Regtech

HKMA Explores Suptech, The Overlooked Missing Piece of The Smart Banking Picture

It is often said that fintech is one of the most regulated tech sectors in the world, and for good reason. There are dire consequences to any developing tech going wrong (Facebook’s recent privacy scandal comes to mind), but straits are particularly dire when it comes to money.

Fintech regulation then becomes a tightrope act—how do we regulate an industry enough to protect its people, while still allowing enough room for it to grow?

This is a problem that even the biggest fintech hubs are still struggling with, not excluding our very own. Arthur Yuen, Deputy Chief Executive, Hong Kong Monetary Authority admitted as such during his speech, but also gave out one crucial detail—that the regulator is looking into strengthening Suptech in the region.

A Brief Look into Suptech

With fintech disruption happening across the globe, Suptech here refers to financial disruption aimed at supervisory regulators instead of consumers or financial institutions. It’s the other side of the coin to Regtech, that aims to help institutions remain compliant to regulators. Suptech, on the other hand, helps regulators digitise and automate the regulatory process.

This is crucial, as a Juniper Research report released last year states that Regtech will grow by 48% per year, rising from $10.6 billion in 2017 to $76.3 billion in 2022, as banks seek to avoid costly regulatory fines.

Overall, Suptech could actually simplify the process of fintech firms adhering to regulations and supplement Regtech—while providing regulators crucial digital data that lends well to analytics.

With proper applications, Suptech could help regulatory agencies proactively monitor financial institutions activities, and respond to infractions or violations more quickly.

HKMA and Suptech

Image Credit: Hong Kong Monetary Authority

HKMA has expressed their interest in exploring Suptech for supervision and analysis, but they have laid down some building blocks. According to Arthur, the regulator has already implemented a banking data collection system—where banks with robust IT systems can submit banking return data directly from their own database into HKMA’s through straight-through processing.

It is no coincidence that certain parties have opined that Hong Kong needs to upgrade its regulatory framework to keep up with the times.

In seemingly related news, the regulator has also set up a Supervisory Sandbox sometime in 2016, which allows for selected firms to pilot their fintech initatives without full compliance with HKMA’s supervisory requirements.

But HKMA has lofty goals of using Suptech to help the regulator to anticipate and act on the future of fintech—either through promotion, regulations, or curbing unsavoury trends before they become a huge problem.

All of this ties back to the regulator’s goal of enabling a more diversified Regtech ecosystem and identifying challenges faced by the region’s players.

Arthur Yuen

“The HKMA is prepared to take a leading role with a view to facilitating this relatively less-noticed but nonetheless important jigsaw of the Smart Banking era. And let’s be clear that there will no doubt be challenges when we explore our new Regtech measures.”

The Regulator Faces Stiff Competition in This Arena

Arguably Hong Kong’s closest Asian fintech rival, Singapore’s monetary authority, is already looking at using machine-readable templates for regulatory reporting, and also revamping its data collection procedures, even allowing financial institutions to turn down the regulator’s request if it asks for the same data twice.

Meanwhile, the US Securities and Exchange Commission is using machine learning to predict investor behaviour, particulary in discovering potential frauds and regulatory malfeasance.

Meanwhile, the Financial Stability Board (FSB) released a peer-reviewed country report detailing that while Hong Kong has made some good progress, they still need to figure out its OTC sector, like adopting a more tailored regulatory regime for OTC derivatives trading, completing their resolution framework and operationalising resolution funding mechanisms among others.

With the regulator gung-ho about rising up to global Suptech pressures, we can predict a huge surge in the region’s Regtech in the coming years, though we do hope that the regulator is careful about the implementation of any measures in this field.

Featured image via Hong Kong Monetary Authority