In the first part of a series of articles on legal and regulatory issues in specific industries, we look at fintech, one of the fastest-growing sectors in Asia. By Haky Moon
Asia’s most important financial centres are increasingly focused on the links between financial technology (fintech) and traditional finance with lawyers an increasingly important catalyst for the development of both.
Lawyers from Singapore, Hong Kong and Japan say there is a fair amount of common ground when advising clients – both large corporates and start-ups – in the fintech industry across all three jurisdictions.
Accenture reported the Asia-Pacific region attracted close to $3.5 billion in fintech investments during the first nine months of 2015. For lawyers, the number and complexity of the issues at hand is on the rise. To advise fintech companies, lawyers have to navigate traditional finance and finance regulations while dealing with the reality that financial technology tends to outrun financial regulation.
The issues at hand include data protection, big data management and use and coverage on a wide range of fintech products. There are also security perspectives to take into considerations and the need to protect data. There are also issues associated with cybersecurity laws, intellectual property and open source platforms, to name but three. Issues related to collaboration between traditional and new players in the financial industry along with joint ownership considerations.
That said, the weaving-in of technology, both in financial regulations as well as existing financial institutions, is what makes some of the key legal services required by fintech companies in all three cities to be procedurally more similar than different.
“Right now fintech is a hot topic, and it will be a process of natural selection,” says Anna Gamvros, a partner at the Hong Kong office of Norton Rose Fulbright. “Fantastic products will evolve, someone will radically change the way that we operate, or merge back with traditional business.”
SINGAPORE: EXPANDING ECOSYSTEM
Singapore is quickly expanding its fintech ecosystem and cementing its position as a hub for Asia, as the government and regulators constantly looking for new approaches that attract investment.
A key driver of this push is the effort by Singapore’s regulators to lay the groundwork to embrace more financial technology. Legal firms are key to this effort by helping fintech companies navigate the regulatory landscape.
“Financial institutions and technology providers need practical advice on the regulatory landscape for fintech. Companies across the region understand that to adapt and compete they need to adopt new technologies,” says Matt Pollins, a partner at Olswang in Singapore. “Often, though, their adoption of new technologies is delayed by misconceptions about regulation. Lawyers can help by giving practical advice on how to adopt new technologies in a way that complies with all applicable industry standards and regulatory requirements.”
A key trend in Singapore is an increase in tech-friendly regulation. A recent example is the Monetary Authority of Singapore (MAS) outsourcing guidelines, which give a green light to the use of cloud computing services in fintech. The guidance allows financial institutions to benefit from cloud technologies whilst managing regulatory and compliance obligations.
Pollins’ client pool varies from small startups to large institutions, but getting the correct interpretation of the regulations is the most common legal service fintech clients look for, regardless of the subsector in which they operate.
“For the startups, we’re providing mentoring through schemes like Startupbootcamp (FinTech Singapore) and Accenture’s Fintech Innovation Lab. It has been great for our team to mentor some of these startups as they’ve grown, in one case from ideas stage through to a USD 100 million valuation,” said Pollins. “For financial institutions and tech platforms, we help them to navigate complex regulations and provide support on high-value transactions, whether that is technology outsourcing or M&A.”
As for the legal demands, regulation of financial services differs substantially from one market to the next in Asia Pacific. For instance, there are often questions about data transfers from Indonesia, or cybersecurity in China.
However, in many ways the demands are the same, said Pollins. “Clients need tech-friendly advice on intellectual property, commercial contracts, regulation, M&A and disputes.”
JAPAN: KICKING OFF DIALOGUE
“From what I see, fintech is collaborator [and] not a disruptor in Japan. There is a clear intention to promote fintech in the government. The trend in Japan is that unlike other countries, where some see fintech as a disruptor, in Japan when we usually discuss fintech it’s more of a collaboration between fintech companies and financial institutions,” says Yuri Suzuki, partner at Tokyo law firm Atsumi & Sakai.
Like Singapore, Hong Kong and Australia, the government of Japan encourages banks and other players in the financial industry to promote fintech. And yet, investment in the space in Japan remains small, accounting for just 0.4 percent of the roughly $12 billion invested into fintech globally in 2014, says Accenture.
But things are changing. Research by website Tech In Asia shows investments into fintech startups more than doubled in Japan during 2015 to hit $141.73 million. And with more investment, the dialogue between Japanese companies and government has nudged Japan to do more to accommodate fintech. This is a big step forward for a country with stringent financial regulations.
In 2016, Japan promulgated an amendment to the Banking Act which makes it easier for banks to invest in finance-related IT companies as well as new legislation in regards to virtual currencies. This will take effect in 2017.
Another step forward was an amendment to the Installment Sales Act, which introduces a new registration system for payment services providers in the credit card industry. The amendment was promulgated in December.
The legal services that fintech companies look for in Japan are not unlike those that similar firms in Singapore seek out, particularly help navigating new regulations and advice.
“The key legal services required by fintech companies include advice on financial services regulations, which may be applied to fintech services, along with collaboration with financial institutions, fundraising including investment from venture capital, intellectual property which could relate to the technology or business model and general corporate work,” explains Suzuki.
Currently there are three key fintech services that are booming in Japan, namely payment services providers, personal financial management (PFM) and accounting, according to Suzuki. “Right now there is no regulation for PFM or accounting companies, but Japan’s financial services agency is considering new regulations for payment initiation service providers and account information service providers in the banking sector which may affect businesses of existing PFM and accounting companies. In that sense, we advise these companies firstly on the regulatory landscape and secondly, educational advice about the new regulation,” said Suzuki.
HONG KONG: A MEASURED APPROACH
Much like in Japan, the growth of fintech in Hong Kong is happening in measured steps focused on collaboration with incumbent financial institutions.
A key difference lies in the fintech “sandbox” that is under development. Hong Kong is developing its sandbox at a slower pace than competing financial centre Singapore. “While the Singapore sandbox allows other fintech startups, Hong Kong is really just for regulated institutions. The focus is a bit different in the sense that Hong Kong is focusing on the Hong Kong Monetary Authority (HKMA) keeping an open dialogue, but then also encouraging established institutions to join the race,” says Gamvros of Norton Rose Fullbright.
Hong Kong has been trailing Singapore in the development of regulations.
“From a regulatory perspective, it’s been an interesting process of development. There is a competition between Hong Kong and Singapore. They’re competing to become fintech hubs in Asia. To some extent, it is a mirror of what is happening in the UK and Australia,” said Gamvros.
The clients Gamvros deal with range from fintech startups that are looking for both legal advice and structured funding. “Also, you’ve got your financial institutions who are looking more at the current regulatory framework and lastly you’ve got technology companies who are not necessarily startups, such as mobile payments and the online payments sector,”says Gamvros.
“The broad categories we give legal advice on are not unique to Hong Kong. These are mainly dealing with financial services regulations, having to deal with cyber security, IP exist strategies; those are standard across the board,” said Gamvros.
“Hong Kong has its own quirks, which are very local and different. Parts of it will depend on the fintech product we’re looking at and it will vary. But generally, the issues we see are issues that will rise for any startups.”
“We’ve seen developments, such as fintech facilitation by the Hong Kong Monetary Authority (HKMA), which is facilitating the development of platforms for fintech. We’ve done this through collaboration, officially, IT infrastructure support, coordinating trials, solution providers, computing resources to startups, this enables HKMA regulate fintech startup development. Regulators are trying to be more engaged,” said Gamvros.