Ant Group: The IPO that failed to launch

ADRAMATIC turn of events took place on Nov 3 that set the financial markets buzzing. Ant Group, imminently debuting as the world's biggest initial public offering (IPO) at US$37 billion, had the plug abruptly pulled on its listing by the Chinese regulatory authorities, citing "major issues".

The Shanghai Stock Exchange (SSE) offered a terse explanation that continues to leave market observers speculating. The explanation cited a regulatory interview with Ant Group founder Jack Ma and changes in the regulatory environment which may result in Ant not meeting listing qualifications or disclosure requirements. When this happened, the company was prompted to also suspend its planned listing on the Stock Exchange of Hong Kong (SEHK).

The Chinese authorities summoned Mr Ma to one or more "regulatory interviews" involving the People's Bank of China (PBOC), China Securities Regulatory Commission (CSRC), China Banking and Insurance Regulatory Commission (CBIRC) and the State Administration of Foreign Exchange (SAFE).

The company itself subsequently issued a statement confirming the meeting with the authorities, and that the dialogue was focused on the "health and stability of the financial sector".

A month later, the situation is still murky. Ant's IPO, hotly anticipated since 2018 or even earlier, was planned to take place at the end of thousands of hours of undoubted preparation. Will it go ahead after all, perhaps under a new deal cut with the powers that be? Or must there first be regulatory reform to address issues posing systemic risks to the world's second largest economy? These are more important issues to consider than any speculation regarding the dramatic spanner in the fund-raising works for China's first fintech unicorn.

FROM ANT TO UNICORN

Nearly a decade after the company was spun out of Alibaba, Ant has developed a fearsome market reputation. Its Alipay super-app is used by an estimated 785 million people every month. In addition to a dominant payment tool for consumers, it has become a major platform for personal credit, loans, insurance and even investments.

Alipay offered a simple and cheap solution for merchants to get paid by consumers without credit cards. As Alipay got better at user experience, its adoption became widespread; and it is credited as having helped transform China into a cashless society. Government support was instrumental in the company's success. Yet despite its many achievements, industry experts have noted the frequent run-ins of Mr Ma and the company with regulatory authorities.

UNEASY RELATIONSHIP WITH CHINESE REGULATORS

Regulation necessarily lags behind innovation and in the fintech industry - the who, what, when and how of regulation and oversight is still at a nascent stage. Still, it is an important topic; and subject to active policy, legislative and academic debates.

Ant is simply the biggest of the entities that sit at the nexus of finance and technology, facing intense scrutiny for their disruptive presence in markets around the world. Its recent experience with Chinese regulators is instructive for fintechs operating anywhere.

It is in the DNA of fintechs to drive towards lower costs and the provision of financial products to a wider audience. Mr Ma is a flag-waving inclusivity advocate and has thereby attracted the ire of banks (especially the state-owned ones that are tightly regulated), as well as fintech rivals and even regulatory and governance hawks.

TOWARDS A PRINCIPLE-BASED SUPERVISORY APPROACH

Governments around the world aim for three key objectives of regulating financial services: first, protect consumers and investors; second, maintain financial stability; and third, ensure market integrity.

Consumer and investor protection is a well-established pillar of regulation now faced with the challenge of keeping up with fintech innovation and new possibilities in digital finance. For example, the industry is seeing an increasing amount of data collected about consumers - ostensibly to enable fintech businesses to provide better and more personalised products and services tailored to individuals' specific needs.

An associated issue around data collection is that of privacy and security. In the year of the Covid-19 pandemic, the acceleration of digital services has gone hand in hand with the proliferation of cybercrime, identity theft and online scams.

Second, regulation is rightly concerned with the soundness of the financial system as a whole. Stability risks are usually associated either with industry players that are either "too big to fail" or "too interconnected to fail". Regulators like the Monetary Authority of Singapore (MAS) have long calibrated their oversight according to whether a regulated entity is regarded as "systemically important".

Such an entity must not be allowed to fail, or if it does, the adverse effects of such failure must be managed. However, it is up to each country's authorities to make their own determination as to which industry players are systemically important, and to set their own laws that apply to those entities. What is clear however, is that the recent entry of large technology firms (BigTech firms, of which Ant is one) has presented new and complex trade-offs between financial stability, competition, and data protection.

When the Chinese central bank announced a digital currency (CBDC) in the spring of 2019, some experts observed the possibility that it could sideline digital payment giants such as Alipay and WeChat Pay. Others opined that the CBDC would give another option to the everyday consumer in the retail payments system. Only time will tell.

Third, it is undisputed that trust is the basis of financial transactions, whether digital or not. This highlights the issue of market integrity and the ongoing need to safeguard the financial system from illicit activities, fraud and manipulation.

Financial crimes and data hacks are increasing year by year. With digital technology posing both the problem as well as the solution, financial regulators must be alert to protect the market's proper functioning.

To achieve these three key policy aims, regulators have become more willing to use a broad set of principles and outcome-focused rules ("principle-based approach") rather than detailed prescriptions of "do's and don'ts" ("rules-based approach").

Legal and policy experts agree that overall, the principle-based regulatory approach appears to have gained prominence in light of fintech developments, possibly because it is inherently adaptable to emergent business models.

The key principles of such an approach include legal certainty, technology neutrality, and proportionality which is sometimes referred to as "risk-based". These principles are widely accepted across different jurisdictions and financial sector regulators. Governments are also increasingly conscious of the importance of balancing regulatory risks and innovation. "Light touch, safe harbour" approaches are increasingly preferred, especially in fintech.

The local experience is instructive, as Singapore is not only a highly regarded financial hub which aspires to be sound and progressive, but more recently has developed into a vibrant fintech hub.

The MAS has stated its view that "supervision and development are not incompatible; in fact, they are complementary". It has separate but synergistic departments in its organisation that do supervisory and developmental work respectively.

The Payment Services Act 2019 that came into force early in 2020 is an example of a forward-looking and flexible framework for the regulation of payment systems and payment services that provides for regulatory certainty while encouraging innovation in this space.

The Oxford Blockchain Regulation Framework has provided thought leadership in policy and risk management that acknowledges the disruptive potential of the emergent blockchain technology and seeks to balance robust governance with commercial potential.

WHAT LIES AHEAD

There are many readings of the sudden suspension of the Ant IPO. Some point to the fact that Mr Ma is too wealthy and too conspicuous, too quick to criticise what he views as over regulation. Someone tagged him as a capitalist who failed to know how to play by the political rules of the game. Others say that supervisory dynamics are the underlying problem - regulatory reform is needed to make the fintech ecosystem more robust yet finely balanced.

In spite of the recent setback, Mr Ma's legendary vision and leadership has allowed Ant to navigate the myriad of strategic issues arising from being a pioneer in the fintech industry, steering through market uncertainty and generating unprecedented value for customers to dominate the domestic market and compete on the global stage. Ant's story is far from over.

Tan Chong Huat is Senior Partner at the firm, and Non-Executive Chairman, RHT Group of Companies

Aaron Lee is Of Counsel with the firm's Financial Services (Regulatory) Practice