“Technology and cloud computing allow wealth managers to remain competitive, improve processes, enhance service offerings and improve distribution.”
Regulations fostering greater consumer protections, tax transparency and better conflict and risk management are being implemented across the globe. Experience in markets where changes have already taken place suggests that wealth managers must adapt their business models, often at reduced profit margins, to survive. With these changes on the horizon in Asia, the region’s wealth management industry will need to find ways to adapt.
Regulatory compliance will be the Asian wealth management industry’s biggest focus for strategic spending over the next few years. The region expects to spend 42% of strategic budgets on regulatory compliance, whereas the US expects to spend 10% and Europe 13%, largely because many countries have already transitioned into new regulatory regimes1. The relative youth of Asia’s asset management industry and increasing age of its populations point to more regulations designed to protect consumers in line with what has happened in the US and the European Union (EU). Asian wealth managers can learn important lessons from how wealth managers have responded to similar changes in other countries. Fundamentally, Asian wealth management firms should prepare for increased scrutiny and decide whether to outsource compliance or bulk up their staff to avoid problems and/or penalties.
Transparency in fees and investment advice is the most important aspect of potential regulation from a client’s and regulator’s perspectives. A global CFA survey in 2015 showed transparency in fees/commissions was the most important driver of client trust in investment firms2. We can expect regulations similar to the new US Department of Labor Fiduciary Rule of 2016 that requires advisors to work in their clients’ best interests and disclose revenue arrangements clearly. Such a regulation could encourage advisors to offer simpler advisory arrangements, especially where retirement assets are concerned3. Additionally, this kind of regulation will promote competition, which could result in lower wealth management fees and put pressure on revenues.
Technology is helping to democratize the investment industry by giving smaller investors access to more investment options. This development is happening globally, including across Asia. These changes make client acquisition easier and cheaper; however, they also make regulators anxious, leading them to further emphasize consumer protections and ensure certain suitability standards are met. We expect to see more regulations around fiduciary responsibilities in selecting products and new disclosure requirements for product providers. For example, the Hong Kong Securities and Futures Commission has several pending consultations and research papers aimed at improving consumer protections and promoting competition.
Cybersecurity and privacy presents another compliance challenge. In May 2016, the Hong Kong Monetary Authority introduced the Cybersecurity Fortification Initiative, aimed at reducing the risk of cybersecurity attacks in Hong Kong’s banking sector, which includes a Cyber Resilience Assessment Framework, a professional development program and a cyber intelligence-sharing platform4. In the same month, the Monetary Authority of Singapore launched the Singapore Cyber Risk Management Project at the Asia Cyber Risk Summit.5 Although these initial efforts are mostly aimed at banks, we foresee others in the near future aimed at the broader financial sector, including asset and wealth managers, investment banks, corporate treasury operations and large asset owners. In addition to regulations aimed at protecting cyber space, we expect additional scrutiny aimed at protecting customer data.
Technology and cloud computing allow wealth managers to adopt new technologies and providers to remain competitive, improve processes, enhance service offerings or improve distribution. Because cyber risks are introduced through such arrangements, regulators will want to ensure that appropriate measures are taken to vet suppliers and monitor their privacy and security standards. It is not a matter of if cyber breaches occur, but when. Consequently, clients will want assurances that wealth managers have robust processes to identify risks, protect their assets, detect problems, respond to breaches and recover any losses.
Multijurisdictional residence/assets and tax reporting are becoming the norm. The “Panama Papers” revealed only the tip of the iceberg of offshore arrangements used to mitigate tax reporting. Countries such as Germany, the UK, China and the US have recently stepped up efforts to repatriate taxes owed from offshore citizens and corporate entities. Tax transparency and compliance with domestic and international tax laws are requisite for most Asian wealth managers; however, meeting these obligations is becoming increasingly expensive and complex.
Managing conflicts of interest is increasingly important. The financial services industry is prone to conflicts of interest, especially at large universal banks that raise and invest capital, as well as trade on the information. A PwC report found that the following types of conflicts are rife in financial services: nepotism, gifts, outside employment, self-dealing, insider trading, bribery/kickbacks, current or prior relationships with issuers and unjust enrichment6. Some Asian regulations regarding these conflict areas are weak, or regulations are not yet actively enforced7,8.To attract new capital and remain competitive internationally, the Asian markets and regulations will need to change.
