11 January, 2018
Following the launch of the Securities and Futures Commission’s (the “SFC”) Fintech Contact Point and Fintech Advisory Group in March 2016, the SFC introduced the Fintech Regulatory Sandbox (the “Sandbox”) on 29 September 2017.
The aim of the Sandbox is to provide a confined regulatory environment for Fintech firms to conduct regulated activities1 under the Securities and Futures Ordinance (the “SFO”) and by doing so, be able to test their innovative financial products or services and its delivery methods in a safe and conducive space before offering it to the general public. The Sandbox seeks to enable such firms to identify and address risks or concerns relevant to their innovative technologies and internal control systems so as to bring them in line with the existing regulatory framework. The SFC envisages that the establishment or activities of Fintech firms would increase the range and quality of (innovative) financial products and services for investors in Hong Kong, whilst mitigating the risks that the public may be exposed to.
Who is the Sandbox for?
The Sandbox is available to SFC-licensed corporations and start-up firms that intend to carry on a regulated activity under the SFO (collectively, “Qualified Firms”). A Qualified Firm must:
- be fit and proper;
- utilise innovative technologies; and
- demonstrate a genuine and serious commitment to conduct regulated activities through the use of Fintech.
Qualified Firms must be licensed by the SFC in order to carry on regulated activities under the SFO, i.e. start-up firms seeking to make use of the Sandbox but are not licensed to carry on regulated activities, will need to apply for and obtain the appropriate license(s) and comply with the applicable requirements (including financial resources requirements) before commencing regulated activities in the Sandbox.
What will it be like to operate inside a Sandbox?
To minimise risks to investors during the period when a Qualified Firm operates in the Sandbox, the SFC may impose certain licensing conditions, such as those that limit the types of clients which the Qualified Firm may serve; the maximum exposure of each client and require the Qualified Firm to have the appropriate compensation schemes for investors in place.
Qualified Firms should expect more intense monitoring and supervision by the SFC. The SFC may highlight areas where a Qualified Firm can enhance their internal control procedures.
For further information and guidance, please refer to the SFC’s circular.
How long will Qualified Firms need to operate inside a Sandbox?
There is no specified time period. Once a Qualified Firm demonstrates to the SFC that their technologies are reliable and fit for their regulated business, and their internal control procedures are adequate to address any risks identified, then it may apply to the SFC to remove or vary some or all of the licensing conditions so that the Qualified Firm may operate on the same playing field as other licensed corporations that operate outside the Sandbox.
Recognition of technology related experience in Fintech
On the same day, the SFC also issued another circular to clarify its approach on what the “relevant industry experience” requirement means in the context of Fintech for individuals who wish to apply to become a responsible officer (“RO”).
This is one of the elements that the SFC considers when assessing whether an individual is competent to become an RO.
Where the regulated activity involves the use of an innovative technology, platform or system (the “Technology”), an RO applicant’s previous experience in the relevant Technology may be regarded as “relevant industry experience” if such experience may be essential in integrating the Technology into the regulated activity. In other words, the RO applicant must have played a key role in developing or maintaining the Technology, which is central to the regulated activity.
What this means for you
"The Sandbox should not be viewed as a means to circumvent the applicable legal and regulatory requirements."
Given that the SFC’s ultimate concern is investor protection, Qualified Firms that are placed into the Sandbox will not only be placed under closer monitoring and supervision by the SFC, it may also be subject to more licensing conditions than usual or licensing conditions which are not normally imposed on other licensed corporations (i.e. those that operate outside the Sandbox).
Companies seeking to enter the Sandbox may speak to the SFC through its Fintech Contact Point to better understand the SFC’s requirements before submitting an application.
1 Dealing in securities, Dealing in futures contracts, Leveraged foreign exchange trading, Advising on securities, Advising on futures contracts, Advising on corporate finance, Providing automated trading services, Securities margin financing, Asset management and Providing credit rating services.
For further information, please contact:
Mark Reed, Partner, Stephenson Harwood
mark.reed@shlegal.com
