First published by Conventus Law in association with Appleby and Swartz, Binnersley & Associates.
While Hong Kong has long been the jewel in the crown of Asia's financial sector, the city is now pursuing growth through the addition of financial technology investment.
There are approximately 550 FinTech companies in Hong Kong, with around 290 of these being start-ups. According to a whitepaper by Hong Kong's leading start-up ecosystem, WHub, the city's FinTech start-ups have raised USD940 million since 2010.
Moreover, the city is home to eight unicorns – privately owned companies with a valuation of more than USD1 billion –these being Airwallex, BitMEX, GoGoVan, Klook, Lalamove, SenseTime, WeLab and TNG Wallet.
The city has significant potential for growth, serving as a nexus between East and West. Regional rivals such as Singapore have leaned on their technological readiness to attract start-ups, whereas Hong Kong has capitalised on its rich history as the beating heart of the Asia-Pacific's financial sector.
The Hong Kong Monetary Authority (HKMA) has adopted a more conservative approach to FinTech than some of its regional counterparts.
The HKMA issued eight licences this year to companies offering financial services on the internet without having physical branches. The regulator has said it will not consider new virtual bank licence applications for a year after the current eight become operational.
Backers of these new banks include traditional financial houses such as Bank of China and Standard Chartered Bank, big Chinese technology groups such as Tencent and Alibaba's payments affiliate Ant Financial, as well as other FinTech start-ups.
The process, however, has drawn some criticism from participants. FinTech start-up Airwallex moved its HQ from Melbourne to Hong Kong in the hope of winning a licence. The firm failed to make the shortlist and subsequently criticised the HKMA, saying its requirements were too restrictive and could deter international FinTech firms from coming to the city.
Although Airwallex's criticisms are a concern – given its size, status and backing from Tencent – international law firm Appleby takes a more optimistic view of the current process.
Checks and balances
Prabha Sasidharan, a senior associate with Appleby's Hong Kong corporate team, noted that while more can always be done from a regulatory perspective, all licensing processes require certain "checks and balances".
She added that many of her firm's clients have found the HKMA's process to be reasonable and not a stumbling block to investment.
Fiona Chan, a partner in the Hong Kong corporate team, added that the Securities & Futures Commission (SFC) had taken a proactive stance in late 2018 to regulate digital assets by imposing licensing conditions on intermediaries that manage or distribute funds investing in virtual assets of more than 10% of their portfolio, irrespective of whether virtual assets meet the definition of "securities" or "futures contracts". These include guidance on custody requirements, portfolio valuation and risk management.
Chan said: "These, together with other measures introduced by the SFC, are welcome signs that the regulator has finally stepped up to address the necessary regulatory framework and investor protection in this fast-growing industry."
Swartz, Binnersley & Associates' managing partner, Kristi Swartz, noted that Hong Kong Financial Secretary Paul Chan Mo-po announced in his 2019/20 Budget speech that more than HKD100 billion (USD128 million) had been allocated to promote innovation and technology across four areas, including artificial intelligence (AI) and FinTech.
She added: "This stance has been also been adopted by the regulators with the launch of the faster payments system, virtual banking licence and new guidance issued by the SFC surrounding digital assets to meet the demands of the rapidly growing and developing market."
"On the one hand, regulators want to encourage R&D of FinTech companies because they spur commerce and boost consumption. On the other hand, they are also obligated to avoid any destabilisation of the financial sector."
In this sense, well-crafted regulation and legal frameworks can create a playing field where the traditional banks and FinTech start-ups co-exist in a mutually beneficial relationship, with bricks and mortar banks providing capital and nimbler new entrants receiving technology fees to provide the requisite platforms to deliver services. The idea of FinTech companies acting as "companion banks" to the established banks could be a solution that maintains growth in the sector whilst assuaging the regulators' fears.
Many traditional banks in Hong Kong are seeing the rise of virtual banks as a challenge to their operations and profit level, as well as their quest to tap into the wealthy Chinese population. This is causing the traditional banks to react, for example HSBC's recent decision to cut fees as a direct result of the increase in virtual banks.
Though the process has been criticised by some for being too slow and restrictive, there is an argument that a carefully curated regulatory approach will create a more realistic system where FinTech firms that are not fit for purpose will fail and only the strongest will survive. There is a risk that too much state support in a rival jurisdiction, such as in Singapore, could create a false economy for the sector, with failing firms propped up by overly generous subsidies.
Hong Kong also has a geographical advantage in its proximity to China, which brings with it scale and experience in the form of FinTech giants such as Alibaba and Tencent.
The Chinese government's plan to establish Hong Kong, Macau and nine mainland cities as a global innovation hub will further enhance Hong Kong's role as a finance centre. The city is already home to the highest concentration of banking institutions in the world and boasts the world's sixth largest stock exchange based on market capitalisation.
Hong Kong continues to be a gateway to tap into the pool of ultra-high net worth individuals in China who have a particular interest in the technology industry.
Swartz said: "Traditionally Hong Kong has been used as a city to launch into mainland China. When it comes to FinTech, however, the trend has seen China-based firms coming to Hong Kong to develop products, with a different offering to those available in the PRC."
Hong Kong also stands to benefit from its long-established and familiar legal system, with Sasidharan saying: "Beyond banking, Hong Kong also enjoys a framework of law, whose roots are found in both English common law and local legislation, that multinationals are comfortable with."
Swartz echoed this sentiment saying overseas corporations that entered the market could capitalise on the city's legislation around data privacy and intellectual property (IP), friendlier tax regime and forward-thinking regulatory mentality.
Hong Kong is planning for the future and has taken a careful approach to regulating the FinTech sector in order to ensure that it flourishes alongside traditional financial outfits. Challengers such as Singapore and, increasingly, Japan and South Korea are vying for the affections of FinTech investors, but Hong Kong's history, geography and regulatory environment should help to cement its position as a sector leader in the years to come. In the end, competition between the region's financial hubs can only be a good thing for Asia's FinTech sector.
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