As we start a new lunar year, we look ahead to the heavy regulatory agenda planned for 2022 in Hong Kong. These include the introduction of a new investor identification regime in the second half of 2022, continuing growth of the various “connect schemes” into the PRC, licensing for virtual assets, and a feasibility study on retail central bank digital currency.
The twin pressures of new product/regulatory implementation and the current policy settings limiting the supply of talent in Hong Kong will result in difficult choices on resource allocation. In this blogpost, we consider the key areas for product innovation and regulatory themes we expect to see in 2022 and how these will impact financial institutions.
1. Capital markets – new opportunities and regulatory requirements for capital markets intermediaries
As capital market reforms continue in 2022, we expect further opportunities and increased regulation for capital markets intermediaries. We highlight some of these opportunities below.
- The widely anticipated listing regime for SPACs came into effect in Hong Kong in January 2022. We are currently advising on Hong Kong’s first-ever SPAC listing application and have observed firsthand the challenges associated with a new regime. We expect (i) the SPAC listing regime to garner further interest across SPAC promoters and capital markets intermediaries, notwithstanding the competitive pressures from US SPACs whose de-SPAC window is closing; and (ii) the Hong Kong Stock Exchange (HKEX) to provide additional guidance on the listing regime and the role of promoters and intermediaries.
- The trend for homecoming listings is likely to continue and we now expect more overseas issuers to consider listing in Hong Kong in light of the streamlining of the listing regime for overseas issuers, which came into effect in January 2022. The attractiveness of Hong Kong as a listing centre will, however, also depend on the evolving geo-political and regulatory landscape in the PRC and the U.S., including the China Securities Regulatory Commission’s consultation on new rules for overseas listing by Chinese companies, which is widely expected to come into effect in the coming weeks.
- The Securities and Futures Commission (SFC) has concluded its consultation on (i) the conduct requirements for bookbuilding, pricing, allocation and placing activities in the equity and debt capital markets; and (ii) the “sponsor coupling” requirement, under which at least one sponsor (or a group company) should be appointed as the “Overall Coordinator” for an IPO at the end of last year. As the new requirements are due to come into effect in August 2022, capital markets intermediaries will need to familiarise themselves with the new rules and potential changes to market practice.
2. Fintech – fintech regulatory landscape continues to evolve
A number of buzzwords dominated the headlines in 2021. Fringe topics such as decentralised finance, non-fungible tokens and central bank digital currencies became mainstream and financial regulators continued their work to assess whether they had the right tools to preserve financial stability and protect investors. As the fintech regulatory landscape continues to evolve, key developments in 2022 for market participants to watch include the following:
- Virtual asset exchanges and service providers will need to navigate the increasingly fragmented regulatory landscape. Currently, in Hong Kong, virtual assets that are “securities” fall within the regulatory ambit of the SFC, and virtual asset exchanges may “opt-in” to be licensed and regulated by the SFC if “securities” are traded on their trading platform. Going forward, a broader regime to regulate virtual asset exchanges is expected to be finalised this year (with implementation likely in 2023), whilst the Hong Kong Monetary Authority (HKMA) has recently started consulting on a proposed regime to regulate certain stablecoin-related activities.
- There is ambiguity as to whether “Buy Now Pay Later” (BNPL) is a form of lending, and regulatory guidance in this area would be welcomed. Whilst the HKMA has previously noted that BNPL may not necessarily be or need to be regulated in Hong Kong at the moment , its growing popularity globally has resulted in many other regulators responding which may lead to Hong Kong regulators re-considering their regulatory approach on BNPL.
- The HKMA will continue rolling out its “Fintech 2025 strategy” and efforts to digitise the banking sector. For example, the HKMA has recently written to banks to rally for support for the Commercial Data Interchange, which is a consent based system for sharing data across different sectors and entities. The next step for the HKMA will be exploring a link-up with the Commercial Credit Rating Agency and the Companies Registry to leverage credit data and corporate data.
3. Data privacy – continuing implementation work for financial institutions
A number of data privacy-related developments last year will continue to have a significant impact on financial institutions in 2022. These include:
- in the PRC, the introduction of the Personal Information Protection Law in November 2021 (which is a close equivalent to the European GDPR and will significantly impact how data is used by international financial institutions for their cross-border and onshore operations) and various other pieces of data security legislation and consultations issued last year (our round-up of recent developments is here); and
- in Hong Kong, (i) the amendment of the Personal Data (Privacy) Ordinance (PDPO) in October 2021 to introduce a new doxxing offence; (ii) the consultation conclusions by the SFC of an investor identification regime applicable to all on-market dealings in Hong Kong and the requirement for intermediaries to obtain express consent from clients for the transfer of personal data to the HKEX and the SFC prior to the implementation of the regime in the second half of 2022; and (iii) the additional guidance from the HKMA in November 2021 on the sharing of customer data for direct marketing by third parties.
As these developments cut across different business lines of financial institutions (including the brokerage, private banking, wealth management, asset management and custody businesses), we expect financial institutions to continue to grapple with these requirements throughout 2022.
4. ESG – increasing regulation in the ESG space
ESG has been an area of regulatory focus in 2021 and will remain a key area for regulators. In particular, the SFC will be introducing new requirements for fund managers to factor climate-related risks into their business process in the second half of 2022. The HKMA has also published a new Supervisory Policy Manual module “Climate Risk Management”, which sets out requirements on climate risk governance, strategy, risk management and disclosure for banks and will come into force in December 2022.
We expect further developments in the ESG space as Hong Kong regulators will continue working towards: (i) mandating climate reporting that adheres to the standards set by the FSB’s Task Force on Climate-related Financial Disclosures by 2025; (ii) supporting the International Sustainability Standards Board under the International Financial Reporting Standards Foundation to develop and maintain a global, uniform set of sustainability reporting standards; and (iii) adopting a universal taxonomy for green finance, which is being developed under the EU’s International Platform on Sustainable Finance (together with the PRC).
5. Enforcement trends – increasing enforcement in 2022?
At the SFC’s 2021 Regulatory Forum, the SFC indicated that its top enforcement focus for 2022 will continue to be on ramp-and-dump schemes, corporate fraud (including fraudulent corporate loans by listed companies to persons who do not exist or are associates of the listed companies’ directors) and AML/KYC breaches by intermediaries. This announcement also echoes the recent uptick in AML/KYC related enforcement actions by the SFC and other regulators. With the forthcoming change to the senior management at the Enforcement Division of the SFC, it will be interesting to see how the regulatory focus of the SFC will evolve.
In addition to the themes discussed above, we have also recently seen (i) the first public enforcement actions by the HKMA against stored value facility issuers; (ii) the unprecedented takeover of an authorised insurance company by managers appointed by the Insurance Authority; and (iii) a resumption of criminal prosecution of failure to disclose interests in listed companies. In light of these developments, we expect a year of strong enforcement activity targeting financial institutions in 2022, and will be publishing a more detailed publication on the Hong Kong regulatory enforcement trends the upcoming month together with our client event.