Greg Kilminster
Head of Product - Content
ASIC warns of governance challenges as AI innovation accelerates
The Australian Securities and Investments Commission (ASIC) has issued a stark warning in its new report, Beware the Gap: Governance arrangements in the face of AI innovation. Whilst artificial intelligence (AI) is increasingly reshaping the financial services landscape, offering unprecedented opportunities for efficiency, personalisation, and accessibility. The report cautions that many financial services firms may be adopting AI at a faster pace than they are updating their governance and risk management frameworks, posing potential risks to consumers and market integrity.
Innovation racing ahead of governance
As the adoption of AI accelerates, ASIC’s findings suggest that governance systems are struggling to keep up. The regulator’s review, which included 23 Australian Financial Services (AFS) and credit licensees, revealed a governance gap where AI is being implemented. While AI offers numerous benefits to both businesses and consumers, ASIC Chair Joseph Longo warns that these benefits could be undermined if the risks associated with AI are not properly managed.
"Some licensees are adopting AI more rapidly than their risk and governance arrangements are being updated to reflect the risks and challenges of AI," said Longo. "There is a real risk that such gaps widen as AI use accelerates, [magnifying] the potential for consumer harm."
The scope of AI adoption
The review covered 624 AI use cases, spanning banking, credit, insurance, and financial advice. It found that 57% of these use cases were either newly deployed or in development, with an increasing focus on complex models, including generative AI and advanced data analytics. While most current applications of AI in the sector are designed to augment human decision-making rather than replace it, ASIC expressed concerns over the pace at which AI use is expanding, particularly given the competitive pressures driving rapid innovation.
One of the key takeaways from the report is that 61% of the licensees surveyed plan to expand their AI use within the next year. However, this growth is not always matched by sufficient governance updates. Two licensees in particular were found to be deploying AI more quickly than they were adjusting their risk management strategies, which ASIC sees as a concerning trend that could lead to broader consumer risks.
Governance gaps pose risks to consumers
The report identified significant governance weaknesses across the industry, particularly in relation to how AI risks are assessed and mitigated. Only 12 of the licensees surveyed had formal policies that included considerations of fairness, inclusivity, and accessibility, while only 10 had policies on disclosing AI use to consumers. These figures highlight a broader challenge: as AI models become more opaque and sophisticated, it becomes increasingly difficult for firms to ensure that their use of AI aligns with consumer protection obligations.
Among the potential harms identified by ASIC are algorithmic bias, the exploitation of consumer vulnerabilities, and the erosion of consumer trust. In particular, the report highlights concerns around generative AI, with 92% of such use cases being either newly developed or yet to be deployed.
A call for proactive governance
ASIC’s review reinforces the importance of licensees taking immediate action to address governance gaps before AI adoption widens further. The regulator is supportive of the Australian Government’s Voluntary AI Safety Standard, which offers guidance on the safe and ethical use of AI but warns that waiting for legislative reforms to catch up is not an option.
"Licensees and those who govern them should not take a wait-and-see approach to legislative and regulatory reform," Longo emphasised. "Current obligations are technology-neutral, and licensees need to ensure that their use of AI does not breach any of these provisions ."
Where next for AI regulation?
While the regulatory landscape around AI is still evolving, ASIC has committed to ongoing monitoring of AI use across the financial services sector. The regulator will continue to assess the adequacy of risk management and governance frameworks as AI adoption grows, and it has signalled a willingness to take enforcement action where firms fall short of their obligations.
ASIC also supports the government’s proposal to introduce mandatory guardrails for AI in high-risk settings, including requirements for testing, transparency, and accountability. This is in line with ASIC’s broader objective of promoting innovation while safeguarding consumer interests and market integrity.
As AI continues to transform the financial services sector, the message from ASIC is clear: innovation must be balanced with robust governance and risk management. Licensees that invest in their AI governance frameworks today will be better positioned to navigate the evolving regulatory landscape and to mitigate risks to consumers and their own operations.
