Recent developments and fintech
47 Describe the most relevant recent developments affecting private banking in your jurisdiction. How is fintech affecting private banking and wealth management services in your jurisdictions?
The establishment of new virtual banks and the emergence of increased online distribution and advisory platforms for investment products are two key trends expected to shape the private banking and wealth management industry in Hong Kong. The following sets out the legislative and regulatory framework that has developed in Hong Kong concerning these trends.
Further to the revised Guideline on the Authorization of Virtual Banks (Revised Guidelines), issued by the HKMA in May 2018 after public consultation, one of the HKMA initiatives is to bring Hong Kong into a new era of smart banking. It is believed that the development of virtual banks will promote fintech and innovation in Hong Kong, and to help promote financial inclusion. The Revised Guidelines set out the principles that the HKMA will take into account in deciding whether to authorise virtual banks applying to conduct banking business in Hong Kong. A ‘virtual bank’ is defined as a bank that primarily delivers retail banking services through the internet or other forms of electronic channels instead of brick-and-mortar (physical) branches.
Applicants for a virtual bank licence would need to satisfy in substance the minimum criteria for authorisation in the Seventh Schedule to the Banking Ordinance that all licensed banks must meet, and the HKMA must be satisfied that the controllers, directors and chief executives of the applicant are fit and proper persons, with equal importance attached to credit, liquidity and interest rate risks as well as technology and related risks.
Virtual banks would be subject to ongoing supervision by the HKMA similar to conventional banks, but virtual banks would also be subject to tailored requirements that the directors and senior management should have requisite knowledge and experience to enable them to discharge their functions of a technology driven business model.
Although brick-and-mortar branches are not required, a virtual bank will still need to maintain a physical presence in Hong Kong since this is its principal place of business, enabling interaction between the HKMA, as well as dealing with customer queries or complaints. There is also a requirement to maintain local offices to keep full sets of books, accounts, transaction records, and facilitate examination and inspection by HKMA.
Since May 2019, eight virtual bank licensees have been granted by the HKMA, and it is anticipated that the licensees will launch their services by the end of 2019.
Online distribution and advisory platforms
In March 2018, the SFC issued the Guidelines on Online Distribution and Advisory Platforms, applicable to licensed persons or registered persons with effect from 6 July 2019, where engaging in online distribution and advisory platforms for investment products, whether providing order execution, distribution or advisory services (including ‘robo-advice’ services). The Guidelines contain requirements concerning six core principles, with the expectation that operators of online platforms ensure the following:
- proper design - ensuring that the online platform is properly designed and operated in accordance with applicable laws and regulations;
- client information - ensuring that clear and adequate disclosure of relevant information is available on its online platform, including:
- up-to-date product documents or information, and other information enabling clients to appraise the position of their investments;
- investment product ratings and methodologies; or
- investment product risk profiles and clients; and
- risk management - ensuring the reliability and security (including data protection and cybersecurity) of its online platform;
- governance, capabilities and resources - ensuring there are robust governance arrangements in place for overseeing the operation of the online platform as well as adequate human, technology and financial resources available to ensure the operations are carried out properly;
- review and monitoring - performing appropriate reviews of all activities conducted on the online platform as part of its ongoing supervision and monitoring obligation; and
- record keeping - maintaining proper records in respect of the online platform.
Further to these specific requirements, it is emphasised that online platform operators are required to comply with all applicable laws and regulations including the conduct requirements applicable to all SFC licensed or registered persons under the SFC Code of Conduct (including suitability requirements).
Online client onboarding
Responding to industry enquiries, in June 2019, the SFC issued a ‘Circular to intermediaries - remote onboarding of overseas individual clients’ that sets out procedures that the SFC accepts for intermediaries to verify overseas client’s identities when onboarding individual clients online. Such procedures include:
- identity document authentication;
- identity verification;
- execution of client agreements by way of electronic signature;
- verification of designated overseas bank accounts;
- record keeping;
- training; and
Paragraph 5.1 of the Code of Conduct has been amended correspondingly, such that intermediaries may onboard clients in a flexible and more efficient manner while meeting regulatory compliance requirements.
With effect from July 2019, there are enhanced additional requirements under the SFC Code of Conduct where a licensed or registered person providing services in complex products (to be determined taking into account such criteria or factors as described in the SFC Code of Conduct or other SFC circular or guidance whether a product is a complex product) to ensure that the transaction is suitable for the client in question in all the circumstances;- to provide sufficient information on the key nature, features and risks of a complex product so as to enable the client to understand the complex product before making a decision; and to provide warning statements to the client in relation to the distribution of the complex product, in a clear and prominent manner.
Intermediaries would need to be review its services and product due diligence processes in order to determine whether its products are complex products subject to the enhanced requirements, and to accordingly comply with the enhanced suitability requirements, additional expected disclosures and provision of warning statements. This would certainly be relevant in the distribution and offering of investment products to retail investors as well as high-net-worth clients, especially with respect to investments or funds that are not authorised for retail offer (ie, private funds) and not traded in Hong Kong or a specified jurisdiction, that are likely to be considered complex products.
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