Navigating the maze
A guide to the legislative regimes governing the private wealth management industry across Asia
THE REGULATORY MAZE
Pedro Gonçalves offers a helping hand through the regulatory complexities of Asia’s private wealth management industry
Asia’s private wealth management sector, fuelled by robust economic growth and the rise of more self-made millionaires, continues to provide opportunities for wealth management companies.
Singapore manages $53.4bn in private wealth; Hong Kong is a close second with $32.8bn. Thailand is estimated to have about 50,000 high-net-worth individuals and Malaysia is seeing a rapid increase in its mass-affluent population.
Increasing wealth from mainland China is still the motor driving the private wealth sector in the region.
However, as opportunities continue to grow, so do the challenges that the industry faces in Asia. Unrelenting regulatory pressure paired with regulatory requirements differing across jurisdictions create obstacles for wealth management firms operating across multiple locations.
A recent PwC survey showed 82% of participants cited regulatory challenges in Asia among their top three concerns.
So how can professionals navigate this regulatory maze? Here is a map of the landscape.
Hong Kong has the biggest number of billionaires in Asia and on a global scale ranks second only to New York. In 2016 it had 72 billionaires and around 4,600 Ultra-high-net worth individuals. As a result, the wealth management industry has attracted many companies servicing different segments of this wealthy client base.
The four financial regulators are the Hong Kong Monetary Authority (HKMA), the Insurance Authority (IA), the Mandatory Provident Fund Schemes Authority (MPFA) and the Securities and Futures Commission (SFC). They oversee the banking, the Mandatory Provident Fund (MPF), insurance as well as securities and futures industries respectively.
Having four regulators with responsibility over different segments of the industry is commonly seen as a source of confusion, inertia and even disadvantage. This framework is partly a result of Hong Kong’s fund distribution model, which is still concentrated heavily in the hands of banks and thus requires the participation of monetary authorities.
The SFC has been tightening its oversight of the asset management industry and ramping up inspections. Last year it looked into 250 licensed asset management firms and identified multiple cases of regulatory non-compliance. Asset managers were warned to review their internal control procedures and asked to enhance them to meet the SFC’s expectations.
“These enhancements ensure our regulations are properly benchmarked to evolving international standards and strengthen Hong Kong’s position as a major asset management centre,” said SFC’s chief executive, Ashley Alder.
It has also imposed the figure of Manager-in-Charge (MIC). This regime requires every licensed corporation to nominate and disclose to the SFC at least one MIC for each of eight designated core functions, including the licensed corporation’s key business.
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One of the biggest regulatory debates in Hong Kong revolves around the acceptance of rebates. Trailer fees remain legal but are currently under scrutiny. There is currently a tacit understanding that the Hong Kong market is not yet ready to impose a total ban on sales commissions. However, the SFC is tightening the disclosure rules for those who receive trailer fees, making such disclosure mandatory.
In Singapore, IAMs are regulated by the Monetary Authority of Singapore (MAS), which treats them as fund managers. MAS identifies two different categories of fund managers, as determined by the 2012 Securities and Futures Act (SFA). The SFA stipulates that corporations with fund management as their principal business activity need to either hold a Fund Management Companies Licence (also known as LFMC) or a registration under the Second Schedule to the Securities and Futures Regulations (also known as RFMC).
Both types of licences are issued by MAS and they set different requirements regarding their base capital, their compliance obligations, their business operation, their clientele as well as their assets.
The companies with a Fund Management Companies Licence are further divided into Retail Licensed Fund Managers and Accredited Investors Fund Managers. The Monetary Authority of Singapore’s stated capital requirement ranges from SG$250,000 to SG$1m while for RFMC the total value of the assets managed must be below SG$250m.
Private assets are commonly held through a Singapore investment holding company or a private family trust.
Singapore companies provide for limited liability and may generally be more cost-effective to maintain but are subject to the regulatory and reporting requirements under the Companies Act, Chapter 50 of Singapore; for example, they are required – subject to certain exceptions – to file audited accounts and annual returns with the Registrar of Companies.
Information on, inter alia, the directors and shareholders of a Singapore company as well as its audited accounts can be purchased by members of the public for a nominal fee.
Private wealth held in Singapore is taxed locally on income generated in a portfolio and the participation of Singaporean based accountants is a requirement.
This means that internally the information sharing and transparency is extensive, but externally there is little transparency or information sharing. The country does not share banking information with outside regulators.
Singapore has become one of the fastest growing private wealth management hub in the world, and the regulator hopes that trend will continue.
