Hong Kong is becoming increasingly identified as one of the major fintech capitals of Asia; if not the world. The region’s financial landscape is becoming ever-more digital, a development that has been significantly propelled by the distancing effects of the Covid-19 pandemic.
Yet as a result of this digital shift, a growing, almost unavoidable, demand for enhanced efficiency of risk management and regulatory compliance has emerged. It has become clear that without efficient regtech – regulatory technology – capabilities in place, Hong Kong’s blooming fintech landscape sits on unstable ground.
Furthermore, Hong Kong, like many of its Asian neighbours, faces some of the highest levels of financial red tape in the world. And to add to this, the rules and regulations are continuously changing and developing, only increasing the difficulty of businesses and institutions to keep up the pace of compliance. This has resulted in growing awareness around the processes of regulation formation, and an increased need for institution and government cross-collaboration to be present at every stage of the formation of such processes.
“As the financial markets get more complicated and the use of fintech rises, regtech will play a pivotal role in revolutionising risk management and compliance” comments Eric Chan, Chief Public Mission Officer of the Hong Kong-based quasi-government organisation Cyberport. “Both the regulators and the financial institutions in Hong Kong are now working closely to seize the opportunity to capitalise on the benefits of regtech. The effective implementation of RegTech solutions could reduce cost, improve risk management and increase efficiency for financial institutions, as well as enhance supervision for regulators.”
Bridging the gap between regtech development and successful regtech adoption remains a priority of paramount importance for those leading Hong Kong’s race to the top of the regtech world. There needs to be a practical approach in place that will both implement the use of new technology, and prevent any hindrance to its future development.
In a recent white paper published by the Hong Kong Monetary Authority (HKMA), studies highlighted how only 32% of surveyed financial institutions had implemented a full regtech solution into their processes. Upon discovering this highly concerning figure, the HKMA has developed a 24-month milestone to promote regtech adoption in the Hong Kong banking sector.
“The recommendations include enhancing regulatory engagement with the regtech ecosystem, and developing talent pools. These initiatives will reinforce its earlier work in promoting regtech development; such as opening up the Fintech Supervisory Sandbox (FSS) and Chatroom to regtech projects and ideas” said Chan. “According to the HKMA, as of late January 2021, pilot trials of 199 fintech initiatives had been allowed in the FSS, while 50% of them are regtech cases” he added.
It is clear that while there has been recent progression in the adoption and development of regtech from within financial institutions, the same mindset must also be extended to the many independent businesses that support Hong Kong’s economy; and that the entire process must be as interlinked between financial institutions and regulators as possible if the region is to experience holistic success.
“The Hong Kong Government has introduced a number of initiatives to facilitate regtech development. For example, the launch of the Fintech Proof-of-Concept Subsidy Scheme administrated by Cyberport in February 2021 encourages financial institutions to partner with fintech companies, including start-ups, to conduct proof-of-concept projects on innovative financial service products; including regtech. Each approved project will be provided a maximum grant of up to HK$100,000, while projects with greater complexity and broader usage, such as those involving cross-sector or cross-boundary/border applications may receive a grant of up to HK$150,000” said Chan. “We also collaborated with the government to introduce “iAM Smart” Sandbox Programmes, in which fintech private organisations and financial institutions could conduct tests on their API functions and applications under an integrated testing environment similar to the production setting. Cyberport has also facilitated regular open discussion between fintech companies with government officials and regulators.”
With a whole host of diverse and educated institutions at play in the development of regtech, it’s certainly true, and a prime example of an ability to read the room, that the Hong Kong government are fully committed to sourcing practical regtech solutions. When delivering the budget for 2021 – 2022, the Financial Secretary Mr Chan Mo-Po placed particular emphasis on increased funding for regtech and associated regulatory solutions; delivered hand-in-hand with the appropriate Covid-19 relief measures. It is certainly true that the pandemic has given birth to a rise in purely digital companies, and being backed by an acute awareness in the importance of their success, it’s intriguing to wonder what exactly the future of the regtech ecosystem will look like in Hong Kong; especially when the region already leads the way in such a sector.
“With the joint effort of regulators, the financial industry and the regtech community in Hong Kong, the abundant financial and technology talent pool, and the sound foundation as an international financial centre with regulations in line with international standards, we believe that Hong Kong will become a regional regtech hub, as the successful regtech solutions in Hong Kong will also be applicable and could be promoted to other markets in the region” predicts Chan. “Given differences in currency uses, tax regimes and regulatory systems but within a highly integrated market, the Greater Bay Area (GBA) region could actually act as a perfect fintech lab for entrepreneurs to test their multi-currency and cross-border fintech solutions. Mainland China has been leading innovation within fintech adoption, and especially within payment solutions. Regtech is one of the fastest-growing fintech sectors, and if a solution could run smoothly among different cities within the GBA region, the same model could be replicated to other regions; like the ASEAN region for example, and along the Belt and Road.”
“In addition, while regtech solutions involve technologies like artificial intelligence, machine learning, data analytics and blockchain, and the users of regtech include the professional services sector such as legal consultants and accounting firms, Hong Kong could ride on its position as a renowned I&T and services centre to develop itself as the regional regtech hub.” he concludes.
Everything is in place to nurture Hong Kong’s regtech ecosystem, and facilitate its rise to the top of the industry. The realised requirement for intricate cross-collaboration between all parties certainly holds the potential for Hong Kong to dominate the future of regtech; placing the region at the very forefront of technological innovation.