On 4 November 2020, the financial markets in Hong Kong were jolted not by the outcome of the 2020 United States Presidential election, but when Chinese regulators halted the highly anticipated initial public offering (IPO) of Ant Group (an affiliate of e-commerce giant Alibaba) just three days before its shares were scheduled to start trading in Shanghai and Hong Kong in what would have become the biggest share sale in history. The Ant Group’s services offer a wide spectrum of financial products, such as digital payments through its popular app Alipay, wealth management and insurance products, small loans and instant credit. According to a statement issued by the Shanghai Stock Exchange, the Ant Group IPO had been postponed because of “major issues” which might cause the company “not to meet the listing conditions or disclosure requirements”. It is not yet clear when the IPO will resume.
The rise of financial technology (Fintech) and the regulatory response
In recent years, the growth of digitalization and use of social media by companies such as Ant has transformed the way in which financial products were marketed or distributed. The growth is driven by smaller businesses which have turned to the off-balance sheet shadow banking sector, performed outside the formal banking sector and which are usually subject to lower levels of regulatory oversight. The traditional banking model views lending to small businesses as entailing higher risks, since these businesses are usually unable to demonstrate ability to repay loans in an environment which lacks a standard credit score system or hard securities.
Since March 2020, regulators around the world have been concentrating their responses to the COVID-19 crisis. It can be argued that Fintech has even introduced social distancing in the business world, as financial firms have introduced and consumers widely adopted consumer and digital financial technologies, e.g. from remote banking to online account opening and wireless payments. This may lead to more financial crime and fraud in “virtual” platforms and eventually will attract increasing supervision by the Securities and Futures Commission (SFC).
Regulators in Hong Kong have also been keen to provide additional guidelines to cope with the rapid advent of Fintech. For the last few years, the SFC has wielded its powers to regulate virtual assets falling under the definition of “securities” under the Securities and Futures Ordinance (SFO), and may well be expected to expand its powers to online platforms. For example, online platforms which offer at least one virtual asset may attract SFC regulation, and may then include regulating other virtual assets traded on the platform which are not actually “securities”. It is expected that Hong Kong will soon introduce a new licensing regime under the Anti-Money Laundering Ordinance for online platforms which trade any form of virtual asset (e.g. cryptocurrencies) even if none are within the legal definition of a “security”.
Managing Risks
The Ant Group IPO saga highlights the importance of staying in close communications with regulators, and staying up to date with the set of guidelines published by the regulators. We anticipate that regulators in Hong Kong together with its Mainland counterparts, will continue to adapt its rules to keep pace with more innovation, in recognition of the advancement of financial technology and Fintech which will continue to innovate, is here to stay. This does not mean that regulators will not encourage financial innovation, as evidenced by the introduction of regulatory sandboxes by the SFC, to enable new ideas to formulate and grow.
But the major issues are so much bigger than the outcome of one IPO. Ground breaking changes in finance will increasingly demand that regulators seek to understand how technology and financial regulation, potential risks and financial stability, and ultimately investor protection can co-exist in the 21st century. Besides the regulation of the Ant Group’s online co-lending business and loan facilitation, other Fintech innovations will demand greater research by regulators such as digital central bank currencies, which is gaining traction not only in the Mainland but also in many European countries. Regulators can also be expected to consider the influence of artificial intelligence, cloud computing and as well as other sophisticated financial algorithms in the financial services industry, which may compel regulation to many currently unregulated technology firms for investors’ protection.
Mainland China has just unveiled the draft rules from the People’s Bank of China and the China Banking and Insurance Regulatory Commission reining in micro-lending. The draft, which is open for public feedback until 2 Dec 2020, sets inter alia a new requirement for online lenders to provide at least 30% of any loan they fund jointly with banks. There is also a 5 billion RMB registered capital threshold for micro-lenders that offer loans online across different regions. The current threshold varies between provinces but is well below 1 billion RMB.
Micro-lenders which source borrower data from ecommerce platforms to assess their credit will be required to share the credit information with the central bank, according to the draft rules.
In order to navigate these and other changing rules, businesses should pro-actively seek legal advice to identify risks in their business, ensure compliance and further to anticipate and minimise risks from regulatory changes.
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