A high-level Hong Kong government advisory body has urged policymakers to help reduce the fund distribution dominance of banks, which boast a 78% market share in the territory.
The 22-member Financial Services Development Council (FSDC) highlighted the problems of bank dominance, in particular their controlling influence on fees and the type and range of products sold.
In a report issued yesterday, the FSDC urged policymakers to take the lead in facilitating alternative distribution channels, such as e-platforms, and in setting up of a central repository for 'know your client' (KYC) and anti-money laundering (AML) procedures to support new ways of distribution.
The issue about the predominance of bank distribution in Hong Kong was recently highlighted by industry veteran Blair Pickerell at an AsianInvestor forum, as reported. The message has been delivered strongly once again.
The FSDC has clout: it is a high-level, cross-sector body established in 2013 and chaired by Laura Cha, a non-official member of the executive council of Hong Kong. The 22 council members include the secretary for financial services and the treasury and practitioners from the industry, as well as legal and accounting professions and academics.
Marie-Anne Kong, asset management practice leader at consulting firm PwC, said the initial discussion took place in April 2014 with a select group of CEOs at a roundtable on the future of fund distribution in Asia. PwC sits on one of the FSDC's sub-committees.
“What is very promising is that the policymakers clearly embrace the recommendations and have already made reference to them,” Kong noted. “There is still a lot of work to be done to make the recommendations a reality and we must continue our engagement to make it happen.
"The central utility for KYC would be a major breakthrough in particular. It will not be easy to implement, but will certainly be welcomed by financial institutions and investors alike."
In the report, FSDC said the two key obstacles that would prevent Hong Kong from capitalising on opportunities in the funds market were a lack of diversity in fund distribution and a burdensome client on-boarding procedure in the digital era.
It highlighted Hong Kong’s relatively small funds market and the need to expand through the sale of funds to overseas investors, with fixed costs kept at a reasonable level.
However, the present on-boarding procedures are seen as costly and discouraging to investors as this requires face-to-face identification, which would undermine online engagement in particular.
“For this reason, while online platforms have started to gain prominence in more developed markets, they have been slow to take off in Hong Kong," the report stated. "Clear on-boarding guidance will also help participants develop their e-platform strategy more confidently and hence speed up reforms in distribution."
Cost is seen as the factor that could prevent online platforms from taking off. With direct distribution, asset managers will have to invest further in their own on-boarding procedures, the report noted.
“In a market where compliance and regulatory talent is already scarce, there is a need to review the possibility of implementing a central repository for KYC and AML checks through greater use of biometric data,” the report indicated.
FSDC recommended that policymakers follow in the footsteps of South Korea and Australia, which have championed the development of online platforms or exchange platforms (through Fund Online Korea and Australia Stock Exchange-led mFund Settlement, respectively, as reported).
It also recommended a central repository for KYC and AML procedures similar to the KYC registration launched by the Securities and Exchange Board of India.
This agency would create a centralised pool of investor details, to be used by intermediaries and clients, on the understanding that due diligence would only need to be done once.