Asia could see Mifid-lite regulations by 2020
Financial regulators in Hong Kong and Singapore could take inspiration from new funds regulation in Europe to introduce more transparency over fund charges, pressuring mutual fund houses and wealth managers to cut product costs for end investors, predict market observers.
Both Hong Kong’s Securities and Futures Commission (SFC) and the Monetary Authority of Singapore (MAS) are believed to be studying the impact of the Markets in Financial Instruments Directive II (Mifid II), which was introduced in the European Union on January 3.
The new rules cover financial markets behaviour as a whole, and include measures that force fund managers to disclose transaction and research costs, along with a general unbundling of fund charges.
Keith Pogson, partner in the Asia-Pacific financial services division of EY in Hong Kong, told AsianInvestor the SFC, MAS and other Asia regulators are watching Mifid II keenly. He believes some sort of "Mifid-lite" could be introduced in the next two to three years.
“It’s not going to happen tomorrow. They are going to take their time to observe how this pans out, but I wouldn’t be surprised to see a Hong Kong or Singapore Mifid-lite being put together.”
The impact of the introduction of Mifid II has caused a stir in the UK, with the publication last week of a study by consultancy Lang Cat in the Financial Times. It revealed that investors in the UK can end up paying almost double the ‘ongoing costs figure’ (OCF, an industry standard) for many of the country’s most popular funds, once transaction costs are included. This can go up to four times the OCF if distribution platform charges and performance fees are included.
Asian investors are subject to the same issues of hidden, or poorly expressed, fund fees, and regulations in Hong Kong and Singapore were lax when compared to Europe and the US even before the introduction of Mifid II.
Last year, the SFC tried to begin addressing this by issuing the ‘Consultation Paper on Proposals to Enhance Asset Management Regulation and Point-of-sale Transparency’ which proposed a ban on commissions.
But the local funds industry pushed back, arguing that investors in Asia prefer to pay by comission than paying a fee for advice, and the watchdog ultimately watered the initiative down.
“The SFC backed away from the paper they issued last year, so Hong Kong and Singapore are the last two developed financial markets that still allow these fees,” Tobias Bland, managing director of Hong Kong fund group Enhanced Investment Products, told AsianInvestor.
The Hong Kong regulator did at least manage to introduce new rules forcing advisers to disclose how much they are making out of a transaction, but Bland noted that “it’s not very specific about how you make that calculation or where it fits in the document”.
More progress has been made in the Mandatory Provident space. In April 2017 the Mandatory Provident Fund Schemes Authority (MPFA) introduced a default investment scheme, and forced fund sponsors to accept a 75 basis point fee cap. This followed a scathing report in which it highlighted the poor value that funds had provided to MPF members, with a toxic cocktail of high fees and poor investment performance.
It is unlikely that Mifid II could simply be replicated in Asia. The regulation is complex and far-reaching, covering the whole of the European Union and cutting across the entire finance industry. Instead, regional jurisdictions may take a less expansive approach.
“The Europeans, in their typical way of implementing new directives, have had to go for a big bang law, rather than a series of incremental laws,” said Pogson. “My guess is [the Asian version] is going to be centred on best execution and transparency. It’s not going to be focused on data reporting and it’s probably not going to wade too far into more difficult areas, like Asian bond trading, but it will focus on fund fee transparency.”
That would be welcomed by advocates of greater market transparency. Stewart Aldcroft, managing director of Citi Global Transaction Services in Hong Kong noted that fund management companies have long claimed that it is sufficient for them to offer a total expense ratio (TER) to inform retail investors of how much they pay in fees to invest into a fund. However, the measurement tool remains “very contentious” in Asia.
“TERs historically have had many different bases for their calculation, whether they include or exclude certain types of expenses,” he noted. “It is probably an area where more focus is needed by regulators."
Bland was less diplomatic: “The general public have had their wallets robbed by the asset management industry for decades.”
He argued that mutual fund managers “play skullduggery” with TERs, effectively misleading investors as to how much they have to pay. He added that the SFC had compounded the problem by allowing fund distributors to charge retrocession fees for their services.
The fees have a double impact on end-investors. They often amount to several percentage points of assets that are invested, making it harder for investors to enjoy a decent return. Plus, bank and insurance salespeople tend to focus on pushing the products they can make most money from rather the ones that best meets a client's needs.
“Performance is fifth down the list of criteria. The first one is ‘how much am I going to get paid to sell this product?’” said Bland.
He argues Mifid-style regulation would be a good thing for Asian retail investors: "We have (in Hong Kong) the highest turnover of mutual funds in the world, because of the churn and burn culture. Every time an investor buys and sells they pay their broker anything from 50 basis points to 3%."
Pogson agreed: “It’s amazing how effective the fund managers and the banks have been at resisting change. But I think, post GFC there has been a lot of interest in the consumer protection side of the agenda. When it comes to Asia, if the Hong Kong Monetary Authority or the SFC, and the MAS in Singapore want to implement something, I don’t think it’s going to take them too long.
“In true Asian style, we’ll photocopy the European rules and implement the ones we want.”