Financial firms favour tighter rules on product selling

There appears to be strong momentum for an overhaul of financial laws in Asia, according to a survey published last week by law firm Allen & Overy and information provider Complinet.

Compliance executives at financial services firms in Asia, polled for the Asian Regulation Survey 2009, largely support moves to tighten regulation on investment products. They also want to see more mandatory disclosure of derivatives exposures and clearer differentiation between retail and wholesale businesses, among other things. 

Seven out of 10 respondents see a clear need for tighter regulation of the sale of structured products to the retail sector, especially in areas surrounding disclosure and suitability. They feel regulators, especially in Hong Kong and Singapore, were too lax in the supervision of the sale of products such as minibonds and equity-linked notes to retail investors.

"They should require more disclosure, but also enforce that much more," says one deputy head of compliance in Singapore. "Putting in regulations is easy but, once they do it, the enforcement is not there. You don't see Asian regulators as active or fining companies as much as you see in the US or Europe."

In line with the call for greater disclosure, 59% of respondents feel regulators should have done more to regulate proper disclosure of structured products for the retail sector. But there is less support for giving regulators power to supervise products beyond setting and enforcing disclosure requirements -- for example, allowing them to ban particular classes of products.

"Regulators generally aren't sophisticated enough to really understand a lot of these products," says a regional compliance manager at a Hong Kong broker. "They need to be able to rely on the banks and the product providers to do that honestly and openly. There should be clear guidelines governing how product details should be disclosed, how they should be written and how the risks should be explained to investors. Unfortunately, things will probably become more prescriptive in that area because banks have not been doing that adequately."

It would also help to have more mandatory disclosure of derivatives and other instruments that provide economic exposure to shares, say three-quarters of those polled. "I would agree with that insomuch as it could have an effect on balance sheets and for retail investors to decide where they put their money," remarks one regional compliance manager in Hong Kong.

Moreover, banks and other financial institutions should clearly differentiate between their retail and wholesale businesses to provide greater clarity to customers, agree 84% of respondents. In fact, regulators have already begun requiring banks to "physically separate" their deposit-taking branches from their investment services outlets.

"The line should be drawn more clearly," says a head of compliance at an international bank in Singapore. "If people go to the bank to make a deposit they should know they won't be talked into buying an investment product at the same branch."

But it is not only financial firms themselves that need to make changes. Nearly two-thirds (61%) of executives want to see a consolidation or restructuring of regulators in their domestic jurisdictions. Respondents from Hong Kong and Singapore are the most in favour of a regulatory reshuffle, following the Lehman Brothers minibond debacle.

Some feel the answer in Hong Kong is a consolidation of the two main regulators -- the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) -- into a single regulator, as in Singapore and the UK. Others say a better approach would be to broaden the SFC's powers to cover some of the areas currently under the oversight of the HKMA.

At the opposite end of the scale, most respondents in Singapore felt there was little need for an overhaul of the regulatory structure, as the Monetary Authority of Singapore already looks after most aspects of financial regulation in the city state.

As one head of compliance for a large investment bank says: "I've just come out of a meeting where we were discussing the fact that the HKMA is requiring seven years for taping and the SFC requires only three months. There are so many inconsistent requirements from both regulators and when you're operating across the securities and banking sector it gets very complicated."

However, there was less support for the idea that there should be restructuring and/or consolidation of domestic regulators across all Asian jurisdictions, with less than half (44%) of respondents in favour of change and 37% opposing it. Jurisdictions such as Japan and Taiwan were hailed as good examples of strong regulatory regimes. Others, such as Thailand and India, were described as being "a bit more behind the times".

Other survey findings covered currency controls and hedge funds. Most respondents (82%) want to see tighter regulation and greater transparency around hedge funds -- for example, in line with European Union reforms.

Meanwhile, 87% of respondents do not think there should be an increase in foreign exchange controls to limit the flow of capital, arguing that this would lead to a setback in the globalisation process that has taken place over the last few decades.

The overall consensus is that increased regulation is inevitable across the board, with most (87%) of those polled saying compliance costs will increase over the next 12-18 months as a result of rule changes.

The survey polled 54 senior compliance and legal executives at financial services firms across Asia during the second half of August. Respondents represented most of the major financial institutions that operate in Asia and covered jurisdictions including China, Hong Kong, Japan, the Philippines, Singapore, South Korea and Taiwan.