Fintech thrives in China, is regtech next?

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 companies: 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 can hardly do anything, and whenever regulators relax the rules, problems come out again,” says Bo Liu, founder and CEO of Dashu Finance.

According to Liu, what regulators are currently trying to do is to allow fintech companies to work with licensed financial institutions. This way, fintech companies are indirectly regulated by the regulation for licensed financial institutions, “the market will pick the suitable and valuable companies,” says Liu.

In 2016, a Ponzi scheme by Chinese P2P company Ezubao was disclosed, revealing that adequate protection for customers is a significant shortcoming of the Chinese fintech industry. Chinese P2P lenders are improving in quality as fewer platforms defaulted in 2016. According to a recent report from Diyiwangdai, a Chinese P2P company, 938 P2P platforms defaulted in 2016, 218 fewer than in 2015.