Regulators are becoming more involved. Wealth managers have important roles in advising clients and investing assets. Wealth managers and their clients regularly face risks9. Consequently, regulators are concerned with wealth managers’ abilities to work in their clients’ best interests, as well as ensuring the integrity of the capital markets. Again, we can look to global markets to see a regulatory pattern emerging, which is likely to have some impact and influence on Asian regulations.
The US Securities and Exchange Commission (SEC) and US Financial Industry Regulatory Authority are training their analysts to use big data on a real-time basis to look for patterns across the industry and time periods to form the basis of investigations and insights into system abuses against which they can regulate. The SEC has also modernized private fund registration and reporting post global financial crisis. More recently, the SEC finalized reforms for money market funds. In March 2016, the SEC released four proposed rules and one request for comment related to revising existing regulations and incorporating several new pieces of regulation. These cover data reporting for investment advisors and mutual funds, exchange-traded products, liquidity risk management and derivatives. Proposals for stress testing and industry transition-planning regulations were also issued last year10. The asset management industry in Asia is deemed to be behind in regulating this behavior. It seems likely that more regulations similar to those in the US and/or the EU are in the future for many Asian countries.
Industry experts estimate the additional costs of regulation over the next few years for the wealth management industry may add 50 to 100 bps to fees11, which the firms would like to pass on to their clients. However, new regulations promoting competition and fee transparency may make passing through 100% of cost increases very difficult, resulting in squeezed profit margins. Examination of the wealth management markets in the US, UK and Switzerland show that wealth managers bear significant portions of these incremental costs and need to consider their operating models and strategies for handling them12. For smaller managers, outsourcing compliance and reporting to third parties may be the solution, assuming they have done their due diligence on the suppliers and are committed to monitoring them. Larger industry players have already been growing their internal compliance functions. Their size positions them to set standards around cybersecurity and privacy protection, while their market clout affords them influence on regulators that leads to fairer, simpler rules. Whichever strategy firms choose, doing nothing is not an option: regulation and enforcement are only expected to increase, and with those, the consequences for falling out of step with compliance.
1EYGM Limited. Could your clients’ needs be your competitive advantage? The experience factor: the new growth engine in wealth management, 2016, available at www.ey.com/ Publication/vwLUAssets/EY-could-your-client-needs-be-your-competitive-advantage/$FILE/EY-could-your-client-needs-be-your-competitive-advantage.pdf.
2CFA Institute. From Trust to Loyalty: What Investors Want, 2015.
3Sutherland Asbill & Brennan LLP. “DOL Fiduciary Rule,” 2016, available at www.dolfiduciaryrule.com.
4Hong Kong Monetary Authority. “Launch of the Cybersecurity Fortification Initiative by the HKMA at Cyber Security Summit 2016,” available at www.hkma.gov.hk/eng/key-information/press-releases/2016/20160518-5.shtml.
5Monetary Authority of Singapore. “‘A Bold Approach to Cyber Risk Management’: Opening Address by Mr Bernard Wee, Executive Director, Monetary Authority of Singapore, at the Asia Cyber Risk Summit on 16 May 2016,” available at www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/Speeches/2016/A-Bold-Approach-to- Cyber-Risk-Management.aspx.
6PricewaterhouseCoopers. “FS viewpoint: A matter of trust: Managing individual conflicts of interest for financial institutions,” 2012, available at www.pwc.com/us/en/financial-services/publications/viewpoints/assets/pwc-financial-institution-conflicts-of-interest.pdf.
7Macrothink Institute. “A Global Comparison of Insider Trading Regulations,” International Journal of Accounting and Financial Reporting, Volume 3, Issue 1 (2013), available at www.macrothink.org/journal/index.php/ijafr/article/viewFile/3269/2976.
8Conventus Law. “Anti-Corruption in Asia Pacific,” 2015, available at www.conventuslaw.com/report/anti-corruption-in-asia-pacific.
9Deloitte. “Investment Management Outlook 2017,” 2016, available at www2.deloitte.com/us/en/pages/financial-services/articles/investment-management-industry-outlook. html#.
10U.S. Securities and Exchange Commission. “SEC Accomplishments: April 2013–October 2016,” 2016, available at www.sec.gov/about/sec-accomplishments.htm.
11Robeco. The future of asset management, 2016, available at www.robeco.com/images/201604-the-future-of-asset-management.pdf.
12McKinsey and Company. McKinsey Global Wealth Management Survey 2014.