On 25 August 2023, the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA) jointly published a new roadmap, which sets out their regulatory initiatives over the next 12 months for promoting Fintech adoption in the financial services sector.
Similar to Singapore’s collaborative initiative with the financial industry that seeks to test the feasibility of applications in asset tokenisation and decentralised finance (see Project Guardian issued by the Monetary Authority of Singapore in June 2023), Hong Kong’s financial services regulators have collaborated to implement various Fintech policies and initiatives including Fintech supporting infrastructure for Hong Kong financial institutions. The roadmap summarises the HKMA’s Fintech adoption study, the three regulators’ past and existing Fintech facilitation measures and their Fintech promotion initiatives between 25 August 2023 and 24 August 2024.
Below are the key take-aways of the roadmap for SFC licensed asset managers:
1. Wealth / investment services and ESG factors are focus areas for Fintech promotion: the regulators aim to facilitate the application of technology in financial institutions’ business operations, covering financial planning, investment management, investment execution, client communication, and the collection of ESG related data. Hyper-personalised and low-cost wealth, investment and/or ESG solutions will become a trend.
2. The adoption of artificial intelligence (A.I.) and distribution ledger technology (DLT) will continue in Hong Kong:
- A.I. refers to the simulation of intelligence in machines to enable them to perform tasks typically carried out by humans. In the asset management sector, A.I. has been adopted for a while by some SFC licensed entities to provide services (e.g. robo-advisory or online distribution platforms). The SFC is a member of The International Organization of Securities Commissions (IOSCO) and so will follow the regulatory approach recommended in IOSCO’s Final Report on the Use of A.I. and Machine Learning by Market Intermediaries and Asset Managers of September 2021.
- DLT is a decentralised and distributed database system that enables multiple ledgers to maintain a shared record of transactions. DLT can be used to enhance the efficiency of cross-border payments, remittances and securities issuance and settlement by minimising intermediaries’ involvement. In the context of funds, DLT can be employed to tokenise fund units. Currently, tokenisation is more beneficial to private funds than public funds. Private fund managers who manage illiquid assets (e.g. private equities or real estate projects) may enhance liquidity for their funds, through listing the tokenised funds on the 24/7 operating virtual asset trading platforms. Whereas, public funds are already available at plenty of distribution venues, and some of the online distribution channels are even offering very low distribution costs for both of the mangers and investors of the public funds. The tokenisation costs (such as the cost of employment of technology) may demotivate public fund managers. As public funds are in the regulated space, their managers may also want more regulatory clarity on fund tokenisation before action. IOSCO issued Policy Recommendations for Crypto and Digital Asset Markets Consultation Report in May 2023, these are relevant to all digital assets and tokens, including tokenised funds. Some of the recommendations relate to retail distribution (and specifically, retail appropriateness and disclosure) and will in due course be followed in Hong Kong.
3. As part of the roadmap, the regulators will issue guidance on Fintech adoption in the financial services sector. First, a best practice guidance will be published by the HKMA covering topics on contract negotiation between financial institutions and Fintech solution providers, financial institutions’ on-boarding of technology vendors and cyber-security. With respect to asset managers, the SFC will likely issue a circular on fund tokenisation which we expect will provide some regulatory clarity on the tokenisation of public funds. Other than the best practice guidance, the planned regulatory initiatives aim to bridge the connectivity between financial institutions and Fintech solution providers through:
- providing a Fintech Knowledge Hub, which will serve as a centralised platform for industry updates and a cross-sectoral directory of Fintech solution providers, financial institutions and associations in order to address sourcing challenges;
- launching Fintech Spotlight, i.e. a showcase of videos highlighting innovative Fintech solutions across wealth / investment technology, green technology, A.I. and DLT;
- conducting knowledge-sharing webinars and seminars;
- hosting Fintech showcase and roundtable events; and
- delivering training sessions for Fintech stakeholders.
Hong Kong’s Fintech regulatory landscape continues to evolve. The Fintech Promotion Roadmap (and in particular, the Fintech Knowledge Hub) may assist asset managers in tracking developments in Fintech knowledge and market experience.
