Hong Kong capital market firms are investing in cloud-based regtech solutions to enhance their risk and compliance management capabilities amidst new challenges triggered by the pandemic, a new survey by FIS has found. Short for regulatory technology, regtech has emerged as a key tool for companies and regulators to adapt to the evolving financial landscape.

According to the survey, 23% of firms consider risk management, new regulations and compliance requirements as their biggest upcoming challenges. Consequently, 87% and 89% of buy- and sell-side firms are focussing on cloud-based regtech for risk and compliance management.

According to the report, 50% of buy-side firms showed a preference for private cloud-based regtech solutions. However, 60% of sell-side firms and 50% of insurance firms are prioritizing hybrid cloud tech for risk and compliance management.

The report also highlighted the critical role of artificial intelligence (AI) in risk and compliance management. Using AI, companies can analyse and report data for compliance and risk management much faster. Implementing an AI-based regtech strategy can also help provide insights required to tackle emerging challenges while controlling costs. Average compliance costs increased in the ASEAN region by 9%-10% in 2020.

Additionally, AI can also help firms improve efficiency and capture new growth opportunities, the report said. Currently, only 42% of buy-side firms believe their approach to automation, scale and efficiency is highly effective, the report noted.

Investment in AI is especially critical since customers now expect access to more data in real-time. According to the report, only 35% of the firms reported data integration capabilities well-equipped to tackle such demands.

The increased focus on regtech comes amidst a series of initiatives by the Hong Kong Monetary Authority (HKMA) to promote regtech adoption. The HKMA published a two-year roadmap to encourage regtech adoption in the banking sector last year. Last month, it launched the Regtech Adoption Practice Guide for cloud-based solutions. The HKMA is also looking to formulate a regtech skills framework and develop a regtech knowledge hub this year.

Moreover, the emphasis on regtech in Hong Kong is part of the growing trend of regtech adoption across the Asia Pacific(APAC) region, especially in South East Asia.

Regtech solutions are key to tackling new threats and opportunities

The pandemic brought about a major shift in the way businesses operate and interact with customers. Remote working became part of the new normal and increased the challenges around security and risk management for financial companies.

Coping with these challenges requires adjusting and upgrading technological capabilities. In the report, 78% of insurance companies reported an increased urgency to upgrade solvency and risk-modelling capabilities due to COVID-19.

Moreover, COVID-19 and remote working has heightened the risk of cyber-attacks across sectors. 2020 saw an alarming increase in cyber threats and data breaches. Malware attacks increased by a whopping 358% last year, compared to 2019. Ransomware attacks surged 435% and claimed one victim every 10 seconds in 2020.

To tackle these threats, 62% of buy-side firms are prioritizing investment in cybersecurity over the next 12 months, the report noted. 60% of buy-side firms are also focusing on customer and employee data protection and security, the report said.

Moreover, amid market uncertainty triggered by the pandemic, agility has become the key to survival. Therefore, 88% of sell-side firms are increasing their reliance on Business Process-as-a-Service (BPaaS) model for one or more functions, the report said. BPaaS allows firms to access expertise with scalability and flexibility, allowing them to respond to changing market demands expeditiously.

Tara Winters, SVP, Managed Services, Capital Markets at FIS said,

“With ever-increasing regulation and reporting requirements already costing Hong Kong firms dearly, the reduced cost of managed cloud services is great news. But the advantages of a cloud-based operating model go beyond offsetting the costs of compliance. It also offers unprecedented flexibility and scale – enabling firms to rapidly scale hardware up and down to [meet] changing requirements – putting firms in a much stronger position to manage any future challenges.”

Featured image credit: Photo by Unknown Wong on Unsplash