Arthur Yuen: Transforming risk management and compliance
harnessing the power of regtech
Speech by Mr Arthur Yuen, Deputy Chief Executive of the Hong Kong Monetary Authority, at the
Hong Kong FinTech Week 2020, Hong Kong, 2 November 2020.
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Opening
1. Ladies and Gentlemen, a very good morning or good afternoon to you, wherever you are in
the world! Welcome to the Fifth Annual Hong Kong Fintech Week.
2. The focus of this session is how we can harness the power of technology to transform risk
management and regulatory compliance.
3. COVID-19 has sparked many changes for all of us. The fact that I am speaking virtually to
you today as part of a fully virtual Hong Kong FinTech Week is one of those changes. And
those changes once again reminded us of how important it is for government, regulators,
banks and other industries to be adaptive. More importantly, these are not changes to be
feared or avoided. Rather, we should embrace them in order to move forward.
4. At the HKMA, we have always been passionate about promoting and implementing
technology solutions to make our banking system smarter. This, we reckon, is the only way
to ensure that our banking sector remains internationally competitive. Along this same line
of thinking, we are launching a White Paper today that sets out a glide path for the wider
adoption of Regtech in Hong Kong. This White Paper outlines a series of actions that we
would take to accelerate Regtech adoption.
5. I presume that the audience is conversant with the idea of Regtech. But it remains good to
define upfront what we are dealing with. So, by Regtech, which is a subset of fintech, we are
referring to a specific focus on technologies that can facilitate more effective or efficient
regulatory compliance or risk management by financial firms.
The benefits of Regtech
6. So, why do we need Regtech adoption? That's because we believe that Regtech solutions
offer clear benefits to banks, customers, and regulators alike.
7. For Banks, they can leverage on Regtech solutions to enhance risk management quality and
reduce costs. For example, in the area of financial crime and transaction monitoring, some
banks still have teams dedicated to the manual remediation of false positives. But others
have already used Regtech solutions to put automation in place. In doing so, not only have
their alert outputs become more accurate, the process also freed up precious resources to
focus on higher value tasks, including in particular their interactions with customers.
8. For Customers, Regtech delivers improved customer experience and drives financial
inclusion. Several years ago, opening a bank account in Hong Kong could be
timeconsuming. You often had to take time off work in order to visit a branch and physically
verify your identity. By contrast, with the help of Regtech, today I can open a bank account in
the comfort of my home or office in a matter of just minutes.
9. There are also benefits to banking supervisors and regulators. In our supervisory processes,
we spend quite a bit of resources and time in continuously monitoring individual institutions.
By adopting Regtech, we can enhance the overall risk management and compliance quality
of banks. And that in turn leads to better management of the overall risk in the financial
system.
The HKMA's Regtech initiatives
10. So given the importance that we attach to promoting Regtech adoption here, what have we
done so far? In the past few years, we have been facilitating the collective efforts by the
banking industry, the technology community, and other stakeholders in pursuing their
Regtech journey. Let me highlight a few initiatives here.
11. One example is that the HKMA is a pioneer in the introduction of Sandbox and Chatroom,
and a number of Regtech projects and ideas have benefitted from those arrangements.
Over the years, we have seen a surge in the popularity of Regtech in Hong Kong, as shown
by the fact that the number of Sandbox and Chatroom cases focusing on Regtech has
increased fivefold since we launched those arrangements several years ago. A growing
number of Regtech firms are now showing interest in the Hong Kong market, and we have
indeed met a wide range of Regtech firms in our Chatroom sessions.
12. We also complemented those efforts by regular publications such as our "Regtech Watch".
That newsletter is a useful channel for us to introduce banks to potential Regtech use
cases.
13. And late last year, the HKMA hosted our first AML/CFT Regtech Forum with the aim of
generating more conversation and traction on Regtech usage in that particular area.
White Paper on Regtech
14. The White Paper that we are launching today moves forward the conversation on Regtech
even further. It sets out a number of Regtech initiatives that we will undertake in the coming
18 months.
15. Next I would use a few slides to take you through the concept behind our White Paper as
well as to provide a quick overview of its contents.
16. Despite the Covid-19 disruptions, we have been working very hard in the past few months
on a plan to better promote the adoption of Regtech in Hong Kong. The first phase of the
plan has now led to the formulation of this White Paper.
17. Conceptually, we can think of the White Paper as a useful MAP for users: MAP meaning
three key elements - M for Monitor, A for Assess, and P for Plan.
18. What exactly do we mean by that? Again, "M" is for Monitor - it involves understanding the
current and evolving Regtech landscape. "A" stands for Assess - it involves analysing
existing practices and risks associated with Regtech. And "P" is for Plan - it involves putting
our insights into practice by developing practical steps for the future.
