Friendly rivalry between Hong Kong and Singapore has long been an inevitable feature of the relationship between those jurisdictions, and – despite their political, economic and geographical differences – it is all too easy to make comparisons between them. Both are leaders in the region in terms of financial market maturity, and their legal and regulatory frameworks; and both are astute enough to follow – and sometimes take the lead on – key global trends. Yet the two often take different, and sometimes diverging paths.
Recognising the growing importance of RegTech to the economy of the city and the wider region, in 2018 the Hong Kong Monetary Authority (HKMA) launched a series of initiatives under the ‘Banking Made Easy’ initiative. The aim was to facilitate the development of RegTech development in the jurisdiction. In November 2020, the HKMA published a white paper, ‘Transforming Risk Management and Compliance’, which set out a two-year roadmap intended to promote RegTech adoption in the jurisdiction’s banking sector.
Implementation of that roadmap has been variable. One visible, if perhaps rather superficial, initiative was to launch the RegTech Knowledge Hub, a website hosting RegTech resources. It is perhaps rather telling that the most recent press release listed on the site dates from autumn 2022. Nevertheless, at an online virtual event on 30 June 2021, the HKMA’s chief executive, Eddie Yue, explained details of the Hong Kong Fintech 2025 strategy.
He described the strategy as “an ambitious plan for getting Hong Kong’s banking sector to embrace and adopt new technology and rise to a high level of sophistication.” Under this strategy, which was initially announced in November 2020, Hong Kong is to become “a leading hub for developing RegTech solutions and cultivating RegTech talents.”
Yue, in 2021, set out four actions in order to reach that goal, namely: understand the RegTech landscape evolution in Hong Kong; raise RegTech awareness among banks (in particular in relation to “the benefits, applications and solutions associated with RegTech”); encourage new RegTech solutions; and expand the “RegTech ecosystem”, which includes the nurturing of talent.
These are clear and straightforward actions on their face, and hard to argue against. It is of course important to understand the way in which RegTech is being used, and where it is going, and to support the necessary technology and human talent. But, taken alone, there is important detail lacking, in what is an incredibly complex, competitive and fast-moving area.
More encouraging has been the HKMA’s range of more detailed, market-influenced publications. In June 2021,the HKMA produced the first edition of its ‘RegTech Adoption Practice Guide’, a series which was explicitly announced as part of the two-year RegTech promotion roadmap and which is aimed at informing and guiding authorised institutions in this area. The Guide builds on the series of ‘RegTech Watch’ newsletters which were published from 2019 to 2021. Each edition contains guidance from the regulator, as well as case studies – probably the most useful feature. The first focused on cloud-based RegTech solutions; subsequent editions examined issues including regulatory reporting and stress testing (issue 4, November 2021), cyber-risk management (issue 5, June 2021), AI-based RegTech solutions (issue 6, April 2022), and customer data and privacy (issue 9, May 2023 – the most recent).
These documents point to a pragmatic, industry-driven approach from the HKMA, and indicate that the regulator wants to be seen to be in touch and learning from market developments, as well as to provide adequate detail to ensure firms know how to comply with requirements (and have fewer excuses where they fail to).
This closer connection between regulator and market players works both ways. In his 2021 speech, Yue also emphasised that everyone connected to the sector has a part to play, inviting the event’s participants “to reflect on what you can offer, and what is on offer for you.”
The private burden
Some may see this comment as placing an unreasonable expectation on the private sector. In the UK, there has been a trend in areas including fraud prevention and the detection of money laundering for the government to lean on banks and other institutions to provide intelligence and other gatekeeping services. The private sector is well-funded and can often offer capabilities far beyond what the public sector can put up. But this leads to debate over where the line should be drawn, and whether quasi-regulatory public sector roles should be ‘outsourced’.
Others consider it natural to expect the private sector to play a key role in the development of fintech and RegTech, given the rewards that can be reaped.
“Fintech and RegTech are areas with the ambition to make money or reduce costs and the potential to create (additional) profits naturally attracts people,” says Gregor Neveling, an experienced senior consultant based in Singapore, who spoke to Reglex in his personal capacity. “I don’t see a burden there.”
The Singapore scene
In order to be a respected player in this market, a country needs to have created the right conditions, including a financial market which has reached critical mass, a certain level of maturity, a supportive regulatory environment and the right talent.
Like Hong Kong, for many years, the city state of Singapore had been pursuing strategies to allow it to become a world-leading digital economy.
“This naturally led to a focus on developing a robust fintech infrastructure and ecosystem to improve Singapore’s attractiveness and competitiveness as a financial hub,” comments Shu Min Ho, a lawyer with Sidley Austin.
That meant that by 2015, Singapore had ticked many of the required boxes. It had a solid infrastructure to build on, as well as what Ho describes as a “clean and business-friendly image”.
“This naturally paved the way for the development of the fintech industry,” Ho says. “In this regard, strong governmental-support (including through the initiatives described above) have been instrumental to this development.”
The time had come to take the next step.
“Singapore was in the right position to embark on the endeavour and the responsible stakeholders recognised this and acted by creating a vision and a roadmap,” explains Neveling.
