UK And Hong Kong Regulators Enter Into Co-Operation Agreement To Foster Collaboration And Promote Innovation.

 

19 January, 2017

 

On 7 December 2016, the UK's Financial Conduct Authority (FCA) and the Hong Kong Monetary Authority (HKMA) entered into a co-operation agreement as part of an initiative to promote innovation in their respective markets and to reduce barriers to entry for firms both in the UK and Hong Kong. This is the fifth such co-operation agreement that the FCA has entered into (with previous agreements being concluded with regulators in Australia, China, Singapore and South Korea) and the first such co-operation agreement that the HKMA has entered into, representing a key initiative for the HKMA.
 

THE CO-OPERATION AGREEMENT

It is intended that the agreement will help reduce the barriers to international growth by providing a framework for co-operation and referrals between the FCA and the HKMA's respective "innovation functions". The co-operation agreement also sets out the regulators' intentions to support innovation in both jurisdictions through the sharing of information and expertise.

Referral mechanism

The co-operation agreement contains a referral mechanism, which provides a more supported route for innovative firms to enter into the other regulator's market and become authorised there. It will reduce the barriers for UK authorised firms looking to grow to scale overseas and assist non-UK innovators interested in entering the market the FCA regulates. Similar mechanisms are present in the co-operation agreements the FCA has entered into with the Monetary Authority of Singapore and the Australian Securities and Investments Commission.

The FCA and the HKMA will refer to each other "innovator businesses" that would like to operate in the other authority's jurisdiction. Once an "innovator business" (which meets the relevant criteria in their home jurisdiction) has been referred, the receiving authority intends to assist them in understanding the regulatory framework under their remit and how it applies to them.

Information sharing

Under the co-operation agreement, the authorities also intend to share information relating to innovations in their respective markets, including:
 

• emerging markets and trends;
• regulatory issues relating to innovation in financial services; and
• information on organisations or bodies which lead efforts to promote innovation in financial services.

Other joint projects

The co-operation agreement also sets out the authorities' intention to participate in joint innovation projects involving novel financial technologies, as well as expertise sharing and secondments between the regulators.

IMPACT AND OTHER INNOVATION INITIATIVES

The co-operation agreement is not a legally binding agreement, nor does it create new rights or obligations as between the regulators.

However, this co-operation agreement clearly highlights that innovation in the global financial services market remains a key area of regulatory focus as technology is increasingly used and developed.

Both authorities have already established departments or projects to support this growing area. The FCA has an overarching statutory objective as a regulator to make financial services markets work well and promoting competition through innovation forms a significant part of this. In October 2014, the FCA launched Project Innovate, where businesses can receive regulatory support through the Innovation Hub and Advice Unit. Similarly, in March 2016 the HKMA launched the Fintech Facilitation Office (FFO) in order to promote Hong Kong as a centre for fintech development, as well as facilitate the exchange of ideas. The co-operation agreement between the FCA and the HKMA is a key initiative of the FFO.

In connection with these initiatives, the FCA and HKMA have also introduced regulatory safe spaces, or "sandboxes", to encourage firms to test innovative financial products (read our full briefing on Hong Kong's regulatory sandbox and how it compares to other sandboxes here).

The HKMA has also entered into a memorandum of understanding with the Hong Kong Applied Science and Technology Research Institute (ASTRI) to formalise the framework of cooperation and to establish the HKMA-ASTRI Fintech Innovation Hub (Fintech Hub), which will be equipped with all necessary hardware and software IT infrastructure and will be supported by ASTRI’s research and development teams. The Fintech Hub provides a physical space for banks, payment service providers, fintech start-ups, the HKMA and other stakeholders to get together to brainstorm innovative ideas, and serves as a neutral testing ground for the industry to try out the new fintech solutions and conduct proof-of-concept work. In light of these broader developments, it is likely that this new co-operation agreement will further assist those firms operating in the regtech and fintech markets, who are looking to further expand the scope of their business.