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ESMA issues two consultations
The European Securities and Markets Authority (ESMA) has released two consultation papers to gather feedback on proposed amendments concerning the Markets in Financial Instruments Directive II (MiFID II) and the Prospectus Regulation. The consultations follow the adoption of the Listing Act, which aims to streamline financial regulations and enhance access to capital markets within the EU. Both consultations seek to balance regulatory efficiency with investor protection while aligning with recent legislative changes.
Some context
The Listing Act, which was passed by the European Parliament in 2024, introduces significant modifications to the EU’s financial regulatory landscape. One of its key objectives is to ease the listing process for companies, especially small and medium-sized enterprises (SMEs), by simplifying administrative procedures and reducing costs. In the context of these reforms, ESMA has been tasked with providing technical advice on various aspects of the Listing Act and its integration with MiFID II and the Prospectus Regulation.
The first consultation paper addresses proposed changes to MiFID II, specifically concerning the payment arrangements for research and execution services. The second paper focuses on the Prospectus Regulation and related data reporting requirements, with an emphasis on non-equity securities featuring environmental, social, and governance (ESG) elements. ESMA is seeking stakeholder input on both consultations, with final reports expected in mid-2025.
Key takeaways
MiFID II amendments on research provisions
ESMA’s consultation on MiFID II centres around proposed changes to the research provisions in the MiFID II Delegated Directive. The amendments are aimed at facilitating joint payments for research and execution services, regardless of the market capitalisation of the issuers covered by the research. This change addresses one of the key challenges identified by market participants, who have long called for greater flexibility in payment arrangements for research.
The proposed changes to Article 13 of the MiFID II Delegated Directive focus on two main areas:
- Ensuring that the annual assessment of research quality is based on robust criteria, providing greater clarity and transparency for investors.
- Aligning remuneration methodologies for joint payments in a manner that does not compromise firms' compliance with best execution requirements.
This consultation is particularly relevant to research providers, investment firms, and investors, who will need to adapt their practices in line with these new provisions. ESMA plans to assess the feedback received and provide its technical advice to the European Commission by the second quarter of 2025.
Prospectus Regulation and data reporting
The second consultation paper delves into proposed amendments to the Prospectus Regulation, with a focus on reducing the regulatory burden on companies seeking to list on public stock exchanges. ESMA’s recommendations include simplifications to the content and format of prospectuses, particularly for non-equity securities that are marketed with ESG features. These changes aim to foster greater transparency while accommodating the growing demand for ESG investments.
Additionally, ESMA is consulting on updates to the data reporting requirements under the Commission Delegated Regulation on metadata. These updates are designed to improve the collection and submission of data related to prospectuses, aligning with the introduction of new prospectus types and ensuring seamless integration with the European Single Access Point (ESAP).
Another notable aspect of the consultation is the call for evidence on prospectus liability. ESMA has been asked to evaluate whether there is a need for further harmonisation of liability provisions across member states. The aim is to determine whether more uniform rules on liability could enhance legal certainty and investor protection in relation to information provided in a prospectus.
Next steps
Responses to the consultation on MiFID II amendments are due by 28 January 2025, while feedback on the Prospectus Regulation consultation is expected by 31 December 2024.
Following the conclusion of the consultation periods, ESMA will assess the feedback and publish its final technical advice in two separate reports in the second quarter of 2025. These reports will be submitted to the European Commission, which will then decide on the next steps for incorporating the proposed changes into EU law.
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SFC’s regulatory focus on virtual assets
In a speech at the Hong Kong FinTech Week 2024, Dr Eric Yip, Executive Director of Intermediaries at the Securities and Futures Commission (SFC), spoke about the critical importance of regulating virtual assets in the evolving financial landscape. "Virtual assets are at the forefront of every financial regulator’s agenda," he stated, emphasising the substantial volumes being traded and the need to protect the growing number of investors engaging with these markets. The speech also focused on Hong Kong's regulatory efforts to balance innovation with robust investor protections.
Challenges and opportunities in regulating virtual assets
Dr Yip acknowledged the complexities involved in regulating this emerging asset class, which is "technologically advanced borderless, and loosely regulated." He pointed to challenges such as the market’s volatility, fraud incidents, and high-profile corporate failures. However, two trends have emerged that aid regulators in their mission.