“The Asian growth story will dominate the investment agenda in the next decade. Capital and investment will continue to flow into Asia,” Ravi Menon, head of MAS, said in a conference. “Singapore’s role is to connect global investors to Asia, and to bring Asian opportunities to global investors.”
There have been a number of recent legal and regulatory changes in Thailand that have a significant impact from a wealth management perspective.
Bankers estimate there are about 50,000 high-net-worth individuals in the country who are said to control about 40% of money invested in Thai capital markets.
The industry offers few products as Thailand’s capital market regulator, the Securities and Exchange Commission (SEC Thai), demands that most products be capital-protected and has placed restrictions on short selling of stocks by mutual funds.
Thailand’s central bank is also watching the country’s exchange rate, limiting how much can be invested abroad.
Bankers say this has recently been relaxed due to the strength of the Thai baht and Thai banks have been allowed to raise money for local funds feeding into funds offered by international partners.
But it is still estimated that Thailand’s rich hold up to 75% of their money in Thailand, limiting the industry’s ability to sell international investment funds.
Thailand lacks a developed estate legislation, which means Thailand’s rich families pass on wealth from one generation to the next without the need of professional wealth management that in developed markets includes tax and accounting services.
Thailand’s SEC has revised several regulations to enhance flexibility and compliance with international guidelines and market development.
“The amendments which have been approved recently by the Capital Market Supervisory Board aim to increase competitiveness of the ever-growing asset management business by, for example, relaxing several requirements,” SEC boss, Rapee Sucharitakul, said in a statement.
“In so doing, appropriate investor protection is maintained, and more investment choices promoted,” he continued.
There has been a substantial progress over the past few years in Malaysia’s wealth management industry, but the sector still demands more measure to enable it to compete with regional rivals.
One measure introduced by the Securities Commission (SC) allows boutique fund managers, or those with assets under management (AUM) of up to MYR750m ($198m) to establish businesses in Malaysia with paid up capital of MYR500,000 versus the MYR2m required for a fully-fledged fund manager licence.
“To further enhance business efficiency, the range of permissible activities for fund management companies will also be broadened to provide investment advice to clients,” the Securities Commission said in a statement.
It continued: “Marketing activities by licence holders will be liberalised. As part of a phased approach, marketing, sales and client servicing activities by fund management companies can now be undertaken by representatives registered with the SC, in addition to licensed representatives,” the SC said in a statement.
However, compliance costs continue to grow, as asset management companies have to consider international regulations such as the Foreign Account Tax Compliance Act and Know Your Customer.
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Malaysia’s financial regulator is to implement a framework on Shariah sustainable and responsible investments (SRI) in a bid to leverage on the country’s position as a leader in Asia for SRI investing, and attract more institutional and global investors onto Malaysian shores.
For that, the SC has proposed for Malaysia-based asset managers to establish and manage a multi-currency Shariah-compliant investment fund.
Other initiatives include broadening linkages and connectivity, capitalising on global opportunities and increasing the value-add and talent base within the Islamic capital market.
Ranjit Ajit Singh, chairman of the SC, claims Malaysia is well positioned to seize opportunities within the Islamic fund and wealth management industries, as Malaysia currently has one of the largest middle-class Muslim populations in the Asia-Pacific region.
Authorities in Beijing are putting all their efforts into curbing risks in the financial sector after a string of corruption scandals.
One of the most symbolic moves made by the government included setting up a ‘super regulator’, the Financial Stability and Development Commission, after the 19th Party Congress in October 2017 covering the entire financial system (click on box above for details).
The banking and insurance regulator were merged after the former insurance regulator boss was sacked and pleaded guilty to taking bribes.
As President Xi Jinping’s crackdown on graft in the financial industry continues, the asset management community has been been caught in the middle of this campaign.
China’s banking and insurance regulator will soon publish detailed rules on banks’ wealth management products (WMPs) as part of Beijing’s effort to curb risks in the financial sector.
With those new rules, the China Banking and Insurance Regulatory Commission is expected to adjust the limit for exposure of bank wealth management products to so-called non-standard investments, known widely as shadow banking products.
Currently, such investments by banks cannot exceed 35% of the outstanding amount of their WMPs or 4% of their total assets.
Beijing has stipulated that private fund manager wholly foreign owned enterprises (WFOEs) are no longer considered financial institutions and thus prohibited from issuing or selling asset management products.
Foreign asset managers who have established a private fund manager WFOE may find their fundraising activities severely hampered by this development as this clarification means that WFOEs in China stand to lose investments from wealth management products.
Financial institutions operating in China are no longer allowed to use asset management products to invest in commercial banks’ credit assets or provide channel service in an attempt to bypass the new regulations.