This is a guest post by Hungyi Chen, Ph.D. candidate at the Graduate School of Law, Nagoya University. He is researching alternative finance in East Asia.
1. The recent development of online alternative finance
Given the recent trend that Fintech is rapidly growing in the world, in order to maintain the role of international financial center, the financial authority of Hong Kong has been aware of issues relating to Fintech industry. On November 13th, 2015, Stored Value Facilities Payment Systems, such as online stored payment business as PayPal, is allowed to operate by non-bank. This is a milestone for Hong Kong including non-bank of operating business highly relevant to conventional bank.
In order to enhance the development of startups in Hong Kong, financial technologies (Fintech) are emphasized by the authority since the investment of Fintech is a target of many venture capitalists. Nevertheless, compared with other jurisdictions in Asian countries, which already lightened entry requirement to encourage non-bank for engaging business of equity-based crowdfunding, such as Japan, Korea, Malaysia, Taiwan, and Thailand, the entry requirement of Fintech, especially alternative finance may be stricter in Hong Kong.
Until now, there is still no equity-based crowdfunding platform established in Hong Kong. However, the huge demand from capital market gradually leads the development of crowdfunding in Hong Kong, especially debt-based crowdfunding, which is also known as Peer-to-Peer Lending. Currently, there are 4 major peer-to-peer lending platforms, including BestLend, GoLend, Monexo, and WeLend.
2. Relevant industry background
With unique selling factors, the peer-to-peer lending platforms may have a rapid growth in the near future. On one hand, from viewpoints of investors, the deposit rates of savings are from 0%~0.001%. Even the deposit rates of fixed deposit of 12 months are from 0.15%~0.2%. Additionally, inflation rates are around 4% continuously in 2013 and 2014, which means the real interest rate may be negative in Hong Kong. Accordingly, there are strong incentives for investors to vitalize their capital.
On the other hand, from viewpoints of borrowers, there are two fundraising channels for loans, including banks (Licensed Banks, Restricted License Banks, Deposit-taking Companies) and Money Lenders. Since the financial authority restricted the mortgage market of banks to prevent a real-estate bubble, it is difficult for borrowers to get the loan amount they need from banks by mortgage. As a result, they turn to Money Lenders as an alternative opportunity. Although the interest rates of Money Lender are generally higher than banks, compared with banks which normally take 1-6 weeks for examining procedure, the process of Money Lender is more simplified.
The market scale of Money Lenders in Hong Kong is approximately 30.5 billion HKD (3.9 billion USD) and 6.6 billion HKD (852 million USD) in mortgage market in 2013. And the top 10 Money Lenders share 53.9% of this market. Though peer-to-peer platforms in Hong Kong are still at an initial stage, with strength of technology, they can provide relatively lower interest rates and attract more investors by Internet.
3. Regulatory developments
On May 7th, 2014, the financial authority, has issued a notice regarding risks and legal compliance of crowdfunding since crowdfunding has become a widespread idea and business model in Hong Kong. The Chief Executive Officer, Securities and Futures Commission has also indicated “Parties seeking to engage in crowd-funding activities should be aware that a breach of the relevant laws could lead to serious consequences including criminal liability.”
In order to provide protection and relief against excessive interest rates and extortionate stipulations in respect of loans, ‘no person shall carry on business as a money lender without a license.’ Under the Money Lenders Ordinance in Hong Kong, the definition of money lender includes the business of loan, or advertises or announces himself in any way as carrying on that business. Accordingly, a company operating or advertising as a lending business, such as peer-to-peer lending, may need a license in Hong Kong. Most peer-to-peer lending platforms in Hong Kong have registered as a money lender according to Money Lenders Ordinance in Hong Kong, such as BestLend, GoLend, and WeLend. Nevertheless, in practical, it may not be necessary for peer-to-peer lending platforms to apply as a money lender in Hong Kong. For instance, Monexo, a peer-to-peer lending platform in Hong Kong, providing a platform for only bridging connection between borrowers and lenders, does not show any lending license on its website as the requirement of Money Lenders Ordinance in Hong Kong. In other words, the business model of peer-to-peer lending is the core issue for evaluating legal compliance of a platform in Hong Kong at this moment.
The Securities and Futures Commission (SFC), which is responsible for regulating Hong Kong’s securities and futures markets, had issued a notice regarding crowdfunding. Based on this notice, there are several financial regulations that may be relevant to equity-based crowdfunding, including be subject to provisions of the Securities and Futures Ordinance (SFO), the Companies (Winding Up and Miscellaneous Provisions) Ordinance or relevant SFC requirements. Accordingly, a company of equity-based crowdfunding should meet the requirement of SFO and its relevant rules. Currently, there is no equity-based crowdfunding for general investors and also no specific financial regulation for lightening the cost of legal compliance for Fintech startups operating equity-based crowdfunding in Hong Kong.
 The Proposed Regulatory Regime for Stored Value Facilities and Retail Payment Systems in Hong Kong (consultation paper), Financial Services and the Treasury Bureau, http://www.gov.hk/en/residents/government/publication/consultation/docs/2013/E-money.pdf (last visited February 17, 2016).
 Regulatory regime for stored value facilities and retail payment systems commences operation, GovHK, http://www.info.gov.hk/gia/general/201511/13/P201511130423.htm (last visited February 17, 2016).
 Budget Speech (The 2015-16 Budget), Financial Services and the Treasury Bureau, http://www.budget.gov.hk/2015/eng/budget10.html (last visited February 17, 2016).
 Deposit Rates, The Hongkong and Shanghai Banking Corporation Limited, http://www.personal.hsbc.com.hk/1/2/hk/investments/mkt-info/deposit-rates/interest-rates?pwscmd=cmd_init (last visited February 17, 2016).
 As above.
 Hong Kong in Figures, Census and Statistics Department, The Government of the Hong Kong Special Administrative Region, http://www.censtatd.gov.hk/fd.jsp?file=B10100062015AN15E01.xls&product_id=B1010006&lang=2 (last visited February 17, 2016).
 The Industry of Money Lenders (Chinese version), Hong Kong Exchanges and Clearing Limited, http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1229/a3583/CGICG-20140728-13.PDF (last visited February 17, 2016).
 As above.
 As above.
 Securities and Futures Commission.
 Notice on Potential Regulations Applicable to, and Risks of, Crowd-funding Activities, Securities and Futures Commission, http://www.sfc.hk/web/EN/files/ER/PDF/Notice%20on%20Crowdfunding.pdf (last visited February 17, 2016).
 SFC outlines risks of crowd-funding and potential regulatory issues, Securities and Futures Commission, https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR51 (last visited February 17, 2016).
 Section 7 of Money Lenders Ordinance (Hong Kong).
 Section 26 of Money Lenders Ordinance (Hong Kong).
 As noted in endnote 12.