- First, the increase in legal action and regulatory scrutiny on virtual asset players has prompted a shift towards compliance. "Many players who used to benefit in an unregulated market now start to take a step back," said Dr Yip, as they weigh the benefits of legitimate operations against the risks of remaining outside regulatory frameworks.
- The second trend is the convergence of traditional finance (Tradfi) with the Web3 ecosystem. This growing overlap brings established compliance principles—such as AML safeguards and asset custody practices—into the virtual asset space. According to Dr Yip, "the future of virtual assets lies in a regulated marketplace that balances its development with investor protection."
Progress in licensing virtual asset platforms
Hong Kong has made significant progress in establishing a regulatory framework for virtual asset trading platforms (VATPs). Dr Yip announced that the SFC had licensed three VATPs, with 14 more applications currently being processed. Notably, 11 of these applicants are “deemed to be licensed” under the new regime, which came into effect on 1 June 2024. The SFC has employed a risk-based approach to these applications, conducting on-site inspections to assess critical areas such as asset custody, cybersecurity, and AML processes.
“We have completed all the on-site inspections in just five months,” Dr Yip said, noting that the SFC has engaged directly with firms' personnel and ultimate controllers. This hands-on approach has resulted in applicants committing to rectifying issues identified during inspections.
Establishing a consultative panel
Dr Yip also unveiled plans for a consultative panel for VATPs, set to launch in early 2025. This panel will bring together senior management from all licensed platforms to discuss regulatory priorities and business development. "We trust the consultative panel will foster a sense of community, transparency, and shared responsibility," Dr Yip stated. The panel is expected to produce a virtual asset white paper outlining a roadmap for the industry’s future, with a focus on product development and compliance enhancements.
Looking ahead: Regulatory building blocks and tokenisation
Beyond licensing, the SFC is working to build a comprehensive regulatory framework for virtual assets that mirrors traditional securities markets in areas such as trading, settlement, and custody. The aim is to enhance liquidity and ensure orderly risk transfer, creating a more robust market infrastructure. Dr Yip emphasised the importance of ongoing collaboration with asset managers, market makers, and custodians to refine the regulatory regime.
Turning to the future, Dr Yip spoke about the potential for tokenisation and the SFC’s involvement in Project Ensemble (see also below), a Hong Kong Monetary Authority initiative aimed at standardising tokenised asset transactions. The SFC is actively supporting the development of use cases for tokenised deposits and other innovative financial products, with significant progress already achieved. “Project Ensemble is a key milestone on our tokenisation journey,” Dr Yip said, adding that further developments would be unveiled during FinTech Week.
Investor protection and international collaboration
Investor protection remains a core pillar of the SFC’s mission, particularly given the borderless nature of virtual assets and their appeal to younger investors. Dr Yip highlighted the SFC’s efforts to enhance cybersecurity measures and improve investor education through campaigns that raise awareness of fraudulent platforms and scams. He also noted the importance of international cooperation in preventing regulatory arbitrage, emphasising the SFC’s commitment to working with overseas regulators to align virtual asset regulations and share intelligence.
Conclusion
Dr Yip closed his speech with an optimistic view of Hong Kong’s future in the virtual asset space. “We have developed Hong Kong from a fishing village to a world-leading financial centre, and I like our odds in doing the same for the virtual asset market,” he said. As Hong Kong continues to refine its regulatory framework, he stressed the SFA’s committment to fostering innovation while safeguarding investors—a balance that will define the future of virtual assets in the region.
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FATF consults on amends to AML/CFT standards
The Financial Action Task Force (FATF) has launched a public consultation on proposed changes to its Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) standards. The revisions aim to balance financial inclusion with risk management by introducing clearer guidance on proportionality in AML/CFT measures. FATF is seeking input from stakeholders on the suggested updates, which affect key recommendations that govern the risk-based approach, customer identification, and digital transactions.
