The fund-management industry hopes Ashley Alder can bring regulatory reform as the new head of Hong Kong's Securities and Futures Commission, but he was non-committal about the regulator's intentions at his formal unveiling on Friday.
There is a feeling that the SFC has been somewhat in limbo in the past few months since Martin Wheatley left the chief executive post in June.
“Everyone’s positive about [Alder's] appointment, as they all now feel we can move forward. The SFC has been pretty rudderless for some time,” says Philippa Allen, Hong Kong-based CEO of Compliance Asia, which provides compliance services to fund managers.
Alder, perhaps understandably, says it's too early to comment on specific reform plans, but he admitted that big challenges lie ahead. He points to the “sheer volume” of issues facing the SFC, adding that “part two of a global financial crisis” now unfolding makes things that much tougher.
But he intimates he is unlikely to rush into making changes overly quickly. For instance, when asked how he might address the issue of Hong Kong's rivalry with Singapore as a financial hub, Alder acknowledged that Singapore can be relatively nimble in making rule changes, but said regulators should be wary of moving too fast.
Indeed, the perennial debate over Hong Kong-versus-Singapore regulation was sparked off again last week, when the Lion City finalised new asset-management industry rules, says Allen. “Fund managers are again asking themselves: ‘Are we better off going to Singapore?’,” she adds.
Still, there is optimism following Alder's appointment, since asset managers see him as having the right experience for the role. He has worked in Hong Kong for more than 20 years, including a stint at the SFC from 2001 to 2004 as executive director of corporate finance, and was most recently Hong Kong head of UK law firm Herbert Smith.
“There's generally been a good reaction that it's a Westerner coming in who has SFC experience, who knows the markets and knows Hong Kong,” says a Hong Kong-based consultant to the asset-management industry at a professional services firm.
Among many hedge funds, he adds, there is relief that the appointee was not someone from mainland China with little experience of international markets and, in particular, hedge fund trading activities.
So what are asset managers hoping to see in terms of regulatory changes?
The main issues for hedge funds have been delays in the processing time for licences, difficulties with authorisation of responsible officers (ROs) and recent enforcement actions targeting certain trading strategies, says Allen.
For instance, the SFC has been taking a lot more interest in ROs' CVs. “The process for approving ROs was speedier a couple of years ago,” says Allen, “but assuming that an individual meets the SFC's basic criteria, it should be up to the firms themselves to decide if the RO has the right work experience for the job.
“Is there any real reason why a COO or general counsel should not be an RO for example?” she asks. “Sometimes they are actually the person in the firm with the best compliance attitude.”
Meanwhile, for traditional long-only managers, the funds-approval process has been a perennial concern – since issues over the mis-selling of Lehman Brothers' mini-bonds – leading to significant delays in getting products to market, says Allen.
The commission has for some time been re-interpreting its views about areas that it can decide as a policy issue, she adds. However, industry sources feel that the SFC is not consulting the industry on these shifts in viewpoint, notes Allen, and some firms feel the commission does not always fully understand the way the alternatives industry works.
“If the commission is going to change policy,” she says, “the industry would appreciate it if they would consult market participants or make changes on a more formalised basis.”
And changes are needed, argues Allen, not least to the Securities and Futures Ordinance. “Martin Wheatley did not want to change the SFO or its underlying rules; he didn’t want to fight that battle,” she says. “However, a lot of at the coal-face, day-to-day compliance issues arise because the legislation is unclear. But will [Alder] want to tackle this?”
Meanwhile, there are also hopes that the SFC continues – and indeed steps up – its tough stance on those breaking the rules.
“The crackdown that’s taken place in the past few years on insider trading and market abuse has been applauded by many fund management companies in Hong Kong, and there are concerns that if we had gotten the wrong man to replace Martin Wheatley, such cases might disappear,” says the unnamed consultant.
He compares Hong Kong to Singapore on this front: “There seems to be less visible evidence of regulatory action in terms of curbing market abuse by fund managers in Singapore; unless of course regulatory moves are being swept under the carpet.”
“The key thing is that the SFC has to keep cooperating with the UK and US regulators – it needs to play hardball with the cowboys in the industry,” he adds. “One hopes money will be spent on the SFC with regard to surveillance and other forms of tracking and identifying market abuse, fraud etcetera. Investors need confidence, especially as foreign money increasingly flows into the Hong Kong market.”
But there’s a feeling among some industry observers that asset managers are not being inspected often enough. The unnamed consultant points to the situation in the US, where the Securities and Exchange Commission was given a big budget to make a lot of hires with investment banking experience after the Madoff ponzi scheme was uncovered in December 2008.
“Regulators need bigger budgets in Asia,” he adds. “Mainland Chinese fund managers, for example, are used to one set of rules in China, and the SFC needs to be on top of this. We need to avoid scandals – the inspection regime needs to be tougher as a deterrent to misbehaviour.”
Asked on Friday whether asset managers should be expecting tighter or looser rules, Alder said he was not yet in a position to comment.