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17 August 2016
The growth in financial technology (FinTech) across Asia is presenting new regulatory, legal and security issues in different jurisdictions, according to law firm Simmons & Simmons.
In a recent media briefing on the outlook for the FinTech sector, discussions focused on the latest regulatory developments, and the key legal and cybersecurity issues, as well as other challenges and opportunities that overseas investors face in China.
Investment in FinTech in Asia is now second only to the sector in North America. Companies and institutions are developing innovative FinTech products that are disrupting traditional financial services, presenting both opportunities and risks.
Ian Wood, partner and head of the firm’s corporate & commercial practice in Asia, says that governments are competing to foster the most attractive environment for FinTech innovators. “With their strong financial services talent pool and with access to some of the world’s fastest growing markets, there are real rewards for the Asian jurisdictions that get this right. We expect growth to be focused on business-to-business FinTech services initially, as the regulators develop the regulatory framework to enable easier deployment of FinTech services and products to consumers”.
However, opportunities may be missed if regulations are not adapted to enable consumers to have access to FinTech products and services, Wood warns. “The regulatory regime in Hong Kong is reasonably complex and it can be difficult to determine which regulations apply to FinTech services,” Wood says. “Coupled with high compliance costs, this can deter entrepreneurs from entering the market. The lack of a regulatory framework directed specifically at the FinTech sector in Hong Kong will undoubtedly result in challenges for innovative businesses and could undermine the development and competitiveness of the sector against peer regional markets, such as Singapore.”
With the current focus by governments on the sector, regulators are likely to be more flexible in the application of the rules, Wood adds. “We have already seen a number of jurisdictions such as Hong Kong and Singapore establishing committees to determine ways to develop the industry. Seeing both regulators and market participants working together in this way is very encouraging for the future”.
Singapore will stage FinTech Festival, the first event of its kind in Asia, from November 14 to 18 this year, which will bring together a series of back-to-back FinTech events and provide a platform for collaborations, connections and cocreations, says Wood. “Singapore is therefore slightly ahead of us but we are sure we can catch up.”
According to online data portal, Statista, China’s FinTech sector has seen rapid growth in recent years and is expected to reach a scale of business at US$1,140 billion by 2020. In addition, China Internet Intelligence Centre is expecting that the sector will grow to have over 500 million users by the end of 2016.
China’s FinTech future is seemingly bright with businesses not subject to the level of regulations as compared with Hong Kong and Singapore, which has partly contributed to the fast growth of products such as peer-to-peer lending. However, overseas investors remain concerned.
“Chinese FinTech players have benefited hugely from the world’s largest consumer market, to a certain extent isolated from global competition,” says Davis Wang, a Simmons & Simmons partner and country head for China. “Some of China’s tech giants greatly outweigh their international peers, and some in the market are concerned that the big players in China are too powerful to allow smaller innovative start-ups or foreign peers to compete. The other big challenge for overseas investors is regulatory restrictions. Internet businesses are regarded as telecom value added services in China which require Internet Content Provider licenses from the Ministry of Industry and Information Technology or its provincial branches. Moreover, financial regulators have been playing catch up with the market. The theme from the last few years of deregulation and promotion has now changed to more regulation, partially caused by the recent scandals in the P2P lending market - P2P frauds have cost endusers significantly.”
About a decade ago banks worried that technology companies would cut into their market share but as China’s e-commerce businesses have continued to grow, many FinTech products do not only come from technology companies but financial institutions as well.
“FinTech fills in the gap where traditional banks are unable to serve, such as soliciting funds from and providing funds to small businesses - FinTech wins customers from traditional banks by its convenience and flexibility,” says Xun Yang, of counsel in Simmons & Simmons Shanghai office. “However, cybersecurity and data protection are key issues impacting FinTech. Major cybersecurity breaches have been well documented such as the Ctrip incident. In fact, cybersecurity problems have been widespread. In 2013, 74% of internet users suffered from a cybersecurity incident or data leakage according to the China Internet User Security Report, 2013, by the China Internet Information Centre.”
Regulators, institutions and end users are increasingly aware of cybersecurity risks and are taking action, Yang says. “During the last few years, China has been developing its data protection rules, which are not very different from the European standards and have additional requirements that European countries don’t.”
For example, China has imposed statutory requirements regarding the selection of IT devices, software and technology for use in finance businesses, as well as network structure. “These requirements, to a certain degree, restrict the digitalization and revolutionization of the finance business,” says Yang. “However, cybersecurity concerns also present an opportunity for operators who have a positive reputation, as they can win consumer trust and business.”
Yang reminds companies that they must patent their technologies and restrict sensitive information access, even among employees. “Consumers are concerned about privacy, so if companies can offer such protection, their reputation will spread, which means better business for them.”
