With financial regulations constantly changing, putting banks and financial institutions under constant pressure to keep up with the latest requirements, a new wave of technology is emerging to help the finance industry comply with rules and manage their risks.
Dominic Wu, chairman of the Asia Financial Risk Think Tank, says that, faced with the growing number and complexity of regulations, the banking and finance sectors realise that hiring more people to perform anti-money laundering (AML) and know-your-customer (KYC) processes is no longer a sustainable proposition.
“Regulatory requirements and expectations from the authorities are the main drivers for the development of risk management and compliance solutions,” Wu says. Regulatory technology, or regtech, automated solutions that can speed up the time-consuming and expensive processes of vetting clients and transactions, which are necessary to prevent money laundering and other financial crimes. Wu says the setting up of the regulatory “sandbox” by the Hong Kong Monetary Authority has provided a safe space, or incubator, for new financial services solutions, including regtech tools, to be developed. It allows room for co-operation and scrutiny.
Unlike fintech, which banks invest in to create a competitive advantage, Wu says regtech lends itself to cooperation and collaboration because ultimately those in the finance sector want to eliminate the same risks and comply with the same regulations. Wu cites Symphony, a platform which enables financial services professionals to communicate securely using compliant standards and end-to-end encryption. This platform was established by a group of the world’s leading financial institutions to address compliance requirements affecting the wider industry.
With the market for regtech solutions expected to grow to around US$120 billion (HK$938 billion) by 2020, according to a Reuters projection, Wu believes there are opportunities for Hong Kong’s finance sector to collaborate with enterprises in mainland China where regtech is gaining ground. Wu suggests collaborating with technology companies in Shenzhen where there is a plentiful supply of software programmers and private equity available to invest in regtech development. He says the combination of Hong Kong’s understanding of international compliance and regulatory requirements and Shenzhen’s development capabilities could prove to be a winner. “Regtech platforms, especially bilingual solutions, could be a big help for mainland financial institutions looking to expand their global footprint,” Wu says.
Hong Kong could become the gateway, providing regtech products and solutions in the same way that London and New York have become platforms for regtech. Similarly, given its role as a centre for regional financial operations such as investment management and insurance, Wu sees the potential for Hong Kong to become a centre for “wealthtech” and “insurtech” and data analytics, particularly in the context of the Greater Bay Area economic initiative.
KF Lam, head of compliance at United Overseas Bank (UOB) Hong Kong, notes that through its regulatory stance, policies and processes, Hong Kong has secured a reputation for being one of the world’s most competitive financial hubs. “Many regtech players, including both established firms and start-ups recognise that financial institutions are looking to reduce operational risks and manage compliance costs better,” Lam says.
“Regtech enables banks to digitalise reporting and compliance processes that typically require manual data entry and checking, while addressing increasingly complex regulatory requirements in a more efficient and effective manner.”
These requirements could be in the areas of AML, countering the financing of terrorism, fraud prevention and detection, credit assessment, customer data protection and cybersecurity. The use of technology also helps to reduce the risks of human error.
“Given Hong Kong’s location in Greater China and the bilingual abilities of the local workforce, regtech companies here can explore expansion in other markets such as mainland Chinese cities, Macau and Taiwan,” Lam says.
However, alongside the opportunities, there are also challenges. These include the need to demonstrate reliability, security and continuity of services, and the soundness of the methodologies used. For example: in the area of customer privacy, a regtech firm must ensure it can protect a financial institution’s customer information and assets.
Lam says a shortage of experienced and trained technology talent is another challenge for the development of regtech in Hong Kong. However, he adds that government investment of HK$2 billion in the Innovation and Technology Venture Fund to assist regtech start-ups will provide a welcome boost for the industry.