19. And our White Paper MAP breaks down this process into five key areas -
Under "M", the white paper lays out new developments in Regtech, and explores their
importance to Hong Kong's banking industry
Under "A", the white paper assesses prevailing practice, and attempts to define and
evaluate existing barriers to Regtech adoption
As for "P", there are three elements involved. The first element is about laying out a
common practice framework for implementing Regtech in Hong Kong; the second
element involves making practical recommendations for initiatives that can contribute
towards the wider adoption of Regtech; and the third element is about delivering a
practical roadmap of the HKMA's plans for promoting Regtech adoption.
20. The White Paper is actually based on findings from a survey of banks and Regtech
providers, interviews with industry stakeholders, benchmarking against other jurisdictions,
and an analysis of Hong Kong's Regtech progress so far. Some of you may have offered
your valuable contributions to it. So, taking this opportunity, I thank those of you who have
done so for your generous help and support.
21. The White Paper will be available for public download through our official website later today.
Here, let me give you a quick snapshot of some of its key contents.
Regtech adoption barriers
22. First and foremost, about Regtech adoption barriers.
23. We note that Regtech adoption in Hong Kong has made significant progress in recent years.
In fact, 32% of our survey respondents said that they have fully implemented at least one
Regtech solution in their bank. Having said that, we do believe that Regtech adoption can be
and should be much wider than it currently is. And to make that happen, some barriers
must be addressed.
24. At this point, I would venture a guess that at least some of you are thinking that, when it
comes to barriers to Regtech adoption, the HKMA must be one of the biggest barriers. It is
true that in our study, Regtech firms ranked regulators as the fifth highest barrier to Regtech
adoption. But interestingly, banks thought the opposite. They actually ranked regulators as
the third lowest barrier. Well, of course, this may just be an indication that banks are
exceptionally tactful in responding to our survey!
25. But joking aside, I am sure you want to know what are the most common Regtech adoption
barriers identified in our study? Those include:
First, concerns over budget issues
There are also concerns about solutions lacking maturity
And then respondents talked about a shortage of appropriate talent
There are also concerns about the risks involved in applying Regtech solutions; and
Finally, there is a lack of awareness of the potential value of Regtech
26. Quite understandably so, budget constraints were consistently named as the top barrier by
both financial institutions and Regtech providers. Especially in the current environment, cost
management is a key focus for most banks. But it is sometimes forgotten that, as well as
improving the quality of risk management and regulatory compliance, Regtech offers
longterm cost savings. This is a benefit that needs to be articulated much more loudly and
clearly going forward.
27. And then about the lack of mature solutions - a lot of available Regtech solutions were
developed for other markets, and respondents to our study shared that those solutions may
not adequately address specific Hong Kong circumstances. Nor are those solutions always
able to meet all the specific business requirements of our financial institutions.
28. Another barrier is the lack of skilled talent. Our findings show that local banks have particular
difficulty in recruiting and retaining talent with skills across multiple disciplines. It appears
that we do need to focus more of our efforts in developing a workforce that possesses skills
across different business domains, as well as technical programming, data analytics and an
understanding of regulations. It does sound like an impossible mission, but nonetheless we
believe it is a critical one.
29. It was also noted that most banks are taking a "low-risk" and conservative approach to
adopting Regtech solutions. Some still consider Regtech to be a relatively new area that
requires further investigation before any action is taken.
30. That is closely linked to the fifth barrier: a lack of awareness of Regtech. This is especially
the case at board and senior management level, where leaders are often not fully on board
with Regtech adoption because they do not fully understand its potential benefits.
Regtech promotion
31. So those are some of the key challenges that we need to overcome. Before talking about the
solutions, let me share our vision for Regtech in Hong Kong - what we call "Regtech 2025" -
which is the underlying theme for the White Paper.
32. Regtech 2025 requires us to achieve 4 key goals by the year 2025. We can crystallise
these goals in four action-driven verbs : Lead, Adopt, Grow, and Nurture.
In terms of "Lead": Hong Kong aims to become one of the global leaders in Regtech by
the year 2025
In terms of "Adopt": we want to ensure that Regtech will be extensively adopted by the
Hong Kong banking sector in the next few years
As regards "Grow": not only do we want wide adoption of Regtech among banks, we
also want Hong Kong to become a breeding ground for growing Regtech solutions for
financial institutions
And finally on "Nurture": we want to ensure that Hong Kong will emerge as a hub for
nurturing Regtech talent
33. With these four key goals in mind, the White Paper sets out 16 recommendations across
five core areas, all designed to accelerate Regtech adoption.
34. We can summarise the five core areas using the following framework:
35. The five core areas are: -
Minds Matter
Solutions Matter
Regulators Matter
Talent Matters
And Momentum Matters
36. Let me briefly talk about how each of these areas really matters in achieving our overall goal
37. First of all, "Minds Matter" refers to the importance of awareness. High awareness is
essential for gaining buy-in across an organisation, and securing the appropriate resources
to implement solutions. A fundamental step in promoting Regtech adoption is therefore to
boost awareness of the benefits of Regtech adoption across a wide group of stakeholders,
and to highlight the available use cases in the market.
