Hong Kong: HKMA Encourages Regtech Adoption and Looks at Conduct Risk Solutions

In the fourth edition of Regtech Watch, the HKMA focuses on the use of technology in conduct risk management, in particular how Regtech can help banks detect misconduct and monitor conduct and culture within their organisations. Regtech Watch is an ongoing newsletter published by the HKMA to promote the adoption of regulatory technology (Regtech) by the banking industry in Hong Kong SAR. The HKMA recently issued a circular requesting that Authorised Institutions (“AIs”) support the HKMA's upcoming Regtech activities and speed up adoption of Regtech in the Hong Kong banking sector, so AIs should review the Regtech Watch editions and consider whether there are potential solutions appropriate for their institution.

This edition includes an interesting overview from the HKMA on the difficulties associated with monitoring conduct risk, which is timely given the work underway on the Bank Culture Reform initiative, both at the HKMA and within banks. The HKMA has published some observations of the usage of Regtech in the tricky space of conduct risk management which can be hard to identify using traditional risk management processes. Conduct risk is a broad area, and usually requires many human hours to catch employees behaving “badly”, even where there may be some automated systems in place to monitor behaviour. The Regtech examples which the HKMA highlights generally involve data analysis solutions to enable firms to get an overall picture of an employee, or to identify the truly problematic issues worthy of a red flag.

The use cases include the use of natural language processing (“NLP”) and machine learning (“ML”) technologies developed to monitor sales calls and a system which creates dashboards for senior management summarising conduct risk data for the entire institution. It is important to add that the HKMA does not endorse  the solutions in Regtech Watch, but they are provided to inform AIs of potential use cases for AIs. The examples given can be a useful way of carrying on conversations within institutions around implementing Regetch.