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Innovate or perish: Regulation remains biggest hurdle to HK’s Fintech push

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

Coincidentally, the Steering Group on Fintech set up last year under the Financial Services and Treasury Bureau(FSTB) released a report just two days after the Budget announcement. The report offered a number of suggestions on the promotion, facilitation, regulations, talents development, and funding of Fintech. However, when listening to the Secretary for FSTB Professor KC Chan addressed the government’s plans to regulate Fintech, an inconvenient truth appears to be crushing the dreams of many entrepreneurs.

Regulations revision is time-consuming

Quite contrary to the long-term vision and innovative attitude that the Budget portrayed, Professor Chan said at the press conference that to revise the existing regulations that cater for P2P lending and crowdfunding will be too time-consuming and the government prefers to make only slight changes on the existing laws. In addition, he urged technology companies to comply with the current regulations, despite many in the industry found it too stringent and out of touch with the global trend.

Going further, Professor Chan cited that the scandal at Ezubao (e租寶)—a Chinese Ponzi scheme that attracted RMB 50 billion (US$7.6 billion) fund from 900,000 investors by portraying itself as a P2P lending company—to illustrate the risk of Fintech. He added that the government has yet to see a demand for P2P lending services, and therefore not necessary to amend the laws. Meanwhile, protecting a prudently regulated financial system is at a higher priority.

Such comments appear to conflict with the vision presented at the 2016 Budget. This announcement also came as a surprise for many practitioners and entrepreneurs, who are expecting breakthrough to come from this report.

Professor Chan might not believe that Hong Kong is lagging behind from others major financial hubs in Fintech development, but let us not be fooled by his optimism. Hong Kong has the lowest score for developing a Fintech ecosystem among the seven major global financial centers, according to a study commissioned by the UK Trade & Investment, the British counterpart of Invest Hong Kong, and conducted by Ernst & Young. The report points out that the lack of ICT talent and inadequate funding for startups are undermining Hong Kong’s massive potential in Fintech development.

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Legal ambiguity crushes Fintech ambition

Without a proper regulatory framework that allows the Fintech business models to thrive, the government’s ambition to turn Hong Kong into an innovation hub will be hard to realize. P2P lending and crowdfunding are Fintech business models that are gaining popularity around the world. US and China are the frontrunners and these governments are competing on speed and agility to drive regulatory revision.

Ironically, one of the reasons for a lacking demand for P2P lending services in Hong Kong, as Professor Chan suggested, is due to the ambiguity in the legal system. Many entrepreneurs are concerned as they are operating in uncharted waters. The lack of understanding from the government also didn’t help to bring in policies and regulatory framework to clarify that ambiguity for the Fitech entrepreneurs.

The risk-averse attitude of our government has already put us behind other financial centers. Countries like New Zealand, UK, Malaysia and South Korea have allowed citizens to crowd fund or invest in startups with limitations, like investment size for the general public investors. Canada and US have also loosen the restrictions imposed on similar types of investment. Last year, the US Securities and Exchange Commission also passed an amendment that allows crowdfunding under specific restrictions and investment limits.

Business-friendly regulations trumps mega-events

Hong Kong Government has created a dedicated platform for regulators to communicate with Fintech entrepreneurs is a promising gesture. But, the major concerns for Fintech entrepreneurs still lie on the regulatory framework.

From applying for licenses, opening bank accounts to applying loans and subsidies, Fintech entrepreneurs might find themselves facing hurdles as their business models are potentially illegal, according to the existing stringent regulations. Apart from the struggle to raise funds, many entrepreneurs are urging the Securities and Futures Commission to clarify the existing laws and wash off any legal uncertainty concerning Fintech development.

When it comes to boosting Fintech development in Hong Kong, the government’s ability to shape an environment with business-friendly regulations will bring more tangible results than any mega-events or promotions. Their roles to offer business and investment incentives and to expedite necessary changes in the regulatory regimes are crucial.

Change is the only constant—thiAnchors is the ancient wisdom that never gets old.

Office Of Hon. Charles Mok, Legislative Councillor (IT)