Hong Kong Monetary Authority’s ‘regtech’ push raises transparency concerns at financial institutions

Hong Kong’s financial services industry has raised concerns about the use of technology such as machine learning and artificial intelligence as part of regulatory compliance efforts, as these measures will have the effect of reducing the ability of these institutions to meet their accountability commitments, to customers as well as regulators.

The concerns come amid a push by the Hong Kong Monetary Authority to facilitate the wider adoption of regulatory technology, or regtech. Arthur Yuen Kwok-hang, deputy chief executive of the HKMA, Hong Kong’s de facto central bank, introduced four regtech initiatives last week during the annual conference of the Hong Kong Institute of Bankers.

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The increased use of AI and machine learning creates challenges for banks, wherein they must account for decisions made by these technologies. The use of regtech could reduce their ability to be accountable for the decisions made.

Guy Sheppard, head of APAC financial crimes, analytics and intelligence at Swift, a network that enables financial institutions worldwide to send and receive information about transactions in a standardised environment, said the outcome of a bank’s internal model will dictate how it, for example, off-boards certain types of customers even before they have conducted any financial crimes.

“I would like to see how regulators will address a bank off-boarding a certain profile of customers after their internal model has dictated that they are beyond the bank’s stated risk appetite,” he said.

Deep learning, which uses sophisticated mathematical modelling to process data in complex ways, offers few clues on how it arrived at a conclusion. Sheppard said such lack of transparency was a “pain point” regulators would have to accept with regard to regtech.