Julian Korek, Founding Member of Kinetic Partners identifies five key issues that concern financial industry leaders going into 2013 in the firm's Global Regulatory Outlook 2013. "The business leaders that participated in this inaugural study say that they welcome regulation, understand the need for it, and want to work with lawmakers in this area. However, they still have strong reservations around the core challenges in turning next-generation regulation into effective business processes" he warns.
While in the main, those interviewed understood the need for new regulation, their concerns were topped by a perceived lack of clarity with 55%, more than half of the executives surveyed, saying that clarity is the key issue missing from current regulation plans. "Worryingly, not a single regulator currently has clarity listed as a key aim" the report comments.
The respondents felt that they had concerns regarding relationships and trust: "It is clearly in the best interests for all concerned if firms feel able to critique proposed regulations openly. Regulators should actively encourage this engagement in order to ensure that new regulations are effective, consumers are protected, and the industry remains competitive" the report says.
The respondents to Kinetic Partner's survey claimed that a growing number of finance firms were unwilling to engage with regulators about regulations with which they have issues, as they "don't want to upset them".
Culture was also an issue, lacking clear definition in a global world. "There is already a great deal of diversity between different regulators,leading to significant differences in interpretation in different countries or regions. As a result, nearly 80% of those surveyed for our Global Regulatory Outlook report believe that regulation has had little impact on the stability of the global financial system, and 77% believe that global regulations may stall new product innovation or development" the report found.
Another concern lay in performance versus risk with respondents concerned that while strong business performance is clearly important for CEOs, the board and other stakeholders, management needs to have a sound understanding of risk and compliance in order to be truly effective. "Too much focus on risk and regulation could result in reducing choice for customers. Already, some UK banks moot withdrawing from the pension and personal financial products market in response to regulator pressure to ‘take the risk out of investing', which could reduce opportunities for consumers".
The final key concern for the respondents was internationalism and extra-territorialism with the financial services sector currently seeing a significant drive towards more agreements, working groups, standards and co-operation across jurisdictions. "Whilst our survey reveals that many firms see this as a key ingredient in helping to drive more effective regulation, it remains to be seen what impact might this have for regulators, the regulated and industry bodies".
Turning specifically to the Asian arena, AnnMarie Croswell of Kinetic Partners reports from Hong Kong that it is an attractive place to set up an office for existing global funds and asset managers. "Advantages include the strong local investor base, being in the same time zone as currently emerging and booming markets, and being part of the action of trading and research".
But she finds that that the best reason for firms to operate in the Hong Kong time zone is China. "We agree with the 52% of our clients surveyed who believe the next big opportunity in Asia will come from Shanghai. Over the next few years, China's stringent investment criteria are increasingly welcoming more opportunities, such as with the Qualified Foreign Institutional Investor (QFII) rules and talks of the new Qualified Domestic Limited Partnerships (QDLP), people will be able to invest outside its borders for the first time. To tap into that investor base of a billion people, one needs to be here, and invest time and resources into compliance" the report says.
However, choosing Hong Kong as a base does come with its challenges - such as trading across different markets within the Asia Pacific region. "These markets include Australia, Japan, Singapore, Korea, Taiwan, India, China and various emerging markets. Such variety requires adapting to the different reporting requirements and regulations within each of these jurisdictions. If a firm considers taking on US investors, there will also be relevant US regulations relating to the SEC and the CFTC. With all of these complex issues at play, often the first challenge our clients face is not knowing what they don't know" Croswell writes.
"Although it is arguable whether regulation is more or less burdensome in Hong Kong or the US, in many ways the Hong Kong approach makes more sense. Firms often complain that the SEC does not understand the industry and that its rules are based on a kneejerk reaction to the financial crisis, as opposed to proactive regulation which is characterized by the SFC in Hong Kong".
Barry Bateman, Vice Chairman of Fidelity International Ltd comments on the treatment of UCITS across the world, in the Kinetic Partners report. "A particular worry in this area is the increasingly different treatment of UCITS III mutual funds between Asia and Europe. The UCITS III rules, misguidedly in our view, enable mutual funds to adopt a wider range of derivative strategies with which the Asian regulators are increasingly uncomfortable. It is now more difficult, therefore, to get regulatory approval in various Asian countries for UCITS III funds and there is a distinct possibility that a group of Asian countries may develop a competing "UCITS" product with a more conservative approach to the use of derivatives. As a company with substantial Asian operations this would not be unduly worrying, but it would reduce the economies of scale that UCITS funds currently provide" he writes.
Kinetic Partners Benoit Andrianne and Philippe Matelic comment on the global spread of UCITS. "Regulators have not changed their minds with regards to UCITS funds, but the financial crisis has prompted Asian regulators in particular to investigate in more detail before they approve funds. More complex UCITS strategies with leveraged derivatives will be considered in more detail by regulators, specifically in Hong Kong, as they consider these more risky than the original UCITS outline. As a result they are more likely to be subject to delay and even rejection. These complexities extend approval processes from six weeks to over a year in some cases for the SFC. With the current UCITS VI consultation, the question being asked of the industry is whether UCITS funds should continue to include more complex structures, such as use of complex derivatives, or should they return to the simpler structure originally envisaged."
The pair advises that for CEOs, the key is to think carefully about the structures they want to use in Asia. "The more complex a structure appears to an Asian regulator, the more questions the regulator will ask. Whilst pan-Asian organisations such as ASEAN are trying to introduce a passport similar to the European Union, the focus of regulation is still to protect the final investor in Asia. The financial crisis destroyed confidence in complex products and there will be a continued political element to shielding local investors into the future".
Asia Pacific Intelligence reviewed the potential development of an ASEAN UCITS vehicle in our November issue.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.