Regtech Development in Hong Kong: Challenges and Recommendations

Recommendations 18 17 RECOMMENDATIONS Based on the challenges identified and suggestions made by the focus group participants, we have the following recommendations to address the existing problems faced by the regtech community: OBJECTIVE 1: CREATE A FRIENDLY REGULATORY ENVIRONMENT THAT ENCOURAGES INNOVATION 1. Establish Clear Guidelines with Notes on Interpretation and Provide Prompt Feedback Regtech is all about enhancing risk management and regulatory compl iance, so the understanding of regulations and policies is crucial to regtech users and solution providers. To avoid misinterpretations, it is important for regulators to issue clear guidelines and to clarify the regulations to avoid guessing and debates on ambiguities from banks and regtech companies, thus preventing excessive time spent on enquiries. Providing feedback during the screening and approval of regtech projects at a faster pace could help companies move faster with regtech implementations. A simplified process for applications with lower risks can be established. Even though this practice is already in place, regulators are suggested to focus more on expediting the process by reevaluating the standards and requirements needed for different types of Financial Institutions (FIs). For example, virtual banks may need a set of updated standards different from the standards for traditional banks. Innovations need buffer for experimentation and so FIs in the emerging sectors should not be expected to be able to meet the same standards that were originally designed for traditional approaches. 2. Provide More Incentives Instead of Using Penalties To improve the adoption of regtech, Hong Kong should explore methods that can add value to regtech services besides cost saving and efficiency in compliance. For local regtech service providers, the development costs are relatively high due to shortage of talent supply and costs of conducting business in Hong Kong, where the market is relatively small compared with other jurisdictions. To balance a highly regulated environment where FIs always need to be careful for not being penalized, the government and regulators should provide support, incentives or rewards to encourage new ideas. The government can consider subsidizing regtech development by paying up to an equal share of the costs as the service providers. For example, incentives can be provided to banks and regtech providers when they launch sandbox projects at HKMA, so part of the budget can be covered. Funding to support regtech startups to help build the ecosystem would also be highly welcomed. OBJECTIVE 2: BUILD A CONNECTED, INCLUSIVE, AND VIBRANT REGTECH ECOSYSTEM 3. Regulators to Take Lead in Technology Development Many past initiatives might not have achieved expected outcomes because they were missing a clear leader to steer all involved parties in the right direction. Generally, the industry thinks the regulators, specifically the HKMA, would be the most ideal party to take lead in technology development, as it oversees many of the regtech users (i.e., the banks). It is recommended that regulators also reach out more to regtech service providers to discuss their expectations and needs, and specify requirements to develop solutions. For the regulators to prioritize technology solutions and development, annual surveys should be conducted to learn about the market and demands of regtech users, and to follow up with KPIs to measure achievements. The government may take ownership of certain projects to drive them forward at a faster pace and stay ahead in the overall fintech development, e.g., develop the industry’s key technologies and API. As an example, a regtech lab can be setup where financial institutions can contribute their needs and pain points and the regulator can share in some of the costs for AI modeling in delivering effective solutions. Another example is to assign a single KYCU service provider to support all banks’ API on the KYCU platform. To avoid head-to-head competition and duplicating resources, the government can act as a facilitator to decide which type of regtech services are to be provided by each local service provider. 4. Build an Inclusive Regtech Network Through the Facilitators Facilitators supporting fintech/regtech companies like Cyberport and HKSTP set up hubs such as Cyberport Technology Network (CTN) and AML Lab, and hold events and seminars for their existing tenants. Though many regtech service providers are eager to join, it is difficult for them to become tenants as there is a high demand for renting their units and competition is intense. It is recommended that different facilitators, including InvestHK and even the HKMA, organize regular forums and events that can be inclusive to all regtech companies. Forums and networking events allow regtech stakeholders and potential clients to connect with each other, which could facilitate business matching. In the meantime, the RegTech Association of Hong Kong is developing a platform planned for launch in the fourth quarter of 2022. The platform will match regtech users with service providers who promote their companies and solutions on the platform. 5. Accreditation of Regtech Solution Providers When financial institutions need to outsource their IT work or engage with a third-party service provider, they have to interpret a long list of guidelines and answer many questions from the regulators. Under the circumstances, the FIs are likely to end up using their internal IT team instead. To help regtech users more easily determine which regtech providers are trusted and have relevant expertise, it is suggested that regulators provide a list of accredited regtech service providers tied with their related field of expertise. This would also send positive signals to the FIs: encouraging them to engage suitable third parties; alleviate their concerns in data security; and expedite their internal approval procedures on vendor selection. The Multiple Credit Reference Agencies (MRCA) could be a source of reference for the accreditation list of regtech solution providers. Although MCRA is not a government agency, it could assist listed regtech service providers to receive accreditation in the banking industry.