Hong Kong mutual fund houses are partly to blame for delays in product registration and need to be more efficient when filing paperwork, says Mark Shipman of Clifford Chance.
Product registration can take up to 12 months. Yet 72% of total processing time for new funds is attributed to applicants and just 28% to Hong Kong's Securities and Futures Commission (SFC), notes Shipman, the firm's head of global funds and investment management.
“That’s one statistic that’s a little frightening,” Shipman told the Hong Kong Investment Funds Association conference this Wednesday. “I was a little bit surprised.
"The point is, nevertheless, that we, the industry, need to make sure we are as efficient as possible to put sound applications to the SFC in the first place, and ensure we address enquiries promptly rather than sit on requisitions we get back.”
The SFC introduced new rules effective next year that will reduce the lapse-time for new fund applications from 12 months to six. “[This] puts pressure on the industry and regulators to ensure we are quicker to market product,” Shipman said.
The Hong Kong-China mutual recognition scheme was also a discussion topic. On the previous panel, Alexa Lam, deputy CEO of the Securities and Futures Commission (SFC), told an expectant audience that regulators were “literally in the final stretch of the journey”. The scheme was initially announced in January 2013.
Shipman noted that while there was still “no visibility around what the mutual recognition scheme will look like, [I] understand it’s not going to be a passport scheme. So it means, I suspect, that there will be an approval process for Hong Kong funds to be approved and marketed in China, and vice-versa for Chinese funds into Hong Kong."
Out of the three proposed passporting schemes on the table – including the Asean funds passport and the Asia Region Funds Passport – Shipman is confident the HK-China scheme will be the first to come into practice, adding it’s the most “sensible in form” of the three.
The panellists also discussed product innovation. Gabriel Gondard, BlackRock's head of strategic product management for Asia ex-Japan, argued it was more challenging for players in the financial industry to be inventive than other sectors such as telecommunications.
“We’re operating in a world to fit into a [changing] regulatory framework, unlike some other industries,” Gondard said. In addition, investors’ needs are constantly changing.
“If you don’t keep innovating, you won’t be serving your investors over time,” Gondard said. “And we’ll see some new additions as the environment continues to change, whether that’s more multi-asset funds or Asian equity strategies in upcoming months.”
While innovation is important for mutual funds globally, Showbhik Kalra, head of products for Asia Pacific at Schroder Investment Management, argued it was more so in Asia.
“[Asian] investors aren't using funds to save for retirement, but rather to trade with,” Kalra said. “That’s one of the unique aspects to the Asian fund business and it’s why product innovation has a greater importance here.”
Although many point to the differences among Asian countries, he noted there were also a few similarities. “Demographic changes are largely taking place at similar paces. Wealth creation is occurring at a similar pace. Product strategy and demand is fairly similar, at least for international products – there’s a strong home bias in a lot of markets,” Kalra said.
Shipman stressed the importance of keeping new products simple. “I believe in the ‘kiss’ principal – keep it simple stupid,” he said. Funds that use a variety of complicated instruments, such as derivatives, are difficult to explain to regulators and retail investors. Investors often won’t buy into a fund if they don’t understand it, which means these funds will never gain in popularity, he added.
“I see some of the investment banks going into complex fund products and I scratch my head and wonder what they’re trying to achieve. Sometimes you wonder if they’re looking after their investors’ best interests,” Shipman said.
Innovation and simplicity were not necessarily mutually exclusive, Gondard added. “There are simple innovative products and some sophisticated and complicated products which are not innovative.”