23 May, 2016
On 17 May 2016, Deacons welcome over 400 guests from Hong Kong's asset management industry at Deacons 8th Annual Investment Products and Regulatory Forum.
Below is a brief overview of the day's proceedings.
Keynote address
Jeremy Lam (Partner and Head of Deacons Financial Services Practice) welcomed delegates and introduced Marc Chandler (Global Head of Currency Strategy, Brown Brothers Harriman). Marc opened the Forum with a wide-ranging keynote focusing on current economic and political risks. He addressed three major topics of importance for global fund managers and investors: the Chinese economy, global political events, and US monetary policy.
On China, Marc explained why in his view the internationalisation of the Renminbi has been exaggerated, in part due to the bull market in the RMB from 2005 until August 2015. Marc next turned to the two most significant pending political risks: the UK’s “Brexit” EU referendum and the US election season.
On US monetary policy and the outlook for the US Dollar, Marc said that investors should listen most closely to the leadership of the Fed: Yellen, Fischer and Dudley. He sees continuing resilience for the US Dollar. With other major central banks pursuing very loose monetary policy, Marc predicted that policy divergence will continue to drive the US Dollar higher.
In this brief video, Marc Chandler highlights a few key points:
Outlook for fund distribution
Deacons Partner Alwyn Li, moderated a panel comprising Stewart Aldcroft (Chairman & CEO, CitiTrust Limited), Shang Chuang (Director, Noah Holdings (Hong Kong) Limited) and Eleanor Wan (CEO, BEA Union Investment Management Limited) which discussed the outlook for fund distribution.
Whilst Hong Kong’s distribution landscape remains heavily focused around the large retail banks, veteran industry participant, Stewart took the opportunity to give attendees a brief but interesting distribution history lesson, highlighting that the dominance of the banks had only taken root since the early 1990s with the growth of UCITS as the primary cross-border fund vehicle sold into Asia.
The issue of expanding distribution channels was discussed involving web-based platforms, exchange traded platforms, robo advice and mobile phone applications. Eleanor commented that “investors are increasingly looking for convenience and ease of access in sales / investment process.” However it was generally recognised by the panel that the question of how to regulate such distribution channels effectively, particularly web-based and robo advice, remained challenging in the context of complying with obligations of suitability imposed on and expected of the industry.
Shang shared his experience of fund distribution in the PRC where the use of the internet and mobile technology has been embraced by investors. It was recognised that with the launch of MRF, Hong Kong was going to have to play catch-up in its use of technology as a means of fund distribution: “China is light-years ahead in terms of settlement”.
Finally, despite the need for alternative distribution channels, it was agreed that the goal is not to replace bank distribution but grow the overall market.
Here is a short clip where Alwyn Li recaps the discussion:
Impact of recent SFC regulatory developments on asset managers
A panel discussion on the impact of recent SFC regulatory developments on asset managers was moderated by Deacons Partner Jane McBride. The panellists were Scott Carnachan (Consultant, Deacons), Greg Heaton (Senior Director, Licensing, Intermediaries, SFC) and Eugenie Shen (Managing Director & Head of Asset Management Group, ASIFMA).
This panel covered current conduct hot topics starting with a discussion on the background to the proposed revamp of the Fund Manager Code of Conduct, which has been subject to soft consultation (a process welcomed by the industry that has raised some useful feedback which the SFC will take on board). The panellists discussed the dangers of producing directed, industry-specific Codes which may be too prescriptive and favoured a more principles-based approach.
The new changes to the Professional Investor regime, including suitability and issues on client agreement disclosure requirements for discretionary mandates, were discussed as still raising some issues.
Less of a priority in terms of current concerns are the new Type 11 regulated activity for OTC derivatives dealing/advising and the related expanded Type 9. As further work remains to be done it seems unlikely the OTC licensing regime will be brought in before 2017.
In terms of topical issues to watch out for in SFC inspections, Jane highlighted that liquidity management and valuation policies are coming under review and reminded attendees "You need policies, you need procedures; they need to work and you need to comply with them."
