Sunday, March 06, 2016

[CWHK] Innovate or Perish: Regulation remain biggest hurdle in Hong Kong's FinTech push

Financial Secretary John Tsang unveiled a list of policies to support the development of FinTech in his latest Budget which include establishing a dedicated team under the Invest Hong Kong, FinTech dedicated platforms to liaise with the industry, having the Enterprise Support Scheme to provide subsidies under ITF and more. It might be late for Hong Kong to gain traction on FinTech but the Budget shows the government is finally steering in the right direction.

Timely enough, the Steering Group on FinTech the government set up last year released a report two days after the Budget where a number of suggestions were made on promotion, facilitation, regulations, talents, and funding of FinTech. However, listening to the Secretary for Financial Services and the Treasury addressing the public for the first time on how the government plans to regulate FinTech, an inconvenient truth probably has struck out the hopes of many innovators. 

Quite contrary to the long-term vision and innovative mind the government intended to deliver in the Budget, Professor KC Chan mentioned at a press conference that to alter the existing regulations to cater for P2P lending and crowdfunding will be too time-consuming and the government prefers to make only slight changes on the existing laws. Not least, he urged technology companies to inquire into how they can comply with the current regulations, which many have found to be overly stringent and out of touch with the global trend. Going further, Professor Chan cited the bust of a P2P lending company in China, Ezubao (e租寶), to illustrate the risk of FinTech and said the government has yet seen a demand on P2P lending in the market which is why it is not necessary to amend the laws. While being prudent is necessary, such a view appears to be contrary to the vision that the 2016 Budget has tried to present, and this move also comes as a surprise to many practitioners and entrepreneurs expecting breakthrough to come out from the Steering Group’s report.

Professor Chan might believe that Hong Kong is not lagging behind other major financial hubs in FinTech but let us not be fooled by his optimism. UK Trade & Investment, the British counterpart of Invest Hong Kong, has commissioned Ernst & Young for a research report on FinTech where it analysed the strengths and weaknesses of 7 global financial centres in developing FinTech and Hong Kong is bottom of the ranking. The report points out that the lack of ICT talent and inadequate investment in startups are undermining Hong Kong’s potential which it deems plenty.  

Without a proper regulatory framework for new business models like crowdfunding to thrive, Hong Kong’s ambition to innovate might be hard to realise and SMEs that could benefit greatly from new investment sources will suffer. P2P lending and crowdfunding are starting to gain popularity globally, with US and China being frontrunners competing on speed and agility in terms of regulatory changes. Ironically, the reason we are not seeing a strong demand of P2P lending in Hong Kong as Professor Chan suggested, is because of the legal grey areas many of the FinTech entrepreneurs are operating in and also insufficient understanding of the government of what the private sector needs in order to flourish. 

The risk-averse attitude of our government has already placed us behind other financial centres. Countries like New Zealand, UK, Malaysia and South Korea have allowed citizens to invest in startups with a ceiling to protect ordinary investors. Canada and US have loosened the restrictions imposed on investment. Last year, US passed an amendment to allow crowdfunding with certain limitations. The creation of FinTech dedicated platforms for regulators to communicate with startups and tech sector is a promising gesture, however, the major problem concerning FinTech innovators still lies with regulation.

From applying for licenses, opening bank accounts to applying loans and subsidies, FinTech entrepreneurs might find themselves facing hurdles as their business models are ‘illegal’ in existing law. Apart from more private investment, many of them see an urgent need for the Securities and Futures Commission to clarify on the existing laws and clear the legal uncertainty regarding how FinTech can be developed. When it comes to boosting Hong Kong’s strength in FinTech, shaping a business-friendly environment with business-friendly regulations will bring more concrete benefits than more mega-events and promotions. Providing the business and investment incentives, and to expedite necessary changes of regulatory regimes will be crucial. Change is the only constant, this wisdom from the ancient Greek just never get old.

Published on Computerworld Hong Kong, Mar 2016


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