LCQ22: Support for start-up enterprises
Some persons-in-charge of financial technology (Fintech) start-up enterprises (startups) have relayed that they have encountered quite a number of difficulties in starting up their businesses. Firstly, support from the Government for testing new Fintech products is inadequate. At present, the governments in quite a number of regions around the globe have introduced sandboxes and encouraged the participation of startups, so that they can test their products or services under a controlled environment and free from the restrictions under the existing regimes. However, since only banks and their partnering technological companies are allowed to take part in the Fintech Supervisory Sandbox (FSS) introduced by the Hong Kong Monetary Authority (HKMA) in 2016, and Fintech companies can have access to FSS only by collaborating with banks, quite a number of startups have been denied access to FSS. Furthermore, startups have also encountered difficulties in opening bank accounts. Not only are the procedures complicated and time-consuming, the success rate is also low, thus significantly reducing the incentive for startups to develop their businesses in Hong Kong. Regarding support for startups, will the Government inform this Council:
(1) whether access to FSS 2.0 introduced by HKMA in September last year is still restricted to banks and their partnering technological companies only; if so, of the reasons for that; if not, the details;
(2) whether the authorities have put in place any measure to encourage startups lacking funds and operating experience to make use of FSS 2.0 to test products and collect market data; if so, of the details; if not, the reasons for that;
(3) given that the existing supervisory laws and regulations may impede the introduction of new Fintech products and services, whether the authorities have put in place any measure to help startups that provide such products and services apply for and obtain the relevant licenses under the existing regimes; if so, of the details; if not, the reasons for that;
(4) given that three regulators, namely HKMA, the Securities and Futures Commission and the Insurance Authority, have introduced their respective sandboxes, and a firm that plans to conduct tests for its cross-sector Fintech products needs only to submit one application for accessing the sandboxes, the regulator concerned will, upon receipt of the application, act as the primary point of contact and assist the firm concerned in contacting the other regulators to enable the firm to access other relevant sandboxes, of (i) the respective numbers of applications received and approved by the authorities, (ii) the average time taken from submission to approval of an application, and (iii) the number of applications rejected and the reasons for the rejection, as at to date;
(5) whether the authorities will provide startups with appropriate innovation laboratories and laboratory scenarios to assist them in conducting tests for improving existing products; if so, of the details; if not, the reasons for that;
(6) whether the authorities know the current success rate of startups in opening bank accounts, as well as the average time taken for opening a bank account;
(7) of the number of complaints received by the authorities last year from startups about their applications for opening a bank account being rejected; the types of startups mainly involved in those cases, and the main reasons for the applications being rejected;
(8) as some persons-in-charge of startups have relayed recently that although HKMA has reminded banks to refrain from imposing over-stringent customer due diligence procedures for anti-money laundering purpose, quite a number of startups' applications for opening a bank account have been rejected by the banks because they have failed to pass such procedures, whether the authorities have put in place any new measure to address this problem; if so, of the details; if not, the reasons for that;
(9) as quite a number of persons-in-charge of startups have relayed that since banks are not familiar with the new business processes and models as well as the application of advanced new technologies associated with their businesses, banks tend to reject such startups' applications for opening a bank account for risk-aversion purposes, whether the authorities have put in place any specific measure to address this problem; if so, of the details; if not, the reasons for that;
(10) of the authorities' measures to assist innovative Fintech companies which are not financial institutions in developing electronic payment services involving transportation and medical services, after such companies have complied with the legal requirements concerned; and
(11) whether HKMA has compiled statistics on the respective current numbers of Fintech companies registered locally and overseas, and among them, the respective numbers of startups; if not, how the authorities will assess the future development of Fintech?
Our consolidated reply to parts (1) to (5) and (11) of the question regarding regulation on financial technology (Fintech) applications and support to start-ups is as follows :
Hong Kong strives to provide a vibrant ecosystem for developing innovation and technology and create an enabling environment for start-ups. In promoting Fintech, the Government needs to strike a right balance between promoting financial innovations and protecting investors and customers.
With the concerted effort and close collaboration among the Government, financial regulators and the industry, Hong Kong's Fintech community has become increasingly vibrant in recent years. The Fintech cluster at Cyberport has over 250 Fintech companies engaging in applied research and development of blockchains, mobile payment, cybersecurity, artificial intelligence, big data, transaction engineering, etc., making Cyberport the largest Fintech community in Hong Kong. About 40 Fintech companies are located in Hong Kong Science and Technology Park (HKSTP).
