Is Hong Kong becoming the next RegTech capital of the world?

The lens through which we have traditionally looked at anti-money laundering compliance is changing.  

This is due to a number of factors. First, there is the rise of FinTechs, whose whole functioning and success is based on a digital-first approach and a customer-centricity that were not common in financial services until recently. Then there is a general realisation that many of the strategies employed so far to prevent the penetration of dirty money into the financial system are not as effective as we would like them to be, something showcased most recently by the FinCEN files scandal. Finally, the new contactless paradigm generated by the coronavirus pandemic has made it painfully clear that manual and paper-based compliance is not a viable option anymore, as compliance teams need to work remotely and the COVID-19 virus can survive on paper for up to 28 days. 

This week, the Hong Kong Monetary Authority has shown a deep understanding of these changes and a clear commitment to addressing them by fostering RegTech innovation across financial services. 

On Monday, November 2nd, the financial regulator chose the launch of the yearly Hong Kong Fintech Week to release an extremely insightful white paper – commissioned to KPMG – to explore the current state of RegTech in Hong Kong, examine common practices and barriers to implementation, and outline a roadmap to accelerate adoption in the banking sector.  

The sixty-nine-page report represents a turning point for regulators globally, due to the clarity and decisiveness with which it takes a stance and provides guidance for industry practitioners regarding RegTech adoption. 

Let’s take a closer look. 

1. When it comes to RegTech, we are just getting started 

The report makes it clear that there are plenty of opportunities for expansion and further innovation. In fact, only 32% of the surveyed financial institutions have already implemented a RegTech solution fully. 

By segmenting the data based on respondents’ business models and geographical spread, it is then possible to identify specific areas where the most opportunities for growth lie.

From a sector point of view, corporate and investment banks are among the verticals with the lowest adoption to date, with 33% of respondents saying they have not implemented any RegTech solutions yet.

Geographically, it appears that Hong Kong-based financial institutions whose HQs are somewhere else in APAC are among the least likely to have already implemented a RegTech solution (47% have not implemented one at all, vs only 17% for FIs with HQs in Mainland China), showing the positive effects of HKMA’s previous efforts to promote RegTech adoption to local institutions.  

2. There’s no FinTech without RegTech 

Already in 2017, industry experts recognised how “FinTech requires RegTech”. Without the RegTech infrastructure operating in the background, FinTech organisations would not be able to provide the outstanding customer experience that distinguishes them. 

The new HKMA white paper confirms this trend, highlighting that virtual banks are further along their adoption journey, with 60% declaring they have already fully implemented at least one RegTech solution, and the remaining 40% equally divided between “currently selecting vendors” and “proof of concept” stages.  

3. There are still RegTech misconceptions to be addressed  

Over the past few years, general understanding of RegTech solutions and their benefits has grown sensibly among industry professionals. However, more can be done to achieve the level of awareness that is needed. 

For instance, the HKMA report quotes a lack of understanding of RegTech’s benefits by middle and senior management as a frequent blocker to more widespread adoption. 

Another example is misconceptions about the financial regulator’s stance on utilising cloud-based solutions. 23% of surveyed banks perceive the local regulators as having negative sentiments towards cloud-based RegTech solutions. This represents a barrier to adoption as the most innovative RegTech providers use cloud computing as their underpinning technology. In reality, the HKMA has already provided clear guidance on what banks can do to properly assess cloud solutions before they can securely outsource internal functions to them, demonstrating a very nuanced and open approach to the use of the cloud in financial services.

4. Hong Kong is on its way to becoming an international hub for RegTech 

Arguably, the most remarkable section of the report it’s the last one, which includes sixteen practical and detailed recommendations to help establish Hong Kong as a global leader in RegTech, a breeding ground for innovative solutions and a hub to nurture specialised talent. 

Among these, the suggestions that most caught my attention included potential financial incentives to accelerate RegTech adoption, as well as a new RegTech Adoption Index, which would provide a more holistic and balanced framework to evaluate adoption and signal the regulator’s commitment in this area. The recommended publication of practical and detailed guides – such as the one published in September 2020 and dedicated to remote on-boarding of corporate customers -  also play an essential role in dissipating doubt for financial institutions looking to innovate their approach to compliance.

In conclusion, all stakeholders – including compliance teams, businesses, customers and regulators - have plenty to gain from greater RegTech adoption across the overall financial system.

The HKMA’s unprecedented declaration of support for RegTech outlines a clear step-by-step plan to achieve this vision. The timing of the circulation of this report – during Hong Kong Fintech Week – is a clear demonstration of the critical role that RegTech plays in the FinTech ecosystem.