The HKMA (Hong Kong Monetary Authority) is looking to build a more diversified regtech ecosystem in Hong Kong and urges for greater collaboration between the banking industry and technology community.
In a keynote speech entitled Regtech in the Smart Banking Era – A Supervisor’s Perspective at the HKIB (Hong Kong Institute of Bankers) Annual Banking Conference 2018, HKMA deputy chief executive Arthur Yuen discussed how Smart Banking initiatives are re-shaping the landscape by creating “better synergy between banking and technology”.
He noted that since last year’s announcement of the HKMA’s seven initiatives, it has seen the launch of more than 70 major digital banking and fintech initiatives from various institutions, many of which have been the result of collaboration between the banking industry and the tech community.
“The rollout of the Open API Framework, and the phase one implementation roadmaps submitted by banks to the HKMA, show there will be an even higher level of integration and collaboration between the banking industry and the tech community,” said Yuen.
He also noted that the HKMA would start granting virtual bank licences around the end of this year or end of next year. The HKMA received about 30 applications from companies seeking to operate a virtual bank in Hong Kong, some of which are “substantially complete” and will thus be included in the first processing batch.
Additionally, according to Yuen, a “large number of bank customers” have already signed up with the FPS (Faster Payment System) since the 17 September launch of the registration.
Given these achievements, Yuen said another important fintech segment – regtech (regulatory technology) – should not be understated nor overlooked, as it offers “tremendous potential” to complete the Smart Banking ecosystem. “We do see a need to further facilitate banks’ use of technologies for compliance with regulatory requirements of the HKMA and other regulators and for risk management purposes,” he said.
According to recent studies, the volume of global regulatory changes has risen at least five-fold in the past decade, which has led to “a growing desire of the banking industry to explore the use of new technologies to enhance the effectiveness and lower the cost of their compliance efforts”.
Coupled with the sheer volume of transactions and data that many banks need to handle and the higher availability of increasingly-capable regtech solutions, the sector has gained popularity, with over USD 1 billion invested in regtech firms in 2017, said Yuen.
In recognition of the growing need for such solutions, Yuen says the HKMA plans to open the Fintech Supervisory Sandbox to regtech-specific projects through its Banking Made Easy initiative, focusing on four areas. These include AML/CFT surveillance technologies; regtech for prudential risk management and compliance; study on machine-readable regulations; and the HKMA’s exploration of ‘suptech’.
On AML/CFT surveillance, Yuen noted challenges for banks in “a sea of data of fund flows”, which have led to annual growth in STRs (suspicious transaction reports) of 40 percent in the past five years. Regtech solutions are key to improving the AML/CTF objectives, namely to detect, disrupt and deter financial crime.
Technologies such as data analytics, machine learning and artificial intelligence in particular have huge potential to complement banks’ AML/CFT surveillance processes, and improve efficiency and effectiveness of the process, he said, such as in helping to detect and recognise suspicious behaviours and patterns, and facilitate the closing of low-risk alerts.
“This helps free up precious analysts resources to focus on investigating high-risk cases, and in turn enhance the overall effectiveness and efficiency of the transaction monitoring process.”
Yuen also sees potential for the use of regtech in the areas related to prudential risk management and compliance, such as capital optimisation, model risk management, stress testing, trading and portfolio management, fraud detection and cybersecurity.
The examples he cited were technologies that turn voice-recordings to text for checking against banks’ internal guidelines, as well as those that automate the BCBS (Basel Committee of Banking Supervision) risk data aggregation and reporting requirements.
Another area of regtech the HKMA plans to study feasibility in Hong Kong relates to the relatively new concept of machine-readable regulations. The use of technologies to automate bank’s interpretations of regulatory requirements and examine revisions to compliance processes and reporting arrangements will not only reduce manual efforts, but will also lower the risk of errors and omissions, Yuen said.
Finally, the HKMA plans to explore the use of suptech (supervisory technology) to enhance the effectiveness and forward-looking capability of its supervision. The regulator seeks to further automate interactions with banks, streamline regulatory data collection mechanisms, enhance digitalisation and analytics of supervisory information and automate supervisory processes.
“All the above initiatives share a common objective, which is to identify challenges facing the industry throughout the regulatory compliance journey and build a more diversified regtech ecosystem,” Yuen said in conclusion, urging for active participate from the industry in regtech initiatives.
“We believe the time is right for closer collaboration among the banking industry, technology community and the HKMA to give a push to the adoption of regtech in Hong Kong.”