In terms of regulation, the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC) and the Insurance Authority (IA) have established dedicated Fintech platforms in early 2016 to help enhance communication between regulators and the Fintech community, handle enquiries from the industry and provide information on regulatory requirements to companies engaging in financial innovation to enhance the industry's understanding of the regulatory environment in Hong Kong.
The HKMA then launched the Fintech Supervisory Sandbox (FSS) in September 2016 which allowed banks and their partnering technology firms (tech firms) to conduct pilot trials of their Fintech initiatives involving a limited number of participating customers without the need to achieve full compliance with the HKMA's supervisory requirements. Banks consider that the FSS is useful in reducing the lead time for launching their Fintech products. With the successful experience of the FSS, the SFC and the IA launched the SFC Regulatory Sandbox and the Insurtech Sandbox respectively in September 2017. The SFC Regulatory Sandbox provides a confined regulatory environment for qualified firms to conduct regulated activities utilising Fintech. The Insurtech Sandbox facilitates pilot runs of innovative Insurtech applications by authorised insurers to be applied in their business operations.
In the light of industry feedback and operational experience, the HKMA launched the FSS 2.0 in November 2017. The FSS 2.0 introduces Fintech Supervisory Chatroom (Chatroom) which provides supervisory feedback to banks and tech firms at an early stage when new technologies are being contemplated, thereby reducing abortive work and expediting the rollout of new technologies. Tech firms can directly access the Chatroom of the FSS 2.0 without the need to partner with a bank. The FSS 2.0 also allows a single point of entry for pilot trials of cross-sector Fintech products under the respective sandboxes.
As at end 2017, 28 new technology products involving nine banks have been tested in the FSS. Out of these cases, 14 pilot trials have been completed, and the products have subsequently been rolled out. Separately, banks have collaborated with tech firms in 16 trial cases. So far the SFC and the IA have not yet received applications to use their respective sandboxes. Nevertheless, the SFC has been in active dialogue with qualified firms showing an interest in using the sandbox. The IA has received 16 enquiries relating to the Insurtech Sandbox and held a number of meetings with potential applicants, including start-ups. Since the launch of the Chatroom till end 2017, the HKMA has received 22 requests to access the Chatroom from local and overseas tech firms (including start-ups). The topics discussed cover technology products related to customer authentication, application programming interface (API), remote account opening and cybersecurity. A number of tech firms which had accessed the Chatroom commented that the HKMA's regulatory feedback was helpful. It enabled them to clearly understand the relevant supervisory requirements and facilitated early enhancement, testing and launch of their Fintech products. The HKMA will keep the Chatroom arrangement under review in light of operational experience and user feedback.
Regarding cross-sector sandboxes, regulators have not yet received applications at the moment. Nevertheless, regulators have received enquiries regarding the cross-sector arrangements of the sandboxes.
In accordance with the statutory functions of regulators, regulatory sandboxes are only applicable to regulated activities using Fintech. Start-ups are required to obtain the relevant licences or partner with regulated financial institutions if they would like to launch regulated activities using Fintech and make use of the sandbox. Start-ups may wish to first contact relevant regulators via the Chatroom or liaison platform to learn more about regulatory compliance issues. A number of tech firms have indicated that they would like to understand the procedure for applying to become an authorised institution and a stored value facility company. The HKMA has provided the relevant information and advice to these firms. For those tech firms that are interested in applying for a licence, the HKMA's licensing teams have already followed up with them and offered appropriate assistance.
On providing appropriate testing scenarios for start-ups, the HKMA launched with the ASTRI the HKMA-ASTRI Fintech Innovation Hub (the Hub) in 2016. The Hub provides a neutral ground for tech firms and banks to formulate innovative ideas about Fintech, perform testing and evaluation of Fintech solutions, and conduct proof-of-concept trials. The HKSTP has been supporting and encouraging tech firms and start-ups to commercialise their research outcome or improve their launched products. For instance, the "First@SciencePark" provides suitable venues and invites its partner companies to showcase their innovative products or service solutions in HKSTP. This allows technology or product testing, collection of live data, use cases and constant feedback, so as to enhance the competitiveness of their products.