Although the city-state’s journey had started earlier, with fintech developments such as broad adoption of mobile banking and early adoption of AI, it was in 2015 that Singapore set the explicit goal to become a leading global fintech hub. However, as an article in The Economist pointed out in 2017, rather than jumping on the fintech-as-a-disruptor bandwagon, the focus was instead to embrace fintech as a means of shoring-up mainstream banks. The Monetary Authority of Singapore (MAS) made an early move to support this goal by setting up a fintech lab for this purpose.
As well as a technical infrastructure, the regulatory environment played a key role in allowing Singapore to advance decisively. Neveling notes the jurisdiction’s “clarity of regulations”, and the well-developed professional services sector.
“Any country must ensure strict regulations with international standards. If this is done with enough support and transparency, then financial services firms are able to comply while keeping costs at a reasonable or manageable level,” he says.
The results are plain to see, with many notable services and products standing out as exemplars of mature, normalised fintech. Examples Neveling highlights include the introduction of PayNow in 2017 (a service which lets anyone transfer money to bank accounts locally by using phone numbers or ‘Unique Entity Numbers’ for companies, and which has since been extended to other countries in the region) and the rollout of SGQR in 2018 (allowing every business an individual QR code that can be used across various payment platforms).
In 2019, the Payment Services Act was introduced. The Act regulates different types of payment companies including those dealing with crypto currencies. More than 400 companies have applied for a licence. The following year saw the introduction of new Digital Banking licences.
Centrally, the development of Singapore’s government services and Singpass/MyInfo as a form of digital ID are also influencing the sector, and bringing benefits such as a significant reduction of the cost of client onboarding.
It certainly looks as if Singapore is close to reaching its goal. By 2022, Singapore stood as the world’s third best fintech hub. This year, in Savills’ FinTech Index the state ranked first in Asia and fourth in the world as a fintech hub, thanks to its stable domestic regulation, agreements with regulatory counterparts in other jurisdictions around the world, and good access to capital. That slight decline in the global ranking is a clear indicator of the extremely competitive world in which Singapore and Hong Kong are trying to operate
As focus shifts further towards RegTech, with fintech arguably having reached a level of maturity which makes it the norm rather than a hot topic, Singapore’s work to date should see it well placed to continue to lead the rankings.
The MAS has spearheaded a number of initiatives focusing on RegTech issues including due diligence, transaction monitoring, detection of suspicious activities and risk management. Ho points to other initiatives that the regulator has begun, such as the Regulatory Technology Grant, which seeks to support financial institutions in enhancing their risk management and compliance functions through the use of technological solutions.
“By virtue of its position as a RegTech leader in Asia, Singapore will likely end up being a major player globally in this space,” opines Ho.
It’s not over yet
There is, of course, still much to be done.
“The industry will need to navigate through a maze of complex and regulatory regimes that go well beyond the traditional financial regulatory framework,” says Ho.
The connected global market, as well as being a source of assistance, also poses risks during uncertain economic times. Sourcing adequate funding could become a challenge, particularly as Singapore’s regional neighbours start to develop their own initiatives to attract industry players, diverting sometimes scarce funds and resources.
The cost of compliance in Singapore remains high, as everywhere around the world, and human resource requirements for activities such as client onboarding, periodic review and transaction monitoring are “constantly rising”, according to Neveling.
Automation, including AI, should ease this demand for resources to a degree.
“Technology should be able to demonstrate a clear win for all in this space and the current and upcoming versions of generative AI will likely significantly accelerate the process,” Neveling says.
However, technology never sleeps and any firm embracing technology as a means of ensuring continued growth is making a significant long-term commitment.
“Innovation is obviously a never ending journey. So the pace has to be kept and there will never be any room for complacency,” says Neveling.
Keeping up will mean understanding new technologies and integrating them with old technologies: it is rare to completely replace a system. This can be seen by the way in which the rapid rise of AI has led many technology companies to integrate AI functionality into their existing products, rather than develop a completely new one.
This constant fight to stay ahead of – or at least not fall behind – the curve can only mean further costs. Practically speaking, that means developing solid, and often complicated, business cases, which in turn means employing more people with the right skills.
Developments in fintech have helped ensure that Singapore’s financial sector has become more efficient and accessible, but the increasingly widespread use and reliance on technology also brings with it a number of RegTech -related challenges. Although encountered at a macro level, the types of these challenges are markedly similar to those currently faced by businesses (as discussed in our recent editorial on business continuity), and notably arise in areas such as data security, AI and cryptocurrency. Singapore’s regulator will need to engage with those challenges, and how they can be solved, working closely with overseas counterparts.
Leaders or followers?
The questions that arise now are: Where next? What role can and will Hong Kong and Singapore play in the region, and globally?
There is of course stiff competition from across the world, including from bigger jurisdictions as well as from small but rapidly developing (and very well financed) ones, notably in the Middle East. Nevertheless, there is no doubt that Singapore has a very strong fintech foundation to build on, and will continue to play a leading role in the RegTech space.
Although perhaps less agile, and dealing with some political uncertainties, Hong Kong offers a firm infrastructure rooted in solid legal and regulatory roots.
Both jurisdictions will continue to punch well above their weight in this space, as in many others. There will be no lack of excitement, and opportunity, for those who are part of the story.
