Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
Thae Khwarg, CEO at SEI Asset Korea, notes that the funds industry has become splintered, inhibiting scale and therefore the ability to innovate. In 1996, he says, the top five players enjoyed 83% of the market in asset terms. Today, the top five fund houses have only 41% of the market.
But he predicts that the coming overhaul of the regulatory framework will allow those providers with skill and scale to become dominant, while û unlike the situation 10 years ago û also allowing plenty of scope for niche players.
Yoon Tai-soon, chairman of the Asset Management Association of Korea, says the incoming Financial Investment Services and Capital Markets Act û aka the Consolidation Act û will scrap or ease 40% of 300 existing financial regulations.
ôThis will create a more reliable market with stronger investor protection, allow domestic financial-investment companies to integrate and compete against international banks, and promote innovation,ö he says. The United Kingdom and Australia served as models to the new law.
Yoon and Khwarg made their remarks at a recent conference in Hong Kong organised by the Investment Companies Institute, the Washington, DC-based funds association for the United States.
The regulatory landscape in Korea today is a patchwork of many, often contradictory laws, which have stymied the development of the capital markets. Different laws are designed for different types of firms, even though these firms may be offering similar services. This has led to loopholes, impeded competition, created barriers to innovation and hindered proper disclosure of risk.
The Consolidation Act will do four things to address this.
First, instead of regulating types of financial service providers, it will regulate by function. Second, instead of spelling out what kind of products are allowed, it will allow products based on broad categorisations of risk, so that new products donÆt require new laws.
Third, financial investment companies can do any kind of business provided they erect proper Chinese walls. Fourth, the law will emphasize investor protection, allow a flexible approach toward æprofessionalÆ investors, remove loopholes regarding protection on certain products, and introduce stricter rules on solicitation and conflicts of interest.
The law will also require three self-regulatory organisations (Amak, the Korea Securities Dealers Association and the Korea Futures Association) to merge and provide unified oversight to all service providers.
The government introduced the new law a year ago, got a draft written in the summer, completed an industry and regulatory review in December, and will submit the law to the National Assembly this summer. If passed, it will become effective in January 2009.
The funds industry is excited by what the new law will allow. The main challenge is that now securities houses will be able to manage assets. But fund managers in turn can now launch many new types of products and sell them through many new channels.
ôSecurities firms are not a big threat,ö says Khwarg. ôOur industryÆs capabilities and know-how are different.ö He says securities firms will succeed in fields such as index funds and money-market vehicles, which require little research expertise. And most brokerages own a funds subsidiary, so theyÆll more likely try to boost their asset manager rather than cannibalise it.
The new law is not without concerns, however. Korea has a track record of launching good laws that get badly regulated. Regulators have lots of power to æinterpretÆ laws, and they donÆt always agree with political declamations.
Secondly, product innovation will require a lot of education. ThereÆs currently poor understanding of risk/return regarding basic asset classes, but the new law will allow some very specialised and illiquid products to be marketed.
The third challenge will be for providers to upgrade their own capabilities, including IT and the resources required to educate their distributors.
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