China’s financial markets have witnessed a number of innovations in recent years, given government support and the relaxed business environment. While new technology brings convenience to people’s lives, risks also arise from a lack of regulation of fintech activities. In the context of the increasing use of big data, regtech could be a key solution.

 

“The regulatory framework is getting more sophisticated. Some of the rules are redundant and contain holes. So how to apply regtech to enhance the effectiveness of regulation is important,” said James Chang, China financial services consulting leader, PwC, at the 10th Asian Financial Forum in Hong Kong. “Regtech, is not only an issue for regulators, but also for those regulated,” said Chang.

 

Currently, licensed financial institutions operate under existing regulatory frameworks, while pure fintech players are not well covered. Chinese regulators are also facing a dilemma in devising regulation for fintech. The main pain-point is how to strike a balance between potential risk and innovation.

 

“In China, it is common that whenever regulators tighten the rules, players hardly can do anything. Whenever regulators relax the rules, problems come out again,” says Bo Liu, founder and CEO of credit outsourcing service provider Dashu Finance.

 

For now, regulators are encouraging fintechs to work with licensed financial institutions. This way, fintechs become indirectly regulated. “The market picks the most suitable and valuable companies,” says Liu.

 

The ‘shadow banking’ scams that emerged in the mainland in the last two years had made Chinese regulators more cautious.

 

In January 2016, high-profile peer-to-peer lending platform Ezubao was investigated by police for running a Ponzi scheme that faked 95% of all its online loans. All in, Ezubao collected more than 50 billion yuan from 900,000 peer-to-peer lenders across China. Chinese financial authorities and police had been cracking down on the country’s shadow banks since last year.

 

In a more regulated and conservative market such as Hong Kong, increasing regulatory requirements are putting more focus on how the latest technology can be harnessed to enhance regulation and regulatory compliance.

 

According to the  Deloitte report, various new solutions will emerge this year for use by both regulators and regulated areas. The areas that are progressing quickly are in the know-your-client (KYC) compliance processes, automated regulatory reporting, and communications monitoring.

 

“While the marriage of technology and regulation to address regulatory challenges has existed for some time, increasing levels of regulation and a greater focus on data and reporting has brought the regtech offering into greater focus thereby creating more value for the firms that invest in these solutions,” says Deloitte.

 

Hong Kong regulators in particular are interested in leveraging on new technologies to maintain the security of financial systems and to understand how to address new risks associated with regtech.

 

“I envisage that the fintech innovation hub will also benefit the Hong Kong Monetary Authority (HKMA),” says Norman Chan, chief executive of HKMA. “We could explore with innovators options and possibilities of using new technologies, such as big data  analytics and other regtech initiatives, to achieve our objectives more effectively without creating undue risks or burden for our internal systems or databases.”

 

However, those that are less regulated in the system, such as cloud providers, could still make the financial market vulnerable to various factors, including cyber-attacks. Hence, cyber risk management will also remain a major focus, according to Ashley Alder, CEO at Hong Kong Securities and Futures Commission.

 

“Cyber-security incidents are now frequent across the financial industry,” says Alder. “There is no doubt that cyber-security threats are now the top risk for banks and the broader financial system.”

 

Authorities in Asia are urging firms to upgrade their capabilities in safeguarding cyber-security. The Monetary Authority of Singapore, for instance, recently announced that a financial services information-sharing and analysis centre will be set up in Singapore to coordinate cooperation and sharing of cyber intelligence between companies.