is matched to a list of insiders to see if there was any unusual activity leading up to the merger or acquisition. Hong Kong is in the process of building similar systems, with the Securities and Futures Commission tendering to build an online platform to receive company reports, which could be analysed using data analytics to monitor activities and flag problems. The Hong Kong Monetary Authority also recently issued its strategy for RegTech in the context of new virtual banking licence issuance. Regulation becomes rather more complicated when technology companies start providing financial services – that is, in the case of TechFin. Technology companies have huge scale, distribution and customer access, which creates more systemic risk, said Mr Barberis, who is focussing on TechFin for his PhD, which will be completed by early 2019. opportunity. “We realised there was a lot of confusion. There was this new term FinTech and people were beginning to see a lot of new things happening. So we set out to explain all the major trends that were coming together to transform the way that finance was operating all over the world,” Professor Arner said. Their first point was that the relationship between finance and technology was picking up. This was first seen in major developed markets, where US$5 trillion a day changes hands through global payment systems and people trade stocks in nano-seconds through high-frequency trading. But they also identified three other, less well-known trends. One was the move to online finance in developing countries. Kenya became a centre for this development after it launched mobile phone-based payment services about 10 years ago and others followed suit in Africa and Asia, including China and most recently India. China in particular has undergone the most rapid financial technological transformation in history, as seen by the financial services ecosystems launched by Alibaba and Tencent that serve hundreds of millions of people. Another trend was the involvement of start-ups, which are increasingly becoming a source of new ideas and new ways of doing things. Alliance for Financial Inclusion (AFI) and highlighted at the 2018 Annual Meetings of the International Monetary Fund and World Bank Group in Bali. Drawing on their research, the scholars put forward a four-pillar strategy for improving financial inclusion and transforming digital financial systems. It includes building digital identification systems, digital payment infrastructure and open electronic payments systems; promoting the opening of accounts and access, starting with electronic payments for government services; designing digital financial markets and systems; and using regulation to support these pillars. “Most of the 1.2 billion people who have gained access to financial services since 2011 have come from a small number of countries – Kenya, China, India, Russia. There are still 1.7 billion people who don’t have access. Banks and “With financial institutions, the whole regulatory system is built around making sure they hold capital so they don’t go bust because of a mismatch of liability and financing. But technology companies don’t have loan books and they don’t try to hold cash. They’re all about flows, not holding capital. Arguably, there is something new on the back of that observation,” he said. FinTech as a door to financial inclusion As these insights have emerged, attention has turned towards providing solutions. “There are increasing examples of industry and regulators working together to design better systems based on technology,” said Professor Arner, who has been the proponent of one such system, with Professor Buckley and Professor Dirk Zetzsche of the University of Luxembourg, that was recently adopted as policy by the “Pre-2008, research and development in financial services was largely about sales – it was rarely about coming up with better ways of doing things. We’ve now had this explosion of start-ups involving both technology and financial services companies trying to come up with these better ways,” Professor Arner said. The final trend they identified was the move of technology companies into financial services, which the scholars dubbed ‘TechFin’. This includes such companies as Alibaba, Tencent, Amazon and Facebook. In addition to these trends, their ongoing research has been identifying the risks involved in financial technology and how these can be addressed from a policy standpoint. RegTech and TechFin The use of new technology to regulate the finance industry is of interest for both firms and policymakers. Firms use it to comply with regulation while regulators aim to use it to improve regulatory outcomes. RegTech itself is not very new, as Professor Arner pointed out: in the United States, the major source of insider trading prosecutions since the 1980s has come from historical stock exchange data that must be handed over to the authorities in cases of mergers and acquisitions. The trading activity Janos Barberis (left) and Professor Douglas Arner (right) at a seminar on regulating FinTech innovation. Professor Douglas Arner (first from left) at the 2018 Annual Meetings of the International Monetary Fund and World Bank Group in Bali. (Courtesy of Alliance for Financial Inclusion) With financial institutions, the whole regulatory system is built around making sure they hold capital so they don’t go bust because of a mismatch of liability and financing. But technology companies don’t have loan books and they don’t try to hold cash. They’re all about flows, not holding capital. Mr Janos Barberis Most FinTech start-ups want regulation because it gives a level of trust to the community, which is good for their business. It helps them compete with the traditional financial institutions. Professor Douglas Arner HKU FinTech Day was held on October 29, 2018 as part of the 2018 FinTech Education Series of the Hong Kong FinTech Week. 05 | 06 The University of Hong Kong Bulletin | November 2018 Cover Story
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