AsianInvestor's regulatory roundup, Oct 3

China/Hong Kong: Through-train expanded to include new shares
The Shanghai Stock Exchange said that Hong Kong investors could buy rights issues offered by Shanghai-listed companies in the forthcoming Stock Connect scheme, while mainland investors would be able to buy rights issues and other public placements in Hong Kong.

The exchange did not specify whether initial public offerings would be included, but they were excluded in an earlier statement issued by the Hong Kong exchange.

The decision to open the primary market reverses the initial idea clarified in the public consultancy draft issued in April, when securities watchdogs specifically excluded share offerings.

Stock Connect, which is designed to allow investors to freely trade and settle eligible shares on the other side of the border, is expected to go live this month.

China: Iosco, IMF flag shadow banking risks
The International Organisation of Securities Commissions (Iosco) has singled out Chinese wealth management products (WMP) as a potential source of systematic risk over the coming year.

It delivered the warning partly because AUM of the products are expected to expand to Rmb12 trillion ($2 trillion) by the end of the year, from Rmb10 trillion in 2013.

Because WMPs are linked to a pool of assets rather than to a specific asset, the timing of cash inflows may not match the schedules of product repayments, Iosco noted.

As WMPs typically have tenures of less than a year, sometimes days, issuers face liquidity and roll-over risks. Another concern is the use to which asset pools are put, said Iosco.

Many fund real estate development. In June, 55 of the 70 largest Chinese cities saw property prices drop, compared to 35 cities in May. That has stoked fears that WMPs are set for a tumble.

“Any contagion effects [from WMP defaults] may not spread to the rest of the world, via the financial system, since the finance sector in China is not fully integrated into the global financial system (owing in part to capital and exchange rate controls),” the report said. “However, contagion could come from the impact on the global economy of an economic slowdown in China.”

The International Monetary Fund has added its weight to the issue. It noted in a recent report that among emerging market economies, the large size (between 35-50% of GDP) and fast growth (over 20% per year) of China’s shadow banking sector “stands out and warrants close monitoring”.

Singapore: MAS to make FAIR proposals law
The Monetary Authority of Singapore (MAS) is preparing to enshrine Financial Advisory Industry Review (Fair) proposals in law.

The body released a consultation paper on proposed amendments to existing legislation yesterday that are intended to raise the standards and professionalism of the financial advisory industry and encourage greater efficiency in the distribution of life insurance and investment products.

MAS said the move would create a more competitive market for insurance products and enable consumers to make more informed decisions through improved access to information.

As part of the changes, life insurance companies are developing products that can be purchased directly without commissions.

MAS has also appointed a vendor to design and build a web aggregator for consumers to compare the premiums and features of life insurance products. It aims to implement the Fair initiatives next year. Firms will be given until January 2016 to comply.

Singapore joins other jurisdictions that are reforming their distribution models. Commission-based distribution in the US is shifting to fee-based, and Australia has moved in that direction. The UK and Switzerland, meanwhile, have banned commissions and compelled fund houses to be transparent about retrocessions paid to banks.

Australia: Regulator seeks views on disclosure
The Australian Securities & Investments Commission (Asic) is seeking industry feedback on proposed changes to fee and cost disclosure requirements. 

For superannuation funds, Asic is addressing the issue of indirect costs, such as hidden brokerage fees and double-counting, whereby a fee might appear more than once in a disclosure statement.

Asic proposes to include such costs in statements for the first time. It is also looking at the disclosure of mutual fund costs, as well as which consumer advisory warnings would be appropriate for retail investors looking to buy into such products.

“Consistent and accurate fee and cost disclosure is important for ensuring consumers are well informed and confident in making investment decisions,” said Asic commissioner Greg Tanzer.

“Asic is responding to industry concerns to clarify some of the key fee and cost issues that will help to improve the quality and consistency of disclosure,” he added.

Comments on the proposed amendments are due by October 17.

US: Pimco probed over ‘pricing irregularities’
California-based fund house Pimco is reportedly being investigated by the US Securities and Exchange Commission (SEC) over irregularities in its pricing of exchange-traded funds.

The Wall Street Journal reported on September 23 that the regulator was looking at whether the world’s largest bond manager had been artificially boosting returns of its total return ETF, run by the outgoing founder of the group, Bill Gross.

It is reported that Pimco had been buying bonds and artificially inflating their valuations to make its returns seem higher.

“Pimco has been cooperating with the SEC in this non-public matter and we take our regulatory obligations and responsibilities to our clients very seriously,” a Pimco spokesman told Reuters.

Days after news of the probe broke, Gross revealed that he had quit to join rival group Janus Capital.

Singapore: Consultation launched ahead of Fatca compliance
Financial authorities in Singapore are asking the public for feedback on proposed rules drafted to comply with Fatca, the US’s extraterritorial tax rules.

The Ministry of Finance, the Monetary Authority of Singapore and the Inland Revenue Authority of Singapore are seeking opinions on draft income tax regulations that set out due diligence and reporting obligations for Singapore-based financial institutions. The consultation process is due to end on October 17.

The foreign account tax compliance act (Facta) requires financial institutions outside of the US to submit information on financial accounts held by US persons to the US Internal Revenue Service, or face a 30% withholding tax on certain gross payments received from the US.

Singapore has agreed to sign an inter-governmental agreement (IGA) with the US, which would ease compliance costs for institutions in Singapore by requiring them to send tax information to the city-state’s tax authority as opposed to the US. The IGA is expected to be signed before the end of this year.

Hong Kong: Court convicts unlicensed service providers
The Eastern Magistrates’ Court has convicted three people of providing asset management services without the correct licences in two separate cases.

On September 29, Eastern Magistrates’ Court convicted Grace Wong Yuk Han and Lonna Wong Yuk Wah, former dealers of Vermont Securities, of dealing in securities without a licence.

Both pleaded guilty and were fined HK$1,500 ($193) and HK$1,000, respectively. The court also ordered them to pay  investigation costs to the Securities and Futures Commission’s (SFC).

The SFC stated that while unlicensed the two had directly handled securities trading order instructions from customers of Vermont and confirmed execution of trades with customers from May 2011 to April 2012 and from May 2011 to September 2011, respectively.

In a separate case, on September 26 the court convicted Tam Kwok Pui of providing asset management services without a proper licence. He was fined HK$10,000 and ordered to pay the regulator’s investigation costs, which were undisclosed.

It was found that between March 2011 and August 2012, Tam had recruited a client through an investment seminar he had organised, and whilst unlicensed had helped to manage the client’s portfolio of securities and futures contracts.