13 March 2021
FinTech Regulatory and Policy
ISOM5220 FinTech Regulation and Compliance
Application of Technology to Financial Services
Evolution of Financial Technologies
1800s Telegraphic Transfer
1950s Credit Cards
1960s Automated Teller Machine
1970s Electronic Trading
The Global Financial Crisis
Evolution of Financial Technologies
• 15 September 2008: Bankruptcy of Lehman Brothers
• Trust in the financial system was fundamentally broken
• Slew of innovative entrepreneurs
• Technology space: the third platform
Evolution of Financial Technologies
The Third Platform
FinTech Tree
Taxonomy of FinTech
FinTech Regulations
FinTech Regulations
What is Regulation?
• Regulation: action that command and control the decisions of firms, in an
effort to prevent private decision-making that would take inadequate account
of the public interest
• Government: law, administrative rules, taxation
• Self-regulation: industry associations, code of conduct
• Cost
FinTech Regulations
Why Regulate?
• FinTech transforms what financial services are provided, how they are
provided, and to whom they are provided
• Opportunities to financial development, inclusion, and efficiency
• Risks to consumers, institutions, and financial stability
• FinTech regulation seeks to mitigate such risks
FinTech Regulations
Why Regulate?
• Correct for market failures
• Inadequate existing regulatory framework to curb risks
• Risks to investors
• Risks to financial services firms
• Risks to financial stability
• Regulation vs. Innovation
• Regulation imposes control of risks; innovation thrives on risk taking behaviours
FinTech Regulations
Regulatory Objectives
• Financial stability
• Market integrity
• Consumer and investor protection
• Efficiency
• Competition
• Financial inclusion
FinTech Regulations
Regulatory Responses
• No change to the existing regulatory framework
• Clarifications on how existing requirements apply to fintech activities
• Amend existing regulatory framework to include fintech activities
• New regulatory instruments such as laws, regulations, and guidelines
specific to fintech activities
• Prohibiting certain fintech activities
FinTech Regulations
How Regulatory Responses are Devised?
FinTech Activities
FinTech Activities
Digital Banking
• Delivering banking services through electronic channels instead of physical
• Opportunities?
• Risks?
FinTech Activities
Digital Banking Regulatory Responses
• Existing banking laws and regulations - is it fair and feasible to subject digital
banks to the same requirements as their physical counterparts?
• Licensing regimes for digital banks - as compared to conventional banks?
• Suitability of management, risk management controls
• e.g. HKMA Guideline on authorisation of virtual banks
• Facilitate establishment of new banks
• e.g. limited prudential requirements, provide information and support
FinTech Activities
FinTech Platform Financing
FinTech Activities
FinTech Platform Financing
• Deposit taking - banking regulation
• Issues and sells securities or establishes secondary markets for loans -
securities regulation
• Provide payment services - payments regulation
FinTech Activities
FinTech Platform Financing
• FinTech balance sheet lending
• Loan and equity crowdfunding: matching lenders to borrowers, without taking
on risks
• Opportunities?
• Risks?
• E.g. China - specific licensing regime, information disclosure, deposit clients’
funds in commercial banks
FinTech Activities
• Generation of advice through algorithm-based tools, automated client
onboarding, with no or little human intervention
• Opportunities?
• Risks?
FinTech Activities
• Existing securities regulation on provision of financial advice
• Type of advice, adviser, client, purpose of investment, product, activities
• Guidelines specific to robo-adviser
• Suitability, soundness of algorithm, information disclosure
• E.g. SFC: Guidelines on online distribution and advisory platforms
FinTech Activities
Digital payment services and e-money
• Digital payment: use of technology to facilitate payment transactions by
transferring money, clearing or settling balances digitally, without the use of
physical money
• E-money: electronic store of monetary value on a technical device
• Opportunities?
• Risks?
FinTech Activities
Digital payment services and e-money
• Digital payment
• Facilitating access to payment market
• Consumer protection
• E-money
• Bank-like prudential regulation
• Restricted from other banking activities
• Amount and type of assets
• Consumers’ fund protection
FinTech Activities
• Digital representation of value based on cryptography that can be stored, transferred,
and traded electronically
• Issuer
• Economic function
• Underlying assets (stablecoins)
• Licensing regime, clarification on regulation to ICOs, clarification on regulation to
crypto-related, clarification on tax treatment, amendment of AML framework,
publications of warnings, ban on crypto-related activities
• E.g. China?
Enabling Technologies and Policy
Enabling Technologies
What are the risks?
• Data privacy
• Cyber security
• Third-party dependency an dconcentration risks
• Explainability of predictive models used in Artificial Intelligence and Machine
Enabling Technologies
Application Programming Interface
• Interface between different software programs that facilitates their interaction
• Opportunities?
• Risks?
• Facilitate or require API adoption
• e.g. open banking initiatives: sharing an dleveraging of customer-
permissioned data from banks with third-party developers and firms to build
applications and services that provide real-time payments, greater financial
transparency options for account holders, marketing, etc.
Enabling Technologies
Cloud Computing
• Online network of hosting processors that enables on-demand access to a pool of
configurable computing resources.
• Opportunities?
• Risks?
• Regulatory focus:
• Adequacy of information security, data confidentiality and availability
• IT capabilities, recovery capabilities
• Documentation and information
Enabling Technologies
• Automated recognition of individuals based on their biological and behavioural
• Opportunities?
• Risks?
• Regulatory focus:
• Facilitate non-face-to-face, customer identification (onboarding, account
Enabling Technologies
Distributed Ledger Technology
• Record of information through a repeated digital copy of data at multiple
locations, that enables nodes in a network to propose validate, and record
state changes to a synchronised ledger that is distributed across the network.
• Opportunities?
• Risks?
• Existing regulatory requirements?
Enabling Technologies
Artificial Intelligence and Machine Learning
• Applications in financial services?
• Risks?
• Regulatory focus
• Governance
• Application design and development
• Monitoring and maintenance
• Consumer protection
Policy Enablers
Digital ID
• Digital ID: enable citizens to have access to public, commercial, and financial
digital services
• Data protection: Allocate rights and responsibilities for accessing and sharing
consumer data
• Cyber security: mitigation of cyber risk, effective response to, and recovery from,
cyber attacks
• Open banking initiatives: allows banks to share consumer data, provide consent,
with third parties
• Enable innovations in digital financial services that provide benefits to the market
Thank you