to the changing market landscape. in particular, we want to remove any disincentives for the local banks to focus on the need to think more seriously about merger and acquisition. our general position is that it would be desirable to see some consolidation in the local banking sector. but this will have to come through market forces, rather than being mandated by the regulators. we are attempting to dismantle the barriers to competition in a careful way that will give the banks a chance to adapt and avoid undue risks to the safety and soundness of the banking system. for the same reason, we are also having to change our regulatory framework and supervisory approach to ensure that they keep up with changing market conditions. one priority has been to take account of the e - banking developments i have already mentioned. a particular landmark was the guideline on virtual banks which we issued in may of this year. i will not go into the details of this except to say that it was first drafted when the dot. com frenzy was at its peak, and i believe that the cautionary notes that we uttered have stood the test of time. in particular, our guideline stressed that virtual banks must have substance rather than being a concept, and that virtual banks are subject to the same risks as conventional banks and should be subject to the same prudential criteria. essentially, we were warning of the need not to be blinded by the technology. we also warned against over - aggressive pricing and of the need to strike an appropriate balance between acquisition of market share and earning a reasonable return. as with other new banks that we authorise, we would normally expect a virtual bank to be making a profit by the end of its third year. this was criticised in some quarters as being unrealistic and not in keeping with the internet business model. however, as events have turned out, it was that model that was unrealistic rather than our guideline. under our current rules, it is not possible to establish from scratch a new locally incorporated virtual, or indeed conventional, bank in hong kong. that is something that we may review next year in line with the process of deregulation already referred to. in the meantime, this need not be a barrier to setting up virtual banks, either by converting existing local franchises or, in the case of an overseas bank, by setting up a branch in hong kong. as proof of this, we are currently considering two applications to set up virtual banks, and assuming that they can meet

fintech industry that overly rigid or conservative regulations may stifle new technology and innovation. so how do we in the hkma deal with this issue? let me say this : the regulatory philosophy of the hkma is that we adopt a risk - based and technology neutral approach. specifically, we would endeavour to see through the nature and magnitude of the risks involved in a financial transaction or product without positive or negative discrimination on whether a new technology is used. however, it is important not to misinterpret this “ technology neutral ” approach as one that is insensitive to the contributions that fintech and innovation can bring to the financial sector. the more correct narrative is that, without compromising consumer and investor protection, the hkma embraces the use of fintech and innovation. a practical demonstration of our effort in supporting fintech development in hong kong is the setting up of the “ fintech facilitation office ” ( ffo ) by the hkma earlier this year. in may, the ffo launched its first major initiative, namely, the “ cybersecurity fortification initiative ”. it is a major endeavour involving the key stakeholders in the banking as well as the fintech industry. in the interest of time, i do not propose to say much about this important initiative today. 13. what i would like to say is that, in order to further facilitate fintech development in hong kong, the hkma has decided to launch two new initiatives today. fintech innovation hub 14. first, i am pleased to announce that the hkma will collaborate with the applied science and technology research institute ( astri ) to set up the “ fintech innovation hub ”. it will be equipped with all necessary system and support resources to enable players of the banking and payment industry to conduct proof of concept trials of products and services through the use of new technologies, and do it safely – as this controlled environment is separated from their internal systems. also, the fintech innovation hub allows regulators to provide early inputs to the trial works before the actual implementation. while some of the largest banks have built their own laboratories, this new fintech innovation hub will cater for the big and small institutions alike such that the industry as a whole would be able to adopt new technologies more speedily and in a more collaborative manner. 15. among its potential uses, this fintech innovation hub, as a neutral testing ground, will be ideal for two types of activities. first, industry players can test