Custodians challenged by supervisory role in Thailand

Since Thailand's securities watchdog introduced a clampdown on sales promotions used by asset managers to boost fund sales, custodians have had a bigger role to play.
Custodians challenged by supervisory role in Thailand

The recent move by the Thai securities regulator to clamp down on asset management firms’ spending on promotions to attract business reflects the evolution of the market towards a trustee framework. It has also placed additional supervisory obligations on custodians.

Since the first quarter, Thailand’s Securities and Exchanges Commission (SEC) has stepped up scrutiny of the practice whereby fund houses offer promotions, such as lucky draws, rebates or free gifts, to attract new subscriptions.

Other markets that operate under a trustee framework usually obligate asset managers to adhere to the expense policy as specified under a trust deed agreed between the manager and the fund’s trustee. This setup does not exist in Thailand.

As a result of the SEC’s move, the intense competition seen in the domestic mutual fund sector in 2012 has diminished considerably this year, say industry players.

“[The regulator] wants the public to place more focus on the performance of fund managers [rather than on gifts and rebates],” says Pavinee Ongvasith, head of provident fund business at Tisco Asset Management in Bangkok. “In general, this has been a tougher year for the asset management sector.”

The regulator’s disapproval of fund managers’ use of free gifts to lure investors was made clear in February, when SEC secretary general Vorapol Socatiyanurak said it had approved amendments to rules that govern advertising and sales promotions for all service providers.

In what was a highly competitive environment, there was not sufficient information given on products and services, he notes, adding that the use of premiums or gifts to attract investors was often aimed at rushing these investors into making investment decisions.

Pavinee says the gift-focused culture has been a characteristic of the Thai funds industry for the past five years. Investors in long-term equity funds and retirement products in particular have “their eyes on gifts rather than funds’ returns”, she adds, despite fund managers’ willingness to provide full performance disclosure.

The SEC has also imposed addition obligations on custodians, making them “fund supervisors” with fiduciary trustee-like responsibilities. Under the common law legal system, trustees are usually charged with certain fiduciary responsibilities that require them to act in good faith for protecting the interests of the beneficiaries.

Earlier this year the SEC started to require custodians to monitor whether a manager has expensed costs for such free gifts and rebates to the fund, confirms Chee-ping Yap, managing director for Citi’s fund services in Asia Pacific.

“It shows that the regulator is really asking, ‘Why should existing investors of a fund pay for gifts [given] to new investors?’” says Yap.

This is effectively placing the custodian in the role of a trustee. However, the legal concept of trust, or trustee, does not exist in Thailand, unlike in markets such as Hong Kong or Singapore.

It has thus been challenging for custodians to place such additional scrutiny on their fund manager clients in the absence of a legal framework, says Yap.

However, he says it is encouraging for the industry as a whole, as Thailand’s regulator is clearly showing determination to raise industry standards.

“For now, in the absence of a trustee legal framework, fund managers, custodians and the regulator are keeping an open dialogue to find the right balance between higher accountability by the fund industry,” adds Yap, “and placing the right ‘level’ of scrutiny responsibility on custodians that they comfortable with.”

A feature on the latest developments in the Asean fund administration industry will be published in the July issue of AsianInvestor.

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