HKMA publishes final revised guideline on the authorisation of virtual banks

The Hong Kong Monetary Authority has published the final version of the updated Guideline on the Authorisation of Virtual Banks. At present, the revised guideline is in the form of a redline showing changes made since the version consulted on in February this year.

Alongside the revised guideline, the HKMA has published an Annex setting out the consultation conclusions which provides an overview of the responses the HKMA received and the HKMA’s commentary on the conclusions reached.

The revised guideline does not depart materially from the original consultation. But it does clarify several points.

The key amendments and HKMA comments to take note of are:

Financial inclusion and customer base 

Some respondents had queried whether virtual banks were prohibited from offering services to non-retail customers, given the definition of “virtual bank”. The HKMA has reminded firms that a “key objective” of introducing virtual banks is to help promote financial inclusion, and they should therefore target “primarily” the retail segment. It has however clarified that virtual banks may also provide services to other customer segments. The HKMA remains of the view that virtual banks should not impose any minimum balance requirements or low-balance fees on customers

Intermediate Holding Companies

The consultation proposed that where a virtual bank applicant is not owned by a bank or financial institution, it must be held through a Hong Kong incorporated IHC. Respondents had noted that the IHC was to be subject to various conditions and had asked for further clarity around what these would mean in practice. The HKMA provided further details in paragraph 9 of the revised guideline, which now states that the conditions to be imposed on the IHC will likely cover requirements on capital adequacy, liquidity, large exposures, intra-group exposures and charges over assets, group structure, activities undertaken, risk management, fitness and propriety of directors and senior management and the submission of financial and other information to the HKMA. The HKMA notes that these are similar to conditions which may be imposed on banks owned by non-financial firms as set out in the “Guideline on Minimum Criteria for Authorisation

Parent company support

The HKMA has amended paragraph 10 to emphasise the importance of parent company support for the virtual bank, through financial, technological and other means

Face-to-face identity verification

In the consultation, paragraph 12 had originally stated that one of the reasons for necessitating a physical presence in Hong Kong was to “allow the bank to verify the identity of its customers where necessary”. Some respondents had queried whether this reference suggested that verification of identity was required to be done face-to-face at physical premises, which they believed was inconsistent with the concept of “virtual” banking. The HKMA has taken on board this feedback and, clarifying that there is no requirement for identity to be verified on a face-to-face basis, has deleted this wording

Physical presence

In paragraph 13, the HKMA has removed the requirement that records of transactions, books and accounts be kept in Hong Kong, as long as they are “accessible” to the HKMA

Technology risk

System resilience and business continuity management have been included as technology-related risks. The HKMA has also amended paragraph 15 to permit the submission of the independent assessment report on adequacy of information system controls by phases

Business plans and exit plans

The requirement for a virtual bank to have an exit plan is retained and paragraph 20 of the revised guideline provides some examples of areas that should be included in an exit plan, e.g. when the plan will be triggered, channels to be used to repay depositors and the sources of funding for making such payments. Regarding business plans, no change is made to the revised guideline, however the HKMA clarifies, in response to comments received, that there will be no grace period for compliance with the requirement not to engage in predatory business tactics (e.g. to allow a bank to rapidly grow its customer base in the early days of operation)


No change is made to the outsourcing paragraph of the revised guideline, however it is worth noting some of the HKMA comments on the topic.

  • the HKMA does not object to the use of external cloud computing services
  • the HKMA is “open-minded to different forms of outsourcing”
  • compliance with the SPM Outsourcing module is not required on a word for word basis if the applicant can demonstrate the outsourcing meets the supervisory requirements
Capital requirements 

No change is made to the capital requirements, and, in response to feedback on the consultation, the HKMA has taken the opportunity to remind applicants that the minimum paid-up capital requirement of HK$300 million is stipulated by law and is applicable to all licensed banks, and that it is not open to the HKMA to reduce this

Applicant Firms

For firms wishing to make a virtual bank application, the HKMA reminds potential applicants that the revised guideline should be read alongside the Guideline on Minimum Criteria for Authorisation which sets out detailed guidance on bank applications also relevant to virtual bank applications. There is also a team within the HKMA set up to answer virtual bank applicants’ questions and provide some assistance on the application process.

The HKMA notes that it has received queries and indications of interest from over 50 companies since last September. Given the very large number of enquiries, the HKMA notes that unless a substantially complete application is submitted by an applicant by 31 August 2018, the applicant will be most unlikely to be included in the first batch of virtual bank applications to be processed.

Echoing the content of the revised guideline, the HKMA press release notes it will give priority to “applicants which can demonstrate that (i) they have sufficient financial, technology and other relevant resources to operate a virtual bank; (ii) they have a credible and viable business plan that would provide new customer experience and promote financial inclusion and fintech development; (iii) they have developed or can develop an appropriate IT platform to support their business plan; and (iv) they are ready to commence operation soon after a licence is granted.”