Holistic HKMA stirs hope in private bank chiefs

Private banking chiefs have welcomed moves by the Hong Kong Monetary Authority to adopt a regulatory approach more in keeping with the way they manage client portfolios.

Norman Chan, chief executive of the HKMA, delivered a speech this week outlining plans to make Hong Kong the region’s premier private banking hub, easing rules that had straight-jacketed wealth managers and left the city trailing in Singapore’s wake.

It is accepted that the catalyst for the prescriptive methods adopted by the HKMA and Securities and Futures Commission was the Lehman mini-bonds scandal which shone a light on inappropriate selling practices following the US investment bank’s collapse in September 2008.

The more rigid approach that came into force compelled private banks in Hong Kong essentially to ignore code of conduct provisions, initially conceived as a way for more sophisticated clients to avoid some of the requirements designed for retail investors.

But the latest measures announced by Chan, which you can view here, largely represent a reversion to the way the industry in Hong Kong was operating pre-2008, returning to a more holistic assessment of clients’ risk profile and portfolios.

In brief, they include an acknowledgment that high-net-worth and retail clients can be treated differently; a clear definition of a private banking customer and measures to make private banking more user friendly; and that private banks do not mechanically need to match their client’s overall risk tolerance level to product risk level.

Further, the HKMA agreed that private banking clients need not go through biennial reviews if they can confirm there is no material change in their circumstances that warrants updating or modification of the investment mandate.

The acknowledgement that risk assessment and disclosure will not have to be followed to the letter through audio recordings for all clients in all trades will come as a relief, given that it was impractical in many cases. Such matters will be treated more in an ongoing relationship basis.

Chan also encouraged industry efforts to promote a competency framework for new industry practitioners and continuous professional training, and welcomed the proposal to set up a new industry body called the Private Wealth Management Association.

“It’s encouraging that the HKMA has agreed it needs to change, which is a good first step,” says one private bank chief. “Clearly it’s just a start and there is a lot that needs to be changed. But I consider the stated ambition to be an important starting point.”

An industry peer who attended Chan’s speech suggests he demonstrated an evolved understanding of the essence of how private banks serve clients, and praised the HKMA for having taken industry practitioners’ viewpoints into account.

“We have been waiting for this and it is a step in the right direction,” he tells AsianInvestor. “I particularly like the spirit behind these measures and the fact that he is thinking from a portfolio point of view.”

However, both agree that there is still plenty of ground that Hong Kong needs to make up on Singapore (there are 39 private banks in Hong Kong, compared with 48 in the Lion City), with the HKMA proposing changes without addressing its own structure.

One source notes that the Monetary Authority of Singapore, for example, has a section focused purely on wealth management that provides expertise and focus on this segment of the financial industry.

He shares the view that a single regulator is the best arrangement for effective overall supervision of financial firms.

“Across the spectrum of financial institutions there are many that do not only handle securities, but most are involved to some extent in handling securities, so attempting to regulate securities separately from other financial services can create confusion and significant overlap.”

While this is not a universally held view – perhaps a reflection of acceptance that this is unlikely to change – there certainly is a common feeling that the HKMA and SFC must be better coordinated and come up with guidelines that are not conflicted.

“More needs to be done, but with the ambition now publicly stated there is reason to be optimistic that some momentum can develop and Hong Kong can compete effectively with Singapore,” concluded one.