Following a public consultation, the Hong Kong Monetary Authority (HKMA) published a revised Guideline on Authorization of Virtual Banks (the Guideline) on 30 May 2018. The Guideline supersedes the previous guideline issued in 2000 (and updated in 2012). Our blog entry dated 4 March 2018 which provides details of the public consultation can be found here. In general, the consultation did not result in major policy shifts, but it indicated areas where clarification and minor amendments were needed.

The HKMA received comments from 25 respondents, representing various industry participants. More importantly, the HKMA has received enquiries and indications of interests from over 50 companies in connection with virtual banking applications, indicating that its smart banking initiatives are resonating with the market.

A vast majority of changes introduced to the Guideline serve to clarify and refine the HKMA’s approach. For instance, although the Guideline does not elaborate on specific supervisory requirements applicable to virtual banks, it states that the HKMA will follow a risk-based and technology-neutral approach. Moreover, the HKMA provided more details regarding the potential requirements imposed on the holding companies of virtual banks (see item 2 below), the information required in exit plans and the reasons behind the requirement to have a physical presence in Hong Kong. Further to the respondents’ comments, the HKMA also allowed the submission of technological reports in phases (see item 4 below).

The Guideline defines a virtual bank as a bank which primarily delivers retail banking services through the internet or other forms of electronic channels instead of physical branches. This definition was amended to clarify that virtual banks are not precluded from operating in other customer segments.

The Guideline includes the following key points:

  1. Virtual banks are governed by the same supervisory principles and requirements as conventional, non-virtual banks. Simultaneously, the Guideline recognizes that these requirements have to be adapted to take account of the business models of virtual banks.
  2. The Guideline underlines the importance of the ownership of virtual banks and its role in minimizing the risks, especially in the initial years of a virtual bank’s operation. Following respondents’ requests, the HKMA provided details concerning supervisory conditions that intermediate holding companies may be subject to, including: capital requirements, liquidity, exposures, group structure, activities undertaken, risk management, fitness of the management and submission of information to the HKMA. Importantly, both financial and non-financial institutions can own and operate virtual banks.
  3. Virtual banks have to maintain a physical presence in Hong Kong. A local office is required in order to interface with the HKMA and customers.
  4. In order to address technology risks, applicants have to engage an independent, qualified expert to perform an independent assessment of the adequacy of an applicant’s IT governance and systems. A copy of this assessment has to be submitted to the HKMA during the application process. Following respondents’ comments, the HKMA stipulates that a more detailed independent assessment is to be submitted before commencement of operation.
  5. Virtual banks should not impose any minimum account balance requirements or low-balance fees on their customers, on the basis that virtual banking is supposed to serve financial inclusion and address the needs of the target customers (primarily in the retail segment).
  6. Since virtual banks are a new business model in Hong Kong, the applicants are required to provide an exit plan so that a virtual bank can unwind its operations without disruption to customers and financial system if its operations are unsuccessful.
  7. The HKMA’s announcement, as well as the Guideline and consultation conclusions, can be found here.