: "A variety of fintech activities are relevant to the SFC’s regulatory work. Among these are automated trading systems; financial product investment and distribution platforms, including robo-advisors; financing platforms, including peer-to-peer lending and equity crowdfunding platforms; and distributed ledger technology, including the application of blockchain to licensed intermediaries, securities and capital markets."
"Other fintech activities relevant to the SFC’s work include big data, data analytics and artificial intelligence to support front and back office operations of licensed intermediaries; compliance, risk and regulatory technologies, including technologies that support regulatory compliance, regulatory reporting and know-your-client; and cyber and data security technologies, including those for client authentication," it said.
"Fintech covers a wide range of businesses, not all of them subject to the type of regulation which is lacking in Hong Kong, but which is being put in place in the UK, US and other places such as New Zealand," technology law expert Peter Bullock of Pinsent Masons said. "Hong Kong is becoming a magnet for all sorts of fintech companies, and companies looking to harness blockchain will generally not bump up against current legislation, especially those looking at reducing cost in the mid-to-back office."
A recent report by EY, commissioned by the UK Treasury, into how the UK's financial technology ecosystem compares with other jurisdictions (67-page / 4.67MB PDF), ranked Hong Kong as seventh of seven behind the UK, California, New York, Singapore, Germany and Australia.
EY looked at factors such as the availability and pipeline of skills in the seven regions, as well as the level of capital being invested, the attractiveness of the local regulatory and tax regimes and customer demand for financial technology products and services. The report described the Hong Kong financial technology market as being "relatively nascent" and "emerging".
While Hong Kong ranked relatively highly on talent, EY said that its financial technology policy landscape is "viewed as more complex, conservative and, in some regards, simply opaque".
Hong Kong's regulatory regime also scored poorly in EY's report compared with other jurisdictions. However, Haswell said that Hong Kong's regulatory regime is more supportive than other jurisdictions in Asia. He said rules in Singapore tend to be more restrictive and that new innovators can find it difficult to compete with the major state-owned banks in China.
For further information, please contact:
Paul Haswell, Partner, Pinsent Masons
paul.haswell@pinsentmasons.com
