Home Policy & Governance Digital infrastructure investment crucial for RegTech, says PBoC

Digital infrastructure investment crucial for RegTech, says PBoC

HKMA's RegTech conference: (clockwise from top left) Eddie Yue, chief executive of the HKMA; Yifei Fan, deputy governor, People’s Bank of China; Benoît Cœuré, head, BIS Innovation Hub; David Bailey, executive director - international banks supervision, Bank of England; Jane Fraser, chief executive, Citi; Jessica Tan, co-chief executive, Ping An Group | Credit: HKMA

The development of digital infrastructure needs to “accelerate” in order to spur RegTech growth, according to a senior official at China’s central bank.

Speaking at a Hong Kong Monetary Authority’s (HKMA) conference, the People’s Bank of China’s (PBoC) deputy governor, Yifei Fan, laid out approaches to the adoption of RegTech – the application of technology to boost regulatory compliance – that have so far been most effective in China.

The ‘Unlocking the Power of RegTech’ conference was held as interest in RegTech increases worldwide. Just last week the European Banking Authority issued recommendations to encourage ‘sound adoption and scale-up’ of RegTech’s use while the HKMA itself is taking numerous measures to encourage it.

Digital infrastructure is the “core of the new financial system”, Fan said, adding that speeding up investment in such infrastructure could empower financial regulators to better understand the flow of funds and the dynamics of the financial markets.

Describing RegTech as a “complex systematic project that requires close collaboration of all parties” – regulators and the regulated – Fan emphasised the need to establish a “sound system of standards and rules” as well as “a rule-based framework that is driven by data and supported by platforms”.

Tech’s potential to flag risks

Fan told the online audience how financial institutions need to accurately grasp digital trends and explore new ways to explore, screen, prevent and mitigate risks. He proposed that they leverage technologies such as ‘big data’ and artificial intelligence (AI) in their risk-control processes “for automatic risk identification, precise risk characterisation and penetration analysis to enable the early identification of warnings and thus effective handling.”

In order to build a platform that can effectively support the testing, application and conversion of regulations, Fan pointed to the need to translate regulatory policies and compliance requirements into digital contracts and encapsulate them into scalable APIs (application programming interfaces).

During the main panel session, focused on ‘visions of the future’ of RegTech adoption, Fan was asked by the HKMA’s chief executive, Eddie Yue, about mainland China’s “remarkable leading edge” in payments and innovative supervisory technology (‘SupTech’) applications being considered by the PBoC.

Given “the relatively weak foundation”, China’s e-payments industry had tremendous growth potential, Fan said, adding that the sector had “indeed developed rapidly” with the use of big data, cloud computing and AI technologies. Additionally, he said the central bank’s regulatory policies had provided opportunity for the growth of the payments industry to gather momentum.

‘Proactive’ payment supervision

Specifically, Fan cited how the PBoC had established the NetsUnion clearing platform in 2018. In order to reduce regulatory costs and enhance supervisory capabilities to oversee transactions, this clearing service puts payments and reserve funds in the hands of the central banks as a centralised depository.

The deputy governor also described how China had developed an offsite payment supervisory system based on API technology that comprises data analysis, business regulation, statistical decisions and risk-control functions. The system integrates machine learning and data processing, and adopts technologies such as knowledge graphs and artificial neural networks.

“Leveraging big data and artificial intelligence technologies to conduct more comprehensive and precise assessment of the development trends and risk situation in the payment industry, the system helps to transform payment supervision from being passive and retrospective to becoming proactive and forward-looking,” said Fan.

Cœuré: ‘fair amount’ of cultural change needed

In June, the HKMA unveiled its fintech priorities, collectively entitled ‘Fintech 2025’, aiming to encourage the financial sector as a whole to adopt technology ‘comprehensively’ over the next four years, as well as to promote the provision of ‘fair and efficient’ financial services.

During the conference, the authority published its first Regtech Adoption Index, based on an analysis of Hong Kong’s banking industry. Among the key findings is that while many banks have started using RegTech, most commonly in financial crime, RegTech is only employed in a low percentage of risk management and regulatory compliance activities. Meanwhile, barriers to adoption include budget constraints, a lack of awareness of the potential value of RegTech solutions and challenges in the integration with current technology systems.

RegTech was one of the six priorities set out by the Bank for International Settlements’ (BIS) Innovation Hub in its work programme for 2021-2022. Benoît Cœuré, head of the Innovation Hub, was also a speaker at the HKMA’s conference and emphasised the importance of central banks keeping pace with banks’ adoption of technologies. 

Cœuré suggested three main ways that central banks and banks can overcome RegTech adoption obstacles: technology, training and transformation.

“Technology is about setting up an adequate IT infrastructure as well as providing adequate computing power,” he said, while pointing out that transformation meant overcoming cultural challenges. “If you want to understand innovation, you have to innovate yourself and central banks are very conservative places so you will need a fair amount of cultural change,” Cœuré said.

FURTHER READING

‘European Banking Authority sets out ways to boost RegTech use’ – our news story (1 July 2021) on the EBA issuing recommendations to support ‘sound adoption and scale-up’ of the use of RegTech

Hong Kong launches “Fintech 2025” vision’ – our news story (8 June 2021) on the deployment of ‘next-generation’ financial data infrastructure and ‘future-proofing’ for central bank digital currencies being among the goals of a newly announced strategy to drive fintech development in Hong Kong

City of London weighs in behind RegTech’ – our news story (18 April 2021) on a 78-page report produced by the City of London Corporation in partnership with RegTech Associates, a London-based research company

Hong Kong unveils two-year RegTech roadmap’ – our news story (3 November 2020) on the Hong Kong Monetary Authority ramping up its support for ‘RegTech’ by publishing a two-year roadmap to drive adoption in banks