38. One of our recommendations is to establish a "Regtech Knowledge Hub". This is a
centralised knowledge platform for sharing information on Regtech experience and potential
usages.
39. There are also opportunities to expand the scope of Regtech events to reach different
stakeholder groups. Therefore another recommendation is for a series of targeted Regtech
events to be hosted to raise the industry's awareness of this subject.
40. On our part as regulator, another way of boosting awareness is by issuing practical
guidance to help the industry better understand how Regtech can be applied in Hong Kong.
41. Next, "Solutions Matter". It refers to the importance of developing solutions that are
specifically tailored to the banking industry in Hong Kong. So our second area of focus is to
promote Regtech solution innovation.
42. We believe that competition is a key catalyst for innovation. Therefore, in order to promote
solution innovation, we would organise Regtech competitions and challenges so that we can
bring together investors, financial institutions and technology firms to innovate together.
These can be showcases for solutions or approaches that address common pain points in
the industry. Such events also have the potential to create lasting partnerships between
banks and Regtech firms.
43. Next, "Regulators Matter" - so far, I think it is fair to say that the industry welcomes those
circulars and guidelines on Regtech and underlying technologies that the HKMA has issued
so far. No doubt, we have to provide further guidance to the industry going forward, in order
to help the industry understands our policy stance. This would also reaffirm the HKMA's
commitment in this area.
44. But we note that a large proportion of banks operating in Hong Kong have their headquarters
in other jurisdictions. And therefore differences in approaches to Regtech across
jurisdictions can create significant challenges for those banks. We all know that complete
alignment or harmonisation on such matters may not be possible. But we reckon that such
challenges can at least be reduced if regulators from different jurisdictions engage in more
active and ongoing dialogue and information sharing. In that process, of course the HKMA
needs to also stay up to speed with international best practices.
45. The fourth area in our framework is "Talent Matters". This one is perhaps more straight-
forward: a lack of suitable talent will be a major obstacle to Regtech adoption. As a start, no
doubt a combination of upskilling and sourcing new hires is the key to developing talents with
the right combination of local regulatory knowledge, technical skills and business acumen.
To take that one step further, if Hong Kong can evolve into a hub for global Regtech talent,
we will be uniquely positioned to build and export Regtech solutions to the rest of the world.
46. The White Paper suggests developing a Regtech skills framework. This framework will
cover suitable modules and competency standards. And we would seek to identify the skills
required for different roles and which would help speed up Regtech adoption, and then we
would help train and develop both new entrants and existing practitioners.
47. Finally, on "Momentum Matters". All our hard work will not bear fruits if the momentum for
changes cannot be sustained. It is therefore crucial to keep the industry engaged in the
years ahead. One suggestion is that we introduce a benchmark for our progress in
increasing Regtech adoption. This benchmark will provide us with a holistic framework that
will enable us to visualise the success of our Regtech initiatives.
48. That is a quick snapshot of the key recommendations in the White Paper. In fact, we are
already putting some of those recommendations into action.
49. For example, a flagship event is already planned for the first half of 2021. Like this Fintech
Week, that event will also use available technology to bring together delegates from around
the world. So stay tuned for further details of the event.
50. Also in the first half of 2021, we will be announcing details of our first Regtech challenge.
51. And then looking ahead to the second half of 2021, we expect to set up the "Regtech
Knowledge Hub".
52. Around the same time, we also plan to release a Regtech Adoption Index that will visualise
our progress in increasing Regtech adoption over time. In the meantime, we are also
working hard to flesh out our thinking behind the other recommendations. For example, we
would explore the benefits of providing appropriate incentives and other assistance to
stimulate Regtech solution innovation in Hong Kong.
Conclusion
53. So to conclude, I hope that through this presentation, I have sent a clear message to the
audience that the value of Regtech in banking is coming to the fore in Hong Kong. Industry
stakeholders should realise that Regtech and its underlying technologies are the way of the
future.
54. The HKMA strongly believes that Hong Kong has the right foundations to support a thriving
Regtech ecosystem, and ultimately become a Regtech hub. Our city already enjoys broad
fintech capabilities, strong support for technology businesses, a significant and
wellestablished financial services sector, and most important of all, very supportive financial
regulators.
55. We hope the White Paper that the HKMA is publishing today will encourage banks in Hong
Kong to actively consider the challenges that can be solved with Regtech. We want to see
banks embracing new technologies and proofs of concept, and ultimately adopting more
Regtech solutions in the years ahead.
56. This is also an opportunity for the Regtech community to develop their solutions for the Hong
Kong market.
57. I trust that our goals are crystal clear. We want to accelerate the adoption of Regtech in
Hong Kong. And this will involve us working hand-in-hand with banks and the Regtech
community, in order to realise our vision for Regtech 2025.
58. On that, I very much look forward to your support in our Regtech journey in the next few
years. And I trust you would find the rest of the Fintech week both enjoyable and fruitful!
Thank you very much!