The regulators took centre stage on Wednesday, Day 3 at Hong Kong Fintech Week organised by Invest Hong Kong (InvestHK), which kicked off with an announcement by Hong Kong Monetary Authority (HKMA) Chief Executive Norman Chan of a ground-breaking cross-border Fintech Co-operation Agreement on collaboration and trade finance between the HKMA and theMonetary Authority of Singapore (MAS).
Speaking to a full house on HKMA Fintech Day, with more than 1,000 attendees, Mr. Chan followed up the Singapore announcement with news of another new collaboration; this one between the HKMA and Office of Financial Development Service of Shenzhen (OFDS) to support the development of Fintech in the Guangdong-Hong Kong-Macau Bay Area.
The HKMA-MAS agreement is important because, besides formalising the collaboration between the two regulators on referrals of innovative businesses, joint innovation projects, sharing of information and exchange of expertise, it marks shift towards much closer collaboration on trade finance. The agreement took effect 25 October.
Mr. Chan said in his address said that the two authorities have also committed to working on a strategic project on trade finance cross-border infrastructure, based on Distributed Ledger Technology (DLT), as their first collaborative initiative, which will facilitate cross-border trade and financing. Details will be announced by the two authorities next month.
Significantly, other trading partners from around the world will be able to plug into the interface for this cross-border structure, thereby opening up DLT-based trade finance on a global level.
In the panel session that followed the announcement, the HKMA Senior Executive Director Howard Lee said that the challenge for regulators is to protect investors and ensure financial stability.
“Jurisdictions need to protect, but also have a mandate to encourage the development of Fintech,”
Anne Wallace, Head of Innovate at the Financial Conduct Authority (FCA) in the UK, cited some of the benefits of the collaborations just announced. They provide an effective way to share insights and local intelligence, are very helpful to firms setting up a business in new markets – so-called soft landings in another jurisdiction, including licenses, accelerated authentication, practical help and so on – and, down the line, will help with setting global standards.
Former CFTC Commissioner Bart Chilton, back on stage after a rousing performance on Monday, while describing the HKMA as
“the gold standard for digital currency regulation,”
referenced the collaboration agreement in saying that:
“MoUs (Memorandums of Understanding) are big in government… they are only as good as the leadership behind them.”
He added that won’t be a problem here with the HKMA and MAS.
On the same panel, Roy Teo, Head of Fintech Centre Development Department at the MAS, pointed out areas in need of collaboration between the regulators. Infrastructure, which all Fintech companies need; cybersecurity, a recurring theme throughout the day, on which Mr. Teo said
“we all should focus a lot more attention”;
and regulation, particularly with individual sandboxes working together.
Commenting on the challenges for regulators, Ms. Wallace noted:
“Risk mitigation can tend to lead you down the road of the worst case scenario, which can lead to unintended outcomes.”
Mr. Chilton said:
“Regulators don’t always get it right, but it shouldn’t stop you trying to move forward… Investors tend to be more reactive, not forward-looking.”
He said that if you are seen to be to proactive with regulation, others may try less or go in the other direction in a race to the bottom.
While the regulators talked on the main stage, plenary sessions took place alongside. In a session on “Innovation and Regulation; Trends in Risk Management,” Mr. Yang Jun, Deputy Chief Risk Officer at Ping An Insurance (Group) and Chief Risk Officer at Lufax Holding, discussed Ping An’s risk management and investor suitability management in an intriguing presentation.
“Ping An has invested a lot in technology; 1% of total revenue goes on new technology,”
“That’s about 50 billion renminbi in the last decade.”
The investment is evident in its usage of big data and artificial intelligence, particularly when doing credit checks.
He said that using paper documents on credit capabilities – repayment capability and repayment willingness – was costly and the results were unsatisfactory. They can now conduct instantaneous checks on ability to pay by tapping big data. More interestingly they are able to do facial expression analysis using AI to determine whether a potential customer is telling the truth on repayment willingness.
He said psychological questions on risk appetite are more accurately answered using big data analysis. Their research found that in questionnaire,
“65% of customers will not tell the truth.”
He added that they were not lying, but
“there’s a tendency to answer questions in a way to present an image… the wealthy tend to hide their wealth, while the poorer investors say they are richer than they are.”
He said that sometimes salespeople mislead to fulfil KPIs.
Securities and Futures Commission CEO Ashley Alder started the afternoon sessions with a talk about the tension between regulation and Fintech. He said Fintech is not e-banking, it’s far more: amongst other things, it offers transparency, financial stability, and it provides for financial inclusion.
“The regulator’s job is to focus on risk,”
said Mr. Alder.
“As systems become more connected, so risks grow.” In terms of risk, “front and centre is cybersecurity,”
“Data privacy is becoming more of an issue.”
The other major issue is investor protection.
He noted that big data will transform the way financial services are delivered. For example, he said:
“underwriting decisions could become more personalised, meaning that there would be a demutualisation of risk, such as in insurance or credit decisions.”
In terms of technology, Mr. Alder said the governance of machine learning and AI will be especially important going forwards. He added:
“the single most valuable asset is data.”
Utilising data and the adoption of new technology by regulators will help them to regulate more effectively. Partnering with the private sector to do this will play an important part.
Late in the day Henri Arslanian, the Fintech and Regtech Lead for China and Hong Kong at PwC, led a panel discussion.Raymond Tam, Executive Director, Policy and Development, with the Hong Kong’s newest regulator, the Insurance Authority (IA), which was established on June 26, 2017, noted that insurance had reputation for being more traditional, perhaps because there are 90,000 agents and 10,000 brokers in Hong Kong who are resistant to Fintech. But that’s changing.
Mr. Tam said the IA launched two sandboxes and the fast-track authorisation for digital insurance process within three months. The fast track focuses on and encourages innovative business models, he said. Commenting on the arrival of companies like Tencent and Ant Financial, he said:
“We welcome big tech firms into the insurance sector in Hong Kong. That’s why we launched the fast track for digital licenses.”
Mr. Tam added the fast track “doesn’t mean the approval is faster.” It means the queue is shorter – the queue for traditional licenses in Hong Kong being very long.
As they wrapped up, the panellists with Mr. Arslanian echoed the comments of Mr. Alder. All of them – from the HKMA, IA, SFC and the Mandatory Provident Schemes Authority – cited cybersecurity as a major concern, if not their number one concern moving forward.