Following implementing various initiatives for smart banking, the Hong Kong Monetary Authority (“HKMA”) also updated the Guideline on Authorisation of Virtual Banks (the “Guideline”) setting out the principles on which the HKMA would take into account in deciding whether to authorise virtual banks. The HKMA issued the first three virtual banking licences on 27 March 2019 and 5 more virtual banking licences recently. The first virtual bank started its trial run on 18 December 2019 in the HKMA Fintech Supervisory sandbox.
A “virtual bank” refers to a bank which delivers retail banking services primarily through the internet or other forms of electronic channels instead of physical branches. Virtual banks must however maintain a physical presence in Hong Kong to interface with the HKMA and customers to deal with their complaints and enquiries. This allows banks to put more emphasis on the customers and their needs instead of capital investment on physical branches and the manpower.
Key requirements to establish a virtual bank
Virtual bank applicants must comply with the Minimum Criteria for Authorisation under the Seventh Schedule to the Banking Ordinance and should refer to the Guideline on Minimum Criteria for Authorisation issued by the HKMA under section 16(10) of the Banking Ordinance for further guidance.
1. Minimum Criteria under the Seventh Schedule to the Banking Ordinance are summarized as follows :-
(a) If the applicant is incorporated outside Hong Kong, it is a bank (i) as defined in section 46(9); and (ii) it is adequately supervised by the relevant banking supervisory authority.
(b) HKMA knows the identity of each controller of the company. For an applicant incorporated in Hong Kong, each person who is, or is to be a director, controller, chief executive or executive officer of the applicant is a fit and proper person; For an applicant incorporated outside Hong Kong, each person who is, or is to be a chief executive, or executive officer, of the business in Hong Kong of the applicant; and a director, controller or chief executive of the business of the applicant in the place where it is incorporated, is a fit and proper person to hold the particular position which he holds or is to hold.
(c) The applicant has adequate systems of control to ensure that each person who is or is to be a manager of the applicant is a fit and proper person to hold that position.
(d) The applicant has adequate financial resources (whether actual or contingent) for the nature and scale of its operations. In particular, the minimum levels of share capital (including paid-up share capital and the balance of share premium account (if any)) are currently set at HK$300 million for banks and HK$25 million for deposit-taking companies or an equivalent amount in any other approved currency. Also, in the case of an applicant incorporated in Hong Kong, it shall comply with the rules made under section 97C(1) of the Banking Ordinance (i.e. the Banking (Capital) Rules) applicable to it.
(e) The applicant maintains adequate liquidity to meet its obligations as they fall due and comply with the rules made under section 97H(1) of the Banking Ordinance (i.e. the Banking (Liquidity) Rules) applicable to it.
(f) The applicant complies with limits on exposures incurred by a financial institution, that is to comply with the provisions of Part XV of the Banking Ordinance, and the provisions of the rules made under that Part, applicable to it.
(g) The applicant maintains adequate provision for depreciation or diminution in the value of its assets for liabilities which will or may fall to be discharged by it and for losses which will or may occur.
(h) The applicant has adequate accounting systems and adequate systems of control.
(i) The applicant shall disclose adequate information in relation to the state of its affairs, including its profit and loss and its financial resources.
(j) The business of the applicant (including any business which is not banking business or the business of taking deposits) is carried on with integrity, prudence and the appropriate degree of professional competence and in a manner which is not detrimental or likely to be detrimental to the interest of the depositors or potential depositors.
(k) If the applicant seeking authorization to carry on banking business in Hong Kong is a company incorporated in a place outside Hong Kong, either (a) there is, in the opinion of the HKMA, an acceptable degree of reciprocity in respect of banks incorporated in Hong Kong seeking to carry on banking business in that place; or that place is, or is part of the territory of, a member of the World Trade Organization.
2. Requirements under the Guideline which is issued under Section 16(10) of the Banking Ordinance are summarized as follows :-
The virtual bank applicant must satisfy the minimum criteria for authorization in the Seventh Schedule to the Banking Ordinance, which means that it must have substance and cannot simply be a “concept”, taking advantage of the popularity of new technology. Also, virtual banks must bring value to the industry, such as playing an active role in promoting financial inclusion.
Virtual banks are expected to operate in the form of a locally incorporated bank. In particular, the virtual bank applicant can be either :-
(i) Majority owned by a bank or financial institution in good standing and supervised by a recognised authority; or
(ii) Held through a holding company incorporated in Hong Kong, subject to supervisory conditions such as capital adequacy.
(c) Ongoing Supervision
Virtual banks will be subject to the same set of supervisory requirements applicable to conventional banks with certain adaptations to fit the business models of virtual banks under a risk-based and technology-neutral approach.
(d) Physical Presence
Virtual banks need not establish physical branches, but they must :-
(i) Maintain a physical presence in Hong Kong, as their principal place of business.
(ii) Keep a full set of accounts, books and records of transactions which are accessible to the HKMA.
(e) Technology Risk
Virtual bank applicants must engage a qualified and independent expert to perform an independent assessment of the adequacy of its planned IT governance and systems such as their computer hardware, systems, security, procedures and controls for technology risks. The report of the assessment should be provided to the HKMA before the virtual bank commences operation.
(f) Risk Management
At the minimum, virtual bank applicants must manage eight basic types of risk identified in the risk-based supervisory framework of the HKMA, covering credit, interest rate, market, liquidity, operational, reputational, legal and strategic risk, analyse to what extent it will be subject to these risks as a virtual bank and establish appropriate controls to manage these risks.
(g) Business Plan
Virtual bank applicants must have a credible and viable business plan, which strikes an appropriate balance between the desire to build market share and the need to earn a reasonable return on assets and equity. Predatory tactics could be detrimental to the stability of the banking sector and could undermine the confidence of the general public in the bank itself. In any case, a virtual bank should not allow rapid business expansion to put undue strains on its systems and risk management capability.
(h) Exit Plan
Virtual bank applicants must provide an exit plan to ensure that if it became necessary to do so, it could unwind its business operations, in an orderly manner without causing disruption to the customers and the financial system.
(i) Customer Protection
Virtual banks must treat their customers fairly and adhere to the Treat Customers Fairly Charter and observe the Code of Banking Practice issued by the Hong Kong Association of Banks and the DTC Association. Also, virtual banks must adopt fair and balanced terms and conditions between the banks and its customers.
Virtual banks must comply with the principles in the HKMA Supervisory Policy Manual module on Outsourcing. In particular, the HKMA must be satisfied that the operations outsourced remain subject to adequate security controls, that confidentiality and integrity of customer information will not be compromised and that the requirements under the Personal Data (Privacy) Ordinance and common law customer confidentiality are complied with.
(k) Capital Requirement
Virtual banks must maintain adequate capital commensurate with the nature of their operations and the risks they are undertaking.
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