Some context
FATF’s move to review its standards is part of a broader effort to mitigate the unintended consequences of AML/CFT measures, which can sometimes lead to financial exclusion. The proposed revisions primarily focus on Recommendation 1, which outlines the risk-based approach to combating financial crime, and its corresponding Interpretive Note. Changes are also proposed for Recommendations 10 and 15, with the aim of refining how countries, financial institutions, and designated non-financial businesses and professions (DNFBPs) implement these measures.
This consultation is particularly important in light of growing recognition that over-zealous AML/CFT measures can inadvertently exclude vulnerable groups from the financial system. By revisiting the application of simplified measures and embracing technological advancements, FATF aims to foster an environment that promotes both security and inclusion.
Key takeaways
The consultation highlights several key areas for feedback:
- Proportionate measures: FATF proposes replacing the term "commensurate" with "proportionate" in Recommendation 1. This shift is intended to clarify expectations for risk-based actions, ensuring that the intensity of AML/CFT measures corresponds to the level of identified risk. Stakeholders are invited to comment on the new definition of proportionality, which seeks to align FATF’s language with that of financial inclusion frameworks.
- Supervisory responsibilities: Another change concerns the role of supervisors. FATF is considering a requirement for regulators to assess and account for the risk mitigation measures that financial institutions and DNFBPs undertake. This aims to prevent overcompliance, which can arise from a lack of understanding of the nuanced risks, and to reinforce the application of proportionate measures.
- Simplified measures in lower-risk situations: FATF suggests amending Recommendation 1 to require countries to actively enable and encourage simplified measures in low-risk situations. This would shift the standard from “countries may allow” to “countries should allow and encourage” the use of simplified measures, aiming to reduce unnecessary regulatory burdens on low-risk transactions.
- Non-face-to-face customer identification: With the growing use of digital identities and online transactions, FATF proposes updating its guidelines on non-face-to-face customer interactions. The revised text would recognise that, where appropriate risk mitigation measures are in place, digital verification methods should not automatically be deemed higher risk. This reflects the global shift towards digital banking and technological solutions that can offer secure and efficient alternatives to traditional customer identification processes.
Next steps
Stakeholders are encouraged to provide their feedback on these proposed changes by 6 December 2024. The outcome of this review could lead to a more flexible and risk-sensitive regulatory environment, benefiting both financial institutions and the communities they serve.
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HKMA speech: three lessons from the fintech era
In a speech at Hong Kong FinTech Week 2024, Eddie Yue, Chief Executive of the Hong Kong Monetary Authority (HKMA), outlined Hong Kong’s progress in fintech innovation while pointing to the critical juncture where the financial technology sector now finds itself.
With the theme of this year’s event, Illuminating New Pathways in Fintech, Yue described the city’s fintech journey as both exhilarating and challenging, drawing parallels to the performance of an orchestra, where different players—start-ups, regulators, and established financial institutions—each have a part to play.
Lessons from the fintech journey
Yue shared three key lessons the HKMA has learned in recent years, all centred on using innovation to address real-world needs, taking bold steps in driving fintech forward, and fostering collaboration across sectors.
The first lesson, he explained, is that “innovation is not an end in itself, but a means to solve real-world problems.” Here, he pointed to the Faster Payment System (FPS) as a prime example. By linking FPS with Thailand’s PromptPay, the HKMA has enabled cross-border payments that are seamless for consumers, whether settling bills in Shenzhen or buying coffee in Bangkok. The broader objective, Yue emphasised, is the creation of a world where “payment is as simple as if you were in Hong Kong.”
Addressing long-standing challenges in the data ecosystem was another achievement highlighted. He noted the linkage between the HKMA’s Commercial Data Interchange and the Hong Kong government’s data gateway. This initiative, Yue said, has expanded data sources for SMEs, helping them meet their credit needs by tapping into previously inaccessible government data.
