Comparative Guides

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How are the following key activities in the fintech space regulated and what specific legal issues are associated with each? (a) Crowdfunding, peer-to-peer lending; (b) Online lending and other forms of alternative finance; (c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb); (d) Forex; (e) Trading; (f) Investment and asset management; (g) Risk management; (h) Roboadvice; and (i) Insurtech.
Hong Kong

Answer ... (a) Crowdfunding, peer-to-peer lending

In Hong Kong, crowdfunding is subject to restrictions on the public offer of shares; while peer-to-peer lending and similar activities may be caught by the Money Lenders Ordinance (Cap 163).

In this regard, it is noteworthy that collective investment schemes have been defined as a form of securities pursuant to the Securities and Futures Ordinance (Cap 517).

(b) Online lending and other forms of alternative finance

In Hong Kong, any form of lending activity (whether online or offline) will fall under the auspices of the Money Lenders Ordinance (Cap 163).

(c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb)

One of the key statutes governing payment services is the Payment Systems and Stored Value Facilities Ordinance (Cap 584).

Hong Kong has had a stored value facility regime in place for some time. While it is sometimes seen as more stringent than its Singaporean counterpart, its strict regulatory requirements confirm why Hong Kong remains the region’s premier jurisdiction when it comes to fintech development and consumer protection.

(d) Forex

Hong Kong is one of Asia’s strongest strongholds for foreign investment. Over the last few years, there has been a steady increase in the number of brokers’ representative offices being established in Hong Kong.

The regulatory body with jurisdiction over forex trading is the Securities and Futures Commission (SFC), which is one of the strictest regulatory bodies globally, ensuring strong protection for the greater public.

If business activities involve foreign currency exchange, then these constitute a money service that is regulated by the Customs and Excise Department under the licensing regime of the Anti-money Laundering and Counter-Terrorist Financing Ordinance (Cap 615).

(e) Trading

Within the e-trading space, the Hong Kong regulators – in particular, the SFC – have taken proactive steps to implement measures to safeguard the general public.

For example, on 27 October 2017 the SFC released its Guidelines to Reduce and Mitigate Hacking Risks Associated with Internet Trading, issued under Section 399 of the Securities and Futures Ordinance, in which the SFC set out 20 baseline preventive, detective and other control requirements to improve cybersecurity resilience in the industry.

In addition to reinforcing regulatory requirements to keep Hong Kong’s financial systems up to date, the SFC has worked side by side with the Investor Education Centre to launch a cybersecurity awareness campaign.

The campaign was primarily aimed at promoting good cybersecurity practices among users, to help them protect themselves from online trading threats (which have increased over the years in both frequency and sophistication).

A key feature of this campaign was multi-factor authentication, which internet brokers were required to download and install on their websites as appropriate.

This campaign highlights how the SFC has assumed the diverse roles of regulator, promoter and educator – going many steps beyond what is traditionally expected from a regulatory standpoint.

(f) Investment and asset management

The Securities and Futures Ordinance (Cap 571) regulates dealing in securities and future contracts and asset management. A licence is required in order to conduct such business in Hong Kong.

Over the past few years, one of the key developments in this area has been the increase in investment and asset management of digital assets. As more and more Asian jurisdictions clamp down on trade in digital assets, Hong Kong has become a hub for such activities.

Since then, the SFC has issued a number of circulars with guidelines on what traditional financial institutions and licence holders should do as their businesses move closer to the digital realm.

(g) Risk management

Another well-developed regulatory sector in Hong Kong is risk management.

Jurisdiction in this regard is a shared responsibility between the SFC and the Hong Kong Monetary Authority (HKMA). On 24 September 2019 the SFC and HKMA announced the completion of a coordinated inspection campaign of a bank within a mainland-based banking group and a licensed corporation owned by a subsidiary. This proactive exercise revealed a number of vulnerabilities that the dual regulatory authorities are seeking to address.

Since then, both the HKMA and the SFC have announced that they will continue to enhance regulatory cooperation and are closely coordinating with their mainland counterparts to share information and observations derived from their supervisory work.

(h) Roboadvice

Under common law (including contract law), when an individual obtains services from an automated vendor, the contract is not between the individual and the automated vendor (which, under Hong Kong law, does not have the capacity to enter into an agreement); rather, it is with the operator of such services.

Roboadvice involves the provision of financial advice through an online ecosystem using algorithms and other technical tools. There are many different types of roboadvice services, ranging from full automation to less sophisticated adviser-assisted services. Where investment advice is given through these services, the SFC has noted that this will fall within its auspices. Licensed or registered persons that provide roboadvice through client-facing tools are hereinafter referred to as ‘roboadvisers’.

If client-facing tools are not involved, licensed and registered persons providing roboadvice must refer to other relevant applicable requirements governing the conduct of their regulated activities in providing such advice. Such regulations will include the Code of Conduct, Internal Control Guidelines and other codes, guidelines and circulars issued by the SFC.

(i) Insurtech

In Hong Kong, parties must have a licence in order to deal in insurance, regardless of how such business is conducted. A licensed person will come under the auspices of the Code of Conduct.

The Code of Conduct does not operate in isolation. It is part of the totality of duties and obligations owed by licensed insurance brokers in their carrying on of regulated activities under common law (including contract law), the Insurance Ordinance (Cap 41), other ordinances and rules, regulations, codes and guidelines, including those administered or issued by the Insurance Authority.

For more information about this answer please contact: Dominic Wai from ONC Lawyers