Can Hong Kong deliver on regulatory promises?

Hong Kong has overtaken Singapore in investors’ minds as the most progressive regulatory regime for fund management, finds AsianInvestor and Clifford Chance’s annual survey of industry executives.

When asked which jurisdiction was most progressive globally, 57% of respondents placed Hong Kong in first, second or third place, ahead of Singapore with 54%.

While 41% of our 243 respondents in this year’s survey are based in Hong Kong, that’s the same ratio as in our previous polls, where Singapore has always emerged on top. Certainly the Lion City remained on top in last year’s survey.

So it would seem that industry sentiment towards Hong Kong’s Securities and Futures Commission (SFC) is finally improving. The SFC has become more proactive in its public engagement and official statements, and is seen to be making progress in its engagement with mainland China.

Clearly the SFC has been cooperating more closely with its mainland counterpart, the China Securities Regulatory Commission (CSRC), over pending liberalisations, including cross-border mutual fund recognition and the Shanghai-Hong Kong Stock Connect programme.

How smooth its progress is less easy to determine, with sources indicating that the Stock Connect programme has superseded mutual recognition in terms of the SFC’s workflow priorities. But certainly the SFC appears to have improved in terms of communication and transparency.

“Whether it is open-ended fund companies, tax exemptions for private equity funds or all of the pending initiatives with mainland China, you can see a general theme that Hong Kong has been proactive in the past year,” observes Mark Shipman, a partner at Clifford Chance in Hong Kong.

“The next question is: can Hong Kong deliver in a meaningful and relevant way on these initiatives? The next year will be telling in that regard.”

Clifford Chance sponsored our survey, the results of which were published in the latest (July) edition of AsianInvestor magazine. To view our electronic magazine, please click here.

In our survey, the UK overtook the European Union in respondents’ views as a progressive regulatory regime with 35% of votes to 33%. Shipman said this could be because it has been more pragmatic with implementation of the Alternative Investment Fund Managers Directive (AIFMD). Malaysia and Korea, meanwhile, received fewest votes as progressive regulatory regimes.

Separately, when respondents were asked to identify regulatory change that would most impact the investment management industry over the next 18 months, there was consistency with last year’s results.

Basel III and Solvency were voted top with 23%, followed by Fatca (22%) and capital requirements on investment/asset managers (13%). AIFMD was in fourth spot with 10%.

Interestingly, the largest decline in terms of response rate was for consumer investment protection rules. Similarly, when asked which area of change would have greatest impact on the conduct of their business in Asia, there was a 15-point drop for “how products are sold/suitability” to 17%, from 32% last year.

“I think the industry has already factored in the need to enhance suitability criteria and know-your-client requirements into their business,” surmised Shipman. “It has been priced in.”

Respondents said the greatest impact on their business would be from additional regulatory reporting requirements, which saw a four percentage point increase year-on-year to 33%.

While OTC derivates also saw a three-point rise, with new rules around central clearing being introduced this year, if anything at 5% it is still not as large as might have been expected. A wait-and-see approach appears to be in play there.

Respondents also appear more accustomed to US and European regulatory trends. While a strong 49% responded “adverse” when asked what impact such rules would have on their business. That was a three-point drop from last year, while there was a one-point rise for “positive” to 24% and a four-point rise for “no significant impact” to 13%.

Our 2014 survey received 243 responses – the same as last year – with participants including regionally located businesses and sales executives among asset management firms, asset owners and distributors of investment product.