On 17 June 2021, the Hong Kong Monetary Authority (HKMA) launched a new Regtech Adoption Practice Guide series to provide financial institutions with detailed practical guidance on how to successfully implement RegTech solutions. Each issue of the series will focus on a different technology or application area with the objective of driving RegTech adoption in the Hong Kong banking sector.
The inaugural guide – which you can view in full here – is dedicated to “Cloud-based Regtech solutions”.
The guide highlights how the use of Cloud technology offers several benefits, including timely offsite support, fast implementation and highly scalable solutions. In fact, it appears that banks open to using Cloud-based technology displayed greater operational resilience during the COVID-19 pandemic.
The newly released guide is divided in three sections, which set out to:
- Explain how Cloud-based RegTech adoption can support risk management and compliance;
- Provide practical implementation guidance to banks on the adoption of Cloud-based Regtech solutions;
- Share use cases on the adoption of Cloud-based Regtech solutions.
1. Cloud-based RegTech adoption
Enhanced mobility, reduced costs and improved operational effectiveness are among the main benefits of Cloud-based solutions for Authorised Institutions (AIs).
At the same time, key barriers to adoption include company policy and governance, insufficient capability and experience related to Cloud-based technology and inflexible legacy systems.
The report also identifies common risks observed from the industry on Cloud-based RegTech adoption, including cybersecurity exposures due to insufficient IT governance model and control, non-compliance across jurisdictions due to a faulty architecture, data protection and disaster recovery vulnerabilities and data loss generated by the lack of a clear exit strategy when working with an external vendor.
2. Implementation guidance
In order to facilitate RegTech adoption, it is essential for banks to have clear enterprise-wide guidelines on Cloud adoption, including documents outlining the organisation’s Cloud strategy, Cloud migration framework, and Cloud assessment framework.
Once a defined cloud strategy is in place, it is necessary to establish a tool evaluation framework. Most banks usually issue a Request for Proposal (RFP) to the vendors, prepare for evaluation by tailoring selection criteria and materials, and assess the solutions available on the market.
The third phase is integration. The HKMA guide highlights how banks could consider using the API methodology to create an abstraction layer between the legacy system and the RegTech solution they are looking to implement.
The fourth and last phase in the implementation guidance section is Data Security. Rather than a one-off assignment, this is a continuous process that should be properly managed through robust data governance to prevent risks of non-compliance.
3. RegTech use cases
The final section of the Practice Guide explores two specific use cases and their key learning points.
The first use case illustrates how a Cloud-based off-the-shelf RegTech solution helped a bank meet its regulatory reporting requirements in a more efficient manner, lessening the reliance on internal IT.
The second use case details the Cloud-based, Artificial Intelligence-enabled client information management platform used by a bank to automate the assessment and classification of unstructured documents for each customer. Together with a built-in workflow, this platform was able to significantly increase efficiency, reducing a manual process averaging 11 hours per case to 5 hours per case.
Along with the RegTech Adoption Practice Guide, the HKMA also published the final issue of its Regtech Watch series. This last issue outlines the HKMA’s three-year roadmap to integrate supervisory technology (Suptech) into its processes.
All these publications follow the HKMA’s announcement, on 8 June 2021, of a new “Fintech 2025” strategy. In order to drive fintech development in Hong Kong, the strategy includes the new “All banks go fintech” initiative. The Tech Baseline Assessment is introduced to both understand the state of fintech adoption and encourage banks to fully digitalise their operations from front-end to back-end in the coming years. To assist the HKMA in this assessment, all licensed banks with significant operations in Hong Kong are required to prepare and submit a Three Year Plan for fintech adoption to the HKMA by 31 December 2021.