Hong Kong, Singapore and Tokyo each have an opportunity to demonstrate global leadership in the RegTech sector, according to a panel of experts hosted by the Asia Society’s Hong Kong Center.
Hong Kong, Singapore and Tokyo each have an opportunity to demonstrate global leadership in the fast-growing RegTech sector, according to a panel of experts, amid an increased need for new tools to assess and monitor corporate governance challenges, operational risk, and identify when culture challenges lead to increased conduct risk in the financial sector.
Kicking off the panel discussion hosted by Asia Society Hong Kong Center on Thursday (14 January), Stephen Scott, Founder & CEO at US RegTech firm Starling, highlighted a recent emphasis in the industry towards non-financial risk management, in part due to prominent misconduct scandals in major markets around the world.
“At the same time, RegTech has evolved from what was a niche market to what is now an established subsector of the financial industry,” Scott said. According to recent research, the RegTech market is expected to grow to about USD 16 billion in size by 2025, with much of the growth coming from Asia.
“We’re entering a new frontier of regulation,” said Gary Cohn, former Director of the US National Economic Council and the current Vice Chairman of IBM, speaking on the panel. In the last four decades, he said, the financial markets have been regulated using only backward-looking activity and data. “It has not been about looking forward and predicting what’s going to happen and monitoring human behaviour.”
According to Cohn, advancements in quantum computing and artificial intelligence are bringing about a new paradigm of financial regulation – one which focuses on the use of data and technology to apply real-time, predictive behavioural analytics. Ultimately, such capabilities will allow regulators and financial institutions alike to be more forward-looking as they look to enhance their understanding of culture and conduct issues, he said.
Singapore is one Asian market where such changes are already taking place. The MAS (Monetary Authority of Singapore) has been placing a greater emphasis on managing culture and conduct in the banking industry, while also leveraging technology as part of efforts to enhance trust in the financial industry. This shift in focus was exemplified by the creation of a Culture and Conduct Steering Group in May 2019, in partnership with ABS (The Association of Banks in Singapore).
According to Loretta Yuen, Executive Vice President at OCBC Bank and a participant in the Steering Group, related efforts have been mirrored at the organisational level among member banks. “Singapore banks are making real efforts to monitor and manage conduct risk within our respective organisations,” Yuen said. “We really want to deepen and elevate our standards on culture and conduct for our staff as well as our organisation.”
OCBC has itself created a dedicated board level committee, which serves as a “steering beacon” for how the bank moves forward on its culture and conduct journey and promotes ethical behaviour within the group. The bank has also enhanced its performance management and remuneration frameworks, among other initiatives aimed at enhancing culture and reducing the risk of misconduct.
For Yuen, a key theme for all Singapore banks in 2021 will be the implementation of new guidelines issued by the MAS to strengthen senior manager accountability and promote ethical behaviour in the financial sector. The final version of the so-called IAC (Individual Accountability and Conduct) Guidelines was published in September 2020, giving banks one year for implementation.
Under the guidelines, banks are required to identify all senior managers and material risk takers, make sure they are fit and proper for their roles, ensure they are held accountable for their actions and the actions of their staff, and establish effective risk governance and incentive structures that promote and sustain desired behaviours among employees.
Yuen said banks will also be increasingly moving towards the use of positive reinforcement to promote good behaviour at their organisations, while also focusing on the development of dedicated dashboards to enable real-time monitoring and assessment of conduct risk levels.
Developing such dashboards and the analytical methodologies required could take about two years, allowing for the time needed to collect data, analyse patterns, and gauge the overall effectiveness of the various methodologies used, Yuen said. “This varies from bank to bank because it depends on the size of operations and risk appetite, but we are all in this space right now experimenting and building our own dashboards.”
While such dashboards will provide bank leadership with better information flows, better decisioning, and better communications, Yuen sees data quality and data security as two of the biggest challenges that will have to be overcome to achieve the “dream” of real time monitoring and reporting of culture and conduct risk.
Cohn, the former President and COO of Goldman Sachs, is nevertheless optimistic. Forty years ago, he said, the notion of real-time metrics to reflect VAR (Value at Risk), balance sheet usage, leverage calculations and margining would have been seen as utterly impossible.
“Today, it seems you can’t run a financial institution if you don’t do these things,” Cohn said. Just as the pressing need and advances in technology permitted for real-time monitoring of financial risk decades ago, Cohn believes that those same forces are at work today in the domain of non-financial risk.
As the world evolves in terms of computing capacity, cloud security and artificial intelligence, Cohn believes the move to predictive, real-time monitoring of non-financial risk metrics is going to come “a lot faster than people think”, despite any challenges.
Aiding this effort will be a strong regulatory push towards the adoption of new technologies to meet regulatory objectives. Hong Kong regulators in particular have been promoting greater RegTech adoption in the banking sector.
According to former Chief Executive of HKEX (Hong Kong Exchange and Clearing), Charles Li, the growth for RegTech in Hong Kong has been in part due to the fact that the local market is becoming increasingly dominated by technology companies, specifically BigTech firms which are accumulating, developing, and monetising data. “China arguably is more digitalised than any other economy in the world today, all the way to the veins,” he said.
Li said the combination of inadequate financial services in China, the technology talent that has emerged within the country, and a restrictive regulatory framework can be seen as having prompted the growth of RegTech in Hong Kong. A more laissez faire, free and open economy than that on the mainland such as in Hong Kong allows for and encourages innovation, he said.
Market operators like HKEX may often find it difficult to demonstrate leadership in innovation, due to a need to fulfil a universal service obligation and carry all market participants forward, including the laggards, Li added. “We need to foster a culture where there is reward for taking innovation and creativity forward,” he said. “Because of the DNA of the market operators, the risk is always going to be that we’re moving too slow.”
“Regulation is about innovation and safety, so you have to have the right balance,” said Motonobu Matsuo, Secretary-General of the SESC (Securities and Exchange Surveillance Commission) under the JFSA (Japan Financial Services Agency). “That’s the challenge for every single regulatory body.”
Matsuo advocates an agile and flexible approach to regulation, one that encourages the use of new technology by allowing for experimentation. Though Japan has been seen to lag its Asian peers in its digitalisation initiatives, this year will see the establishment of a new ‘digital agency’ which will serve as a “control tower” to guide the country’s new digital policy.
The agency will be tasked with driving forward the digitalisation of Japan’s private and public sectors, the development of a new national digital ID system, and the removal of written stamps and face-to-face procedures in financial services. Meanwhile, Matsuo said, the JFSA is simultaneously working to improve its data strategy and analytical capabilities, while also reviewing its rules to enable greater use of data as part of the government’s digital push.
The panellists agreed that Hong Kong, Singapore and Tokyo all have an opportunity to lead the world in the RegTech space, specifically in the context of culture and conduct risk monitoring, given the attention spent focusing on data and technology and the opportunities they can create.
RegTech firms considering setting up operations in the region will likely be watching for a balance between regulation and freedom to innovate, and gravitate towards the market that promises to facilitate their growth.
A replay of the panel discussion is available here.