Regtech Development in Hong Kong: Challenges and Recommendations

Introduction 4 EXECUTIVE SUMMARY Four focus groups were conducted by HKUST Business School in July 2022 to gather insights from regtech practitioners on key trends and challenges faced by the Hong Kong regtech sector. The 20 participants consisting of management and senior executives were divided into two groups: 1. Regtech solution providers – including key management of operations, business development and engineering; 2. Regtech users – including senior management in management boards, operations, information technology and compliance, from leading commercial banks, virtual banks, Payment Service Providers (PSP), and asset management companies. Barriers for Regtech Growth Overall, regtech practitioners are facing major challenges and limitations in the following areas: verifying data; verifying cross-border identity and accessing cross-border data; sharing of technology with other regtech users and solution providers; recruiting and retaining talent. Specific problems that need to be address with top priority: 1. Low regtech adoption beyond banks 2. Mismatch between available local solutions and user demands 3. Ambiguity of regulations and long approval process of regtech projects 4. Many organizations including government units are yet digitalized 5. Duplication of resources on the same technologies Recommendations Addressing existing challenges, we identified four objectives with ten recommendations for Hong Kong to increase its regtech capabilities. Objective 1: Create a Friendly Regulatory Environment that Encourages Innovation 1. Establish clear guidelines with notes on interpretation and provide prompt feedback 2. Provide more incentives instead of using penalties Objective 2: Build a Connected, Inclusive, and Vibrant Regtech Ecosystem 3. Regulators to take lead in technology development 4. Build an inclusive regtech network through the facilitators 5. Accreditation of regtech solution providers Objective 3: Facilitate the Sharing of Data & Technology in the Regtech Community 6. Standardize the API for different banks to share data 7. Provide shared databases and platforms to be accessed by different regtech stakeholders 8. Allow successful sandbox projects to share solutions Objective 4: Facilitate KYC Processes and Cross-Border Data Access 9. Establish protocols for verification of documents 10. Collaborate with Mainland China to offer standardized procedures and data access 3 INTRODUCTION The definition of regtech covers a broad spectrum of different regulatory areas and functions in finance and other industries. Regtech provides transparency and flexibility in modern regulatory practices and marks the shift from a reactive regulatory system to a dynamic approach. Regtech’s purpose is to improve outcomes, minimize risks and reduce costs. 1 Regtech solutions focus more on regulating real-time transactions, such as Transaction Monitoring (TM) and automated Straight-Through Processing (STP). The emerging regtech technologies and tools in Hong Kong provide advanced solutions common to compliance and risk management. Some examples are: Know Your Customer (KYC) (local and cross-border); data management and risk management in areas such as credit risk; fraud and financial crime detection; and Anti-Money Laundering (AML). With the goals of achieving efficiency and cost savings, regtech involves complicated regulations, control processes, and data privacy policies to verify data locally and cross-border. Regtech is a niche yet important market. In order to leverage market opportunities and overcome challenges, it requires collaboration between the major stakeholders: regulators; financial institutions (FIs); solution and service providers; other regtech users; and other facilitators within the ecosystem. As one of the sub-sectors of fintech, regtech is promoted by the Hong Kong Government as a part of the overall fintech strategy to advance the city as a global financial and fintech hub. Key Stakeholders in the Hong Kong Regtech Ecosystem The development of the regtech industry is spearheaded by the Hong Kong Monetary Authority (HKMA). In November 2020, the HKMA announced a two-year regtech promotion roadmap to encourage adoption, and regularly publishes related information on technologies and the industry’s development. 2 It provides infrastructure, such as the Open Application Programming Interface (API) to share data with users, and the Commercial Data Interchange (CDI) for financial institutions using standardized API to connect with data providers. As part of the regtech roadmap, on 26 April 2022, HKMA “launched the Regtech Knowledge Hub to encourage greater sharing of regtech adoption experience and expertise within the regtech ecosystem in Hong Kong” by providing an online platform to share success stories and implementation services. 3 The Securities and Futures Commission (SFC) also plays a pivotal role in regtech in Hong Kong. It acts as the regulator for Hong Kong-listed companies and all firms dealing with securities and futures such as stockbrokers and asset managers. SFC’s approval is a prerequisite before regtech service providers can launch new solutions to users. Other regtech regulators in Hong Kong include the Insurance Authority and relevant government departments for their particular functions such as Hong Kong Customs and Excise Department, and the Privacy Commissioner for Personal Data (PCPD). 1. World Economic Forum (2022). What is RegTech and what does it mean for policymakers?. https://www.weforum.org/agenda/2022/06/what-is-regtech-and-what-does-it-mean-for-policymakers/ 2. Hong Kong Monetary Authority (2022). The HKMA launches the Regtech Knowledge Hub. https://www.hkma.gov.hk/eng/news-and-media/press-releases/2022/04/20220426-4/ 3. Ibid Executive Summary