Our consolidated reply to parts (6) to (9) regarding the difficulty faced by start-ups in opening bank accounts is as follows:
The progressive tightening of international standards to combat money laundering and terrorist financing (ML/TF) has led to strengthening of banks' anti-money laundering (AML) systems and controls over the past few years. In order to carefully distinguish between the vast majority of bona fide businesses and those few businesses created as front companies for money laundering, banks require customers to provide relevant information/documentation in order to process the account opening applications. For a start-up with no business history or records to refer to or a Fintech company with a rather new business model or involving new technology applications which banks are not familiar with, provision of the relevant documentation/information may take more time.
The HKMA has issued guidance to banks, emphasising that they should adopt a risk-based approach where the customer due diligence (CDD) requirements should be proportionate with respect to the customers' background, circumstances and likely ML/TF risk involved, while treating customers fairly particularly with respect to transparency, reasonableness and efficiency and should not pose an unreasonable barrier to bona fide businesses accessing banking services. For example, the HKMA has specifically clarified that banks should not request a start-up to provide the same degree of detail on its track record, business plan and revenue projections as a long-established company. The HKMA has also required banks to implement measures to enhance the account opening process and customer experience; for example, all retail banks have established review mechanisms to help customers in re-examination of unsuccessful applications. The HKMA's dedicated webpage on account opening and maintenance also provides useful tips for reference by customers including start-ups.
The HKMA has been monitoring the account opening situation. The retail banking sector opens an average of about 10 000 new business accounts per month, with some 60 per cent to 70 per cent of them relating to start-ups and small and medium-sized enterprises. For the successful cases, on average some 50 per cent to 60 per cent of them are opened within two weeks. It is noted that some accounts could be opened as quickly as within a few days, but the actual timeframe for opening an account would naturally depend on the complexity of individual cases and the availability of the relevant information required of the applicants.
In 2017, the HKMA received nine complaint cases concerning refusal of account opening applications of start-ups which mainly involved trading and finance businesses. The HKMA has followed up on each complaint case, including reviewing whether a risk-based approach was applied in the CDD process. It is noted that the major reason for unsuccessful account opening was that the applicants did not provide the bank with the relevant CDD information or documentary proof as a result of which the bank was unable to have a reasonable understanding of their business nature and operations and the purpose for opening a bank account in Hong Kong. It is further noted that in four of these cases, accounts were subsequently opened after the banks re-examined the cases and the start-ups have provided to the banks concerned supplementary information and documents (such as clearer and more detailed explanation of their business models).
The HKMA will continue to monitor the development closely and work with the banking industry, business community and relevant stakeholders on the account opening issue. Our aim is to maintain a robust anti-money laundering and counter terrorist financing regime in Hong Kong which does not undermine access by legitimate businesses and ordinary citizens to basic banking services.
Regarding part (10) of the question on electronic payment in the public transport and medical service sectors, Hong Kong has a well-developed and mature electronic payment ecosystem. Various electronic payment means, including conventional and contactless credit cards, Octopus and EPS, have long been available and are widely adopted by the public for making payments. For payment in public transport, Octopus is widely adopted, covering most public transport services. We understand that the MTR Corporation has launched a trial programme which allows passengers to purchase single journey tickets from designated ticket issuing machines using e-wallets at some stations. Some e-wallet operators are also providing electronic payment services in some taxis to facilitate passengers to pay the taxi fares.
The Transport and Housing Bureau (THB) welcomes the introduction of new technology to facilitate fare collection in the public transport sector. At the same time, THB would need to ensure that any new electronic payment system to be adopted in the public transport sector for fare collection should be reliable, user friendly and efficient and would not cause disruption to the operation of the public transport and the road or traffic conditions, so as to protect the interest of passengers and road users.
In public healthcare system, the Department of Health (DH) and the Hospital Authority (HA) currently accept various electronic payment means, such as the Octopus card, credit cards, internet banking service and PPS. DH and HA will review from time to time their current channels for paying medical fees, keep in view other electronic payment methods available in the market and explore the feasibility of adopting them.
Ends/Wednesday, February 7, 2018
Issued at HKT 14:47
Issued at HKT 14:47