Here is a short video where Eugenie Shen gives us her key takeaways from the panel:
SFC investigations and enforcement
This panel was moderated by Deacons Financial Services Partner Su Cheen Chuah, with panellists Joseph Kwan and Richard Hudson, both partners in our Litigation and Dispute Resolution Practice.
The panel discussed key aspects of the SFC’s powers of investigation and enforcement. People may be surprised to hear that the SFC has wider powers to compel answers to questions and obtain information than either the police or the ICAC.
Joe Kwan gave practical tips on how to deal with SFC investigations and handle restrictions imposed by the secrecy provisions. On dealing with search warrants, suitable protocols should be put in place to deal with any SFC raid and proper training should be given to particular staff. Upon receipt of the SFC notice of investigation, one should evaluate any potential issues, promptly identify and secure all relevant evidence and consider conducting appropriate investigations with in-house or external lawyers.
Richard Hudson addressed issues of solicitor/client privilege in the context of investigations, when privilege should be claimed and on what terms, and how to deal with requests for information and documents.
Factors which are likely to affect the SFC’s decision to investigate and the severity of any disciplinary action include:
Whether the breach was an isolated event;
Whether it involved a breach of fiduciary duty;
Whether it involved any loss to clients;
Whether it was promptly self-reported;
Whether the issue reflected widespread practice in the industry;
The extent of co-operation.
Key takeaways were:
Report breaches in a timely fashion and do not wait until completion of an internal investigation;
Take advice at an early stage;
Respond to SFC requests promptly but know that the SFC is open to reasonable negotiation of the scope of information requested and time for production;
Handle any SFC investigation properly to avoid attracting prosecution and sanction.
Here is a clip where Su Cheen Chuah recaps a few key points:
Trends in accessing China markets
A panel discussion on trends in accessing China markets was moderated by Deacons Partner Taylor Hui. The panellists were Alex Boggis (Managing Director, Aberdeen International Fund Managers Limited), Chantal Grinderslev (Manager & Senior Consultant, Z-Ben Advisors) and Timothy Tse (CEO, Value Partners Group).
The panel discussed the various channels available for in-bound as well as out-bound investment. The different initiatives both have their merits and drawbacks. However, the panellists shared a common view on “optionality”: the more choices they have, the better placed they are to benefit from the latest policy developments in China. From the pre-forum survey results, MRF and QDII seem to be the most popular fund raising tools in China, whereas the Stock Connect Programmes are taking the lead in accessing investments in China. Separately, WOFEs are being established in China by foreign asset managers and they are quickly replacing the representative offices. The WOFEs for different fund houses will have different focuses and strategies, but all with a common goal of catching the next phase of development in the fund management industry.
Here is a short clip where Alex Boggis gives some discussion highlights:
Getting back to basics: What is financial regualtion trying to solve?
Jeremy Lam spoke with James Shipton (Executive Director, Intermediaries, SFC) on what financial regulation is trying to solve.
James spoke of the importance he places on raising professionalism in the financial industry – both skill and conscientiousness – and for market participants to expect and hold their counterparties to high standards of behaviour. He highlighted what he termed the "vicious cycle" of mistake, crisis or malfeasance within the financial industry that has led and continues to lead to more regulation. Regulators and regulation can do only so much, and will never be a complete solution. The obligation rests on the industry itself to break this vicious cycle, and turn it into a virtuous one. The financial industry is not just "numbers on a computer screen". At the end of the process are individuals – pensioners, taxpayers and others. Mistakes have real and sometimes catastrophic consequences for individuals.
James emphasised the importance of culture, both for market participants and for the regulator. He spoke of encouraging the Commission to adopt a culture of inquisitiveness, openness and transparency and also encouraged the industry to engage with the Commission in an open manner, rather than operate in a culture of fear. He concluded with a call to "get regulators on the one hand and industry on the other, not talking past each other but talking to each other".
It's a wrap
Jeremy Lam reflects on the day in this short video:
For further information, please contact:
Joy Wei. joy.wei@deacons.com.hk
