First in Fintech
China’s new regulatory sandbox for financial technology is being hailed as a boon for the further development of the industry in the world’s second largest economy.
On Dec. 5, the People’s Bank of China (PBOC) launched the pilot project of regulation on fintech innovation, providing basic rules for fintech super-vision and initiating the test run for a new PRC regulatory sandbox.
“It is one of the milestones in the development of PRC fintech supervision given the rapid evolvement of the fintech services and products in the PRC in recent years,” says Heidi Chui, partner at Stevenson, Wong & Co.
Chui notes that the goal of this PBOC pilot policy is to establish fundamental rules for fintech regulation and measures regarding information/data disclosure, the issuance of fintech products and protection of the investing public.
Besides being considered PBOC’s open support to implement the pilot policy in Beijing, the pilot policy is also an introduction of the PRC version of the regulatory sandbox.
Chui explains: “Although the announcement does not provide the details of this pilot policy, PBOC clearly expressed the purpose and intention to support Beijing as the pilot city, which is, in addition to the legal and regulatory requirements, to explore fintech innovation regulatory tools which are up to the international standards and correspond to the demands and features of the PRC market environment so that the financial institutions will utilise information technology for the improvement of the quality and efficiency of financial services/products.”
Victor Ho, managing partner of Allen & Overy’s Beijing and Shanghai offices, also believes that the highlighted launch of a China-specific regulatory sandbox will foster experimentation and innovation.
“It is important to point out that the Chinese fintech environment is unique and, in certain areas, far more evolved than other jurisdictions,” he says. “The pilot policy should be seen as an additional incremental step towards a well-considered policy of fostering the evolution of fintech in China.”
Ho emphasises that the country has a significant track record in the successful adoption of technology and innovation which encourages further innovative explorations, technology testing and adoption.
The details of the pilot policy are yet to be released, but considering PBOC’s intention to set up a regulatory sandbox on par with the international counter-parts, “PRC financial institutions may make reference to the current regulatory sandboxes in different jurisdictions such as the UK, Australia, Singapore and Hong Kong to get prepared for the regulatory sandbox in PRC,” Chui suggests.
Although China is learning from other countries by benchmarking its practices and standards with the peers, the sandbox is also gauged to better fit into the overall vision of the Chinese regulator.
Ho notes that the Chinese regulator refuses to compromise financial licensing requirements in the design and implementation of the sandbox regime. “This is because the Chinese regulator is of the view that the pilot policy not only carries with it an innovation encouragement mission, but also a balanced approach designed to address risk prevention.”
Accordingly, rather than admitting unlicensed tech companies into the sandbox and issuing licenses after they exit the box, under the Chinese version of the sandbox regime, participants which are admitted into the sandbox are required to be existing financial license holders, ho continues to explain. Once fintech projects (of such license holders) exit the box, they will be supervised in the same way as other conventional financial products/services.
OPPORTUNITIES FOR LAWYERS
The pilot policy is a sign that China is proactively exploring whether and how the existing laws and regulations apply to fintech while seeking to formulate a more granular approach to fintech regulation to address various risks. And legal professionals are crucial stake-holders during this process.
“Alongside the announcement to launch the regulatory sandbox, there is specific and repeated recognition of the critical roles played by key professional intermediaries such as lawyers in the financial sector and fintech ecosystem,” says Ho. “This is exciting as it recognizes both the changing nature of legal services as well as how important professional service providers are to the development of this area.”
The challenge for lawyers working in this innovative yet disruptive industry is to be fluent in not only the legal and regulatory areas, but also the techno-logical ones.
“While understanding technology may not be possible for all lawyers, not fearing the technology but also developing collaborative and partnering skills are crucial for fintech lawyering,” says Ho.
Although the Chinese regulator has strengthened its supervision over a series of critical issues such as financial consumer protection, cyber security and data protection, and certain high-risk subsectors such as P2P and “joint lending” (between lending license holders and fintech platforms), it is still in the process of establishing a structured and integrated regulatory framework from the top to the bottom, according to Ho.
“Perfecting the regulation of fintech usually means better protection for both investors and corporations, and it would further bolster their confidence and willingness to invest in fintech products or services in the PRC,” Chui adds.
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