Sara SM Or, Partner, Mayer Brown, reviews the revised guidelines issued by the Hong Kong Monetary Authority on the authorisation of virtual banks.

On 30 May 2018, the Hong Kong Monetary Authority (HKMA) issued a revised Guideline on Authorisation of Virtual Banks (the Guideline). In principle, a virtual bank is subject to the same authorisation criteria and requirements as a conventional bank. In addition to the Guideline on Minimum Criteria for Authorisation, which applies to conventional banks, the Guideline provides specific guidance on how the HKMA will apply the minimum authorisation criteria set out in the Seventh Schedule to the Banking Ordinance (the Ordinance) to a virtual bank.

The Guideline is issued as part of the package of initiatives to bring about a new era of smart banking in Hong Kong. The aim is to encourage the development of virtual banks in Hong Kong, with the objectives of promoting application of financial technology and facilitating financial inclusion. The revision of the Guideline demonstrates the HKMA’s willingness to adapt appropriately to cater for features unique to the operation of virtual banks, whilst preserving the security of the financial system of Hong Kong and its position as a major international financial centre.

The Guideline was first issued in year 2000. The principles and requirements in the initial version are clarified and enhanced in the revised version. Major requirements, key updates and refinements include those set out below.


  • Both financial and non-financial companies may apply to own and operate a virtual bank in Hong Kong.
  • Virtual banks are expected to operate in the form of locally incorporated banks, in line with HKMA’s policy for banks that operate significant retail businesses.
  • If the person holding more than 50% of the share capital of the virtual bank is not a bank or a financial institution in good standing and supervised by a recognised authority (in Hong Kong or a comparable jurisdiction), the virtual bank must be held through an intermediate holding company incorporated in Hong Kong. This enables the HKMA to impose supervisory conditions over such intermediate holding company.

Physical presence

  • Virtual banks must maintain a physical principal place of business in Hong Kong, but establishing a physical local branch is not mandatory.

Minimum capital requirement and fees

  • The minimum paid-up capital requirement is HK$300 million. The same requirement is applicable to all licensed banks.
  • Virtual banks should not impose any minimum balance requirements or low-balance fees on customers.

Ongoing supervision

  • Virtual banks will be subject to the same set of supervisory requirements as conventional banks. The HKMA will adopt the risk-based approach as in the case of conventional banks, and will be technology-neutral. By prescribing principle-based requirements, including the Guideline, the HKMA will be able to apply the requirements to virtual banks with regard to the actual operations and technology-driven business model of each virtual bank, and adapt and enhance the existing standards applicable to conventional banks as appropriate.

Record keeping

  • Virtual banks must keep a full set of their books, accounts and records, and the HKMA has the right of access for the performance of its supervisory functions, whether the records are kept in Hong Kong or elsewhere.

Technology risk and risk management

  • In addition to information security, the HKMA emphasises the importance of system resilience and business continuity management for virtual banks, and virtual banks should ensure that the related controls and measures are ‘fit for purpose’.
  • A virtual bank applicant is required to submit an independent assessment report on the adequacy of its planned IT governance and systems as part of its application, and a final report covering an overall evaluation of its information systems before commencing operation.

Business plan

  • A virtual bank applicant must be able to present a credible and viable business plan, as opposed to a concept.
  • A virtual bank applicant should also demonstrate sustainability in its business model. The HKMA will disapprove any predatory tactics and rapid business expansion, which put undue strains on systems and risk management capability.

Exit plan

  • A virtual bank applicant is required to provide an exit plan to address the scenario that its business becomes non-viable. The exit plan should provide for unwinding the business in an orderly manner without causing disruption to customers or the financial system.
  • The exit plan should cover matters such as how and when the plan would be triggered, who could trigger it, and channels to be used to repay depositors and the source of funding for making the payments.

In addition to the above, the Guideline also contains principles covering other aspects of a banking operation, such as consumer protection and outsourcing. The HKMA is reviewing its existing prudential requirements to streamline any possible frictions in the use of digital banking services, and also working with the Privacy Commissioner for Personal Data to provide greater clarity on how the existing personal data protection requirements will apply in the context of online banking. Where appropriate, the HKMA is expecting to provide further guidance with respect to existing anti–money laundering and know-your-customer requirements.

In evaluating the applications received, the HKMA will give due regard to the extent to which the authorisation of the applicant will promote fintech and innovation, new customer experience and financial inclusion in Hong Kong. Priority will be given to applicants that can demonstrate:

  • adequate financial, technology and other relevant resources
  • credible and viable business plan to provide new customer experience and promote financial inclusion and fintech development
  • appropriate IT platform to support business plan, and
  • readiness to commence operation soon after a licence is granted.

The HKMA began accepting applications for virtual bank licences in February 2018. Applicants interested in being in the first batch of applications to be processed should submit a substantially completed application to the HKMA by 31 August 2018. The HKMA is expecting to start granting licences to virtual banks towards the end of 2018 or in the first quarter of 2019. As virtual banking is a relatively new type of banking business model, applicants will be expected to devote extensive resources to working closely with the regulator.

Sara SM Or
Partner, Mayer Brown
Copyright: Mayer Brown