Beware unintended consequences of ‘transparency’ rules

Since the global financial crisis, financial regulators worldwide have pushed for more product transparency. A raft of measures have been introduced to address issues such as information asymmetry and conflicts of interest.

It is hoped this will give investors more visibility about what happens within the value chain, and how manufacturers and distributors have provided value for money. And hence they will be empowered to make informed decisions.

This approach is epitomised in initiatives such as Europe’s Mifid II and Priips (Packaged retail and insurance-based investment products), which lay down very prescriptive details on disclosures. Some regulators go further, mulling a clear segregation of the roles of investment advisers and distributors. Others have banned commissions. 

In Asia, we have similar debates. But most regulators take a measured approach. Instead of mandating a move to a fee-based model, they focus on bolstering disclosures and letting market forces determine the appropriate model.

DIFFERENCE IN DYNAMICS

While we can draw on experiences elsewhere, one must bear in mind different market dynamics and culture, and that each model has merits and demerits.

For instance, in Asia, most markets are heavily intermediated by banks, whereas independent financial advisers dominate in markets such as Australia. If one studies the experiences of markets that ban fund sales commissions, it’s possible to see this has resulted in new issues, such as a gap in the availability of funds advice. The jury is out as to what works best. Further, investors in Asia are generally unfamiliar with the fee-based model. Our surveys indicate such a model is still alien to many Hong Kong investors. For instance, some interviewees thought they had to transact more to justify the fees paid. They feel a commissions-based model is fairer, and provides more value for money for long-term investment.

So there are certain ingrained attitudes and mind-sets that we should address before introducing any new models.   

STRIKING A BALANCE

When it comes to disclosures, we believe there should be consistency in requirements across investment products. Priips, for example, aims to provide a common pre-contractual product disclosure by establishing a common standard for key documents for a range of products. 

While there are certain exemptions, the initiative is a major step forward because it aligns product requirements and goes a long way to reduce regulatory arbitrage between different products.

On the details of disclosures, balance is key; we believe Hong Kong’s Securities and Futures Commission (SFC) has struck an appropriate one. In its 2017 consultation, SFC proposed providers disclose a range of annual management fees to be rebated to distributors. We pointed out it would be sufficient to disclose the maximum percentage amount.

Our concern was that a range could complicate investor decision-making and would not be meaningful. We applaud the SFC for taking on board opinions. We must remember all these requirements involve additional compliance burdens and costs, and may have unintended consequences.

For instance, while research unbundling under Mifid II put transaction/research costs under the spotlight, they affect market competition and availability of types of research, as well as extra-territorial impacts. All will have flow-through effects on investors.  

Transparency is an important tool to empower investors; but can only be meaningful if information is relevant, pertinent and digestible. More is not necessary better; what is important is to strike an appropriate balance.

Sally Wong is chief executive of the Hong Kong Investment Funds Association