Regulatory tech use moves in slow motion

money-glitz | Staff reporter 3 May 2021

Regulatory technology has recently developed rapidly in Hong Kong, however, banks worry that new technologies will not be approved by regulators.

The local innovation and technology sector has already invented a number of tools to assist banks in identifying sanctioned persons, and even applied artificial intelligence to track suspicious capital transactions. Some have been further applied to law firms, accounting firms, and even logistics corporations.

A survey by the RegTech Association of Hong Kong last year, found that the scale of Hong Kong's compliant technology companies has increased tenfold in five years. So far, there are nearly 100 related companies, half of which are start-ups with less than two years of operations.

Association chair, Felix Cheung, says regulators have continued to strengthen financial sector rules since the 2008 financial tsunami. Banks have hired more people to deal with the issue, which have greatly increased costs. Thus, the I&T industry is figuring out ways to simplify such procedures to save salary expenses.

Cheung believes that supervision will only become more and more complicated.

"It will not fit the cost-benefit in the long run if the banking industry continues to hire more compliance and risk personnel," he says.

Use of RegTech includes the supervision of legal compliance, financial crimes, ethics and customer protection, risk management. Its development has attracted the attention of the Hong Kong Monetary Authority.

In November last year, a white paper entitled "Transforming Risk Management and Compliance: Harnessing the Power of RegTech", was published with 16 recommendations, including raising the banking sector's awareness of the potential of RegTech, providing financial incentives to accelerate technology adoption, and building a talent pool.

The banking industry deals with a lot of customer information, therefore, the regulators have the most stringent requirements.

RegTech has mostly been trialed in bank scenarios.

An artificial intelligence supervisory program designed by RegTech solution company Regtics can monitor money transactions and find out suspected money laundering accounts.

However, Wallace Chow, fraud and compliance director of Regtics, has faced two major difficulties when promoting the system to banks in the past year.

"Even if banks find it useful, they are more concerned about whether regulators have approved our technology," he says.

Wong Wai-kong, the founder of Earth Channel, says it is very difficult for a start-up to prove that the system is feasible. The I&T companies often have to negotiate with banks for one to two years before cooperation. He suggests that regulators provide a list of recognized RegTech companies to increase banks' confidence.

In addition, Chow says banks generally require start-ups to carry out proof of concept (PoC) procedures.

Taking their company as an example, since their system needs to obtain bank users' information to prevent information leakage, he must send employees on-site to simulate the whole operation.

Besides the preparatory work, it takes at least one to two months for him to complete each PoC, and the bank will not pay him any fees.

"Even if there is no money, you must do it. Because many banks won't have further discussion with the company unless there are PoC results," Chow says.

The Financial Services and the Treasury Bureau launched the "Fintech Proof-of-Concept Subsidy Scheme" in February, which offers funding up to HK$150,000 for Fintech companies to conduct the PoC project.

Cheung says this amount is not enough as the investment cost millions and it is difficult for start-ups to meet bank security standards in a short time. Many companies can only target brokers with lower security thresholds. Cheung suggests that the HKMA discuss with banks to relax some of the requirements to help the industry grow.

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May 2021

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