The reopening of China is set to be a significant factor in the Asia-Pacific region’s financial performance this year, but with global economic turbulence and an extended crypto winter, how confident are firms for 2023? Technology will continue to disrupt, and regulatory change will influence market development. While regulators are gaining clarity about their digital asset strategies, helping firms to fine tune operations, there are growing concerns regarding the blurring of tech and finance, not least the reliance of banks on a handful of cloud providers. D2LT’s Rachel Scanlon (Managing Director, APAC), and Jasmine Wilson (Legal Intern), consider the outlook in APAC for the year ahead.
There is cause for optimism about financial services in the Asia-Pacific region in 2023. Wall Street is pricing in a decline in share markets in the first half of the year, and a bull market beginning in the second half. Analysts project that in 2023, inflation and interest rates will reach their peak, while labour shortages should also subside once immigration returns to pre-pandemic levels. Market participants should also keep an eye out for the timing and nature of China’s reopening, another key factor in the region’s recovery.
A further significant consideration will be the pace with which authorities across APAC step up their efforts to regulate the financial services industry. While often following in the footsteps of US and European regulators, there are risks of market fragmentation due to the divergent interpretation of global requirements. However, there are clear opportunities for firms in the region to gain a competitive advantage by anticipating the rules that may be implemented.
For global operators that have already achieved compliance with US and EU requirements, it is important to track the progress across Asia in implementing requirements related to MiFID II and EMIR. Furthermore, the work of the International Organization of Securities Commission (IOSCO) on deference processes to strengthen co-operation between regulatory authorities is increasingly recognised as key to both the orderly operation and confidence to innovate across global markets.
Responding to Digital and Technology Innovation
A critical area of regulatory focus is digital assets, particularly in the wake of a year of reckoning for crypto. The recent collapse of FTX has caused many to ask questions about the lack of a regulatory foundation for crypto assets, and to call for greater transparency and effective rules in this volatile market segment. As legal frameworks for digital assets are increasingly being put in place, regulators are generally recognising the benefits that can flow from innovation while looking to protect consumers and market integrity. For example, the Monetary Authority of Singapore (MAS) has stated its ambition to employ digital assets for use cases that will increase efficiency in the finance sector, including experimentation with Central Bank Digital Currencies (CBDCs). Levels of confidence in crypto differ across the region: while Singapore intends to avoid becoming a hub for cryptocurrency speculation and trading, Hong Kong is proposing to open up to retail investors in crypto.
The transformative potential of AI is similarly recognised by regulators, who are looking for ways to promote transparency, accountability and ethics in the field. Singapore and Hong Kong have issued sets of principles for AI designed to foster greater confidence and trust in the use of AI and data analytics. In Hong Kong, for example, the HKMA’s Consumer Protection in respect of Use of Big Data Analytics and Artificial Intelligence recommends attention in four major areas, namely governance and accountability, fairness, transparency and disclosure, and data privacy and protection.
The extension of regulatory focus to include information and data underlines the rapid adoption of new technologies to both innovate and support risk management across the sector.
This regulatory focus on technology and data reflects the continued role of transformations in this respect in disrupting the industry. Traditional businesses are realising that digital innovation as an investment theme is here to stay: approximately one third of global private equity buyouts are tech deals, and tech is driving M&A activity.
Cloud services have become particularly important for financial institutions. Exchanges, banks and insurance companies are entering major deals with cloud companies to help scale up and automate their platforms while reducing costs and providing better cybersecurity. Companies like Google, Amazon and Microsoft have stepped away from launching their own banks or competing with financial firms because these big tech entities place high importance on protecting their relationships with their most valued customers.
However, regulators are concerned about the concentration risk that comes with the finance sector relying on a handful of cloud companies, and may begin to limit the growth of the industry. Stress tests by the Bank of England on cloud providers and requests from the US Consumer Financial Protection Bureau will shed further light on regulatory attitudes in the next 12 months. However, there is little doubt that in future, knowing where banks end and tech firms begin will create new challenges for regulators – especially as innovation accelerates – and we anticipate calls for additional controls in the future. November saw the UK’s Financial Conduct Authority (FCA) tendering an analysis of how the financial services industry is being impacted by the big global tech firms.
Looking ahead, as the region weathers whatever 2023 may bring, financial services organisations need more than ever to be on top of their technology and data. This involves ensuring their legacy systems (many of which were set up over a decade ago) are fit-for-purpose, and able to cope with the demands of the regulators. Overhauling the systems which contain contractual and trading data can result in significant efficiencies, reductions in risk, improved capital and netting positions, and a stronger bottom line.