The second lesson, he continued, is the need to be bold in pursuing innovation. As fintech ventures into uncharted territories, Yue stressed the importance of an "explorer mindset" to experiment with nascent technologies such as tokenisation. While still at a formative stage, tokenisation, as envisioned in HKMA’s Project Ensemble, could define the future of financial markets. This effort, he said, is about demonstrating how “innovation and regulation can work together” to create opportunities in areas ranging from asset management to trade finance.
At the same time, Yue acknowledged the challenges inherent in fostering such emerging technologies, and the importance of providing “clear guidance and market confidence.” Through initiatives like HKMA’s Ensemble and stablecoin sandboxes, the regulator is engaging with market participants to develop risk-based, fit-for-purpose regulatory frameworks.
The third and final lesson is the power of collaboration. “Innovation thrives when we come together,” Yue remarked, noting that partnerships—across jurisdictions and sectors—are essential for realising fintech’s full potential. Hong Kong, as a financial hub, continues to benefit from collaborations with global fintech players and local innovators alike, driving forward with initiatives that foster shared progress.
The horizon for fintech: tokenisation and AI
Looking ahead, Yue outlined two areas that he believes will dominate the fintech landscape: tokenisation and artificial intelligence (AI).
On tokenisation, Yue was keen to draw a distinction between this technology and crypto assets. “Tokenisation is not the same as crypto assets,” he clarified. While both rely on blockchain, tokenisation focuses on transforming the way value and ownership of assets are recorded on a programmable ledger, making these assets more accessible and tradable for individuals and businesses alike. The HKMA envisions tokenisation as a tool for hyper-connectivity, linking users, data, and services to spur economic progress.
Yue cited several examples where tokenisation could revolutionise industries, from streamlining trade finance with digital bills of lading to improving the transparency and credibility of carbon trading. He highlighted the potential for tokenised carbon credits on blockchain to address the ongoing challenge of double-counting in carbon markets. Further, tokenisation could underpin infrastructure for emerging industries such as electric vehicles, where energy generated from EV charging stations could be turned into tokenised revenue streams for investors, facilitating the low-carbon transition.
Turning to AI, Yue stressed its growing role in financial services. The HKMA has long supported the responsible adoption of AI, and the recent explosion of generative AI (GenAI) has sparked new opportunities in areas such as risk management, fraud prevention, and customer engagement. Yue described the HKMA’s launch of the GenAI Sandbox—an experimental platform that allows banks to pilot AI use cases—as a key initiative to accelerate AI development while ensuring that the technology is deployed safely and effectively.
“We will take an interactive and iterative approach,” Yue said of the sandbox trials, pledging that the HKMA will provide ongoing supervisory guidance to promote responsible AI innovation. This aligns with the regulator’s broader aim of ensuring that the benefits of AI are shared across the sector without compromising financial stability.
A data-driven future
Finally, Yue addressed the importance of data in shaping Hong Kong’s fintech future. Open data flow, both domestically and internationally, will be essential to securing the city’s place as a leader in digital finance. At home, HKMA’s initiatives such as the Commercial Data Interchange are already helping to streamline processes like credit risk assessment and KYC, which are critical for SMEs seeking financing. Looking beyond its borders, Hong Kong is working with the Mainland to facilitate cross-boundary data sharing, starting with the pilot for cross-boundary credit referencing.
Internationally, Yue highlighted HKMA’s work with the Bank for International Settlements (BIS) on Project Aperta, which seeks to enable secure, consumer-consented financial data sharing across jurisdictions. Such efforts, he said, would make cross-border transactions faster and more cost-effective, further reinforcing Hong Kong’s position as a financial gateway between East and West.
Embracing the future
Concluding his speech, Yue struck an optimistic note on the future of fintech, while acknowledging the uncertainty that lies ahead. Whether this next phase of innovation will be marked by rapid acceleration or steady progress remains to be seen. However, Yue made it clear that Hong Kong’s commitment to shaping a dynamic, borderless fintech ecosystem has never been stronger.
“We must dream big and push the boundaries of what is possible,” he urged, inviting the audience to embrace a spirit of innovation and collaboration as the HKMA embarks on the next chapter of its fintech journey. “The stage is already set, the instruments are tuned, and the world is waiting.”
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