On 29 September 2017, the Securities and Futures Commission (SFC) issued a circular announcing the launch of the SFC Regulatory Sandbox (the Sandbox) which aims to regulate qualified firms conducting regulated activities under the Securities and Futures Ordinance (SFO) in the financial technologies (Fintech) sphere.
The circular was issued in tandem with announcements by the Hong Kong Monetary Authority (HKMA) and the Insurance Authority (IA) regarding their respective Fintech initiatives.
Due to the often novel nature of such technology, the SFC wishes to regulate Fintech firms in a confined environment before allowing their services to be provided to the Hong Kong public. The intention of the Sandbox is therefore to maintain market integrity and protect investors, by enabling qualified firms to identify and remedy any risks related to their regulated activity as well as to foster Fintech development in Hong Kong.
The Sandbox is available to both licensed corporations and start-up firms that intend to carry on regulated activity (start-ups would need to apply to the SFC to be licensed). To be admitted into the Sandbox, the relevant qualified firm must: (i) be fit and proper; (ii) utilise innovative technology; and (iii) be able to show a genuine commitment to carrying on a regulated activity under the SFO through the use of Fintech. The circular states that the establishment or activities of these firms should increase the range and quality of products and services for investors and benefit the Hong Kong financial services industry.
As with any other person carrying on regulated activity, qualified firms must be licensed by the SFC and must comply with all other applicable regulations and requirements.
In order to minimise risks to investors whilst a qualified firm operates in the Sandbox, the SFC may impose licensing conditions on a qualified firm. The licensing condition examples listed in the circular include (amongst others) imposing limits on the maximum exposure per client and/or limiting the types of clients which the qualified firm may serve.
Whilst operating in the Sandbox, qualified firms may also be subject to closer monitoring and supervision by the SFC, which may, for example, take the form of the SFC highlighting areas in which their compliance could be improved. The circular states that the aim of such closer supervision is to identify and address any risks at an early stage, thereby benefiting both the qualified firms and the investing public.
The circular notes that qualified firms operating in the Sandbox must have sufficient measures in place to protect investors from actual or potential risks. Examples listed in the circular include (amongst others) a qualified firm notifying its clients that it is operating in the Sandbox and providing full disclosure of any compensation arrangements available.
In the circular the SFC also provides guidance that it expects the “great majority” of licence applicants, including firms which make use of Fintech, to go through the normal licence application process without the need to enter the Sandbox. This is consistent with the SFC’s stated intention for the Sandbox (set out above).
For more information, please see a copy of the circular.
On related note, on 29 September 2017, the SFC also issued a separate circular to clarify its approach in assessing the relevant industry experience requirement for individuals including those with technology expertise applying to be responsible officers of licensed corporations.
For further details on the Fintech initiatives announced by the IA and the HKMA, please refer to our IA blog post and our HKMA blog post.