The regulatory overhaul of global financial markets that followed the collapse of US investment bank Lehman Brothers five years ago this weekend stirs mixed emotions among Asian asset managers.

While many welcome the steps taken by regulators to protect consumers and enhance investor confidence, there is underlying resentment that the industry became unfairly tarnished due to the mis-selling of products structured by investment banks.

And while some believe that structural weaknesses in the financial sector such as leverage and moral hazard have yet to be addressed in a serious way, others talk of a legacy of over-regulation that is crimping industry growth and financial innovation.

Over the next week AsianInvestor will consider the impact and aftermath of Lehman’s demise on various industry segments, and examine how Asian markets have responded to the realignment of regulations.

One way the crisis manifested itself was the (mis)selling of Lehman-backed collateralised debt obligations (CDOs), so-called “minibonds”, in Hong Kong, Singapore and Taiwan. This has had a profound effect on how mutual funds are sold in Asia.

In Hong Kong, more than 43,000 investors bought an estimated HK$20 billion ($2.6 billion) of minibonds from banks. Their significant capital losses resulted in public protests outside the offices of the distributors, trustees and regulators.

Evidently this created a bandwagon for politicians to jump on, whipping up a storm of protest that led to distributors compensating retail (not professional) investors. One source points to an industry fear now of what he calls “the rent-a-mob factor”.

There is praise for Hong Kong regulators for their actions, but also scepticism over whether it was right to step in amid suggestions they were partly motivated by guilt at having approved these products in the first place.

Where the sense of injustice springs from among asset managers is that these were structured products, not mutual funds. While the former could be issued by banks at short notice, the latter took months to bring to market.

Moreover, Hong Kong’s funds market is dominated by Ucits products, European instruments with independent trustees, custodians and fund accountants that often require approval from regulators in multiple jurisdictions.

As Blair Pickerell, Asia head of Nikko Asset Management, notes, “in the melee that followed, you would have thought there would have been a flight to quality from structured products to the more highly organised, supervised world of mutual funds".

But mutual funds were tarnished with the same brush. Hong Kong retail funds saw a $4.6 billion net outflow in 2008. (Inflows totaled a record $10.4 billion in the first half this year, the HKIFA revealed yesterday.)

As a result of this scandal, the Securities and Futures Commission (SFC) introduced a string of rule changes, chiefly directed at the sales practices of distributors.

These include segregation of investment services from deposit taking, classification of investor by risk profile and product suitability assessments, disclosure of risks, audio recording of the sales process and commission disclosures.

This has had a knock-on effect on the disclosure requirements of fund managers, resulting in a change to the SFC code on unit trusts and mutual funds in June 2011. Now investors must be provided with a key fact statement on products as well as various risk disclosures.

Lieven Debruyne, CEO of Schroders in Hong Kong, sees only a positive effect from the rule changes, believing the SFC has struck the right balance between protecting investors and encouraging industry growth.

But that view is not universally shared. It is estimated to take 45 minutes to buy a fund from a distributor in Hong Kong for the first time after risk assessments and statements. Yet you can buy a product in the US from a bank or fund house in a fraction of that time – without running a risk that the bank will decline to sell it to you.

“Hong Kong has become one of the most difficult places to buy a mutual fund,” says Pickerell. “I think it is fair to say the Lehman minibond incident has had a major, long-term effect on the development of the mutual fund industry in Hong Kong.”

Clearly risk aversion has persisted since the crisis and the market volatility has been unhelpful for sales growth. Still, a question mark remains over whether Hong Kong investors even now see mutual funds as structurally sound and distinct from structured products. It is unclear if the education process is making genuine headway.

Mark Konyn, CEO of Cathay Conning Asset Management, notes that while providers of consumer services now have a far more thorough set of procedures to ensure the suitability of services and products to retail investors, “many of these measures are aimed at protecting the financial institution rather than assisting customers”.

But Sally Wong, CEO of the Hong Kong Investment Funds Association (HKIFA), points to one positive impact of the minibond scandal. “Before 2008 people only focused on product upside. Now there is increasing awareness of the downside, as well as structural features that previously they would not have bothered to ask about.”

She notes, too, that HK investors’ fixation with equity has changed. HKIFA figures show that in 2008 equity funds accounted for 59% of net fund sales and bond funds -8%. By 2012, equity funds were -9% and bond funds 96%.

“Over a longer-term horizon, what we have seen is investors taking a more diversified approach and started to look for alternative types of asset classes,” Wong states.

But Konyn points out bond funds that currently pay out of capital are not fully understood by investors. “As rates rise and currencies weaken, investors may be surprised by the results,” he notes, adding that banks will need to continue to be responsible with their sales approach.

Undeniably, regulatory changes have forced fund houses to focus far more on compliance, and that has had a cost impact. It’s a gripe AsianInvestor has heard more than once.

But at the same time the industry has been a little self-serving in saying that investors are not yet ready to pay separately for advice, and that now is not the time to ban commissions on sales (Australia is leading the way in Asia Pacific).

As Patrick Corfe, marketing director for Aberdeen Asset Management Asia, notes: “If trail commissions were abolished, management fees in theory would fall. Investors might feel differently about advice then. But the industry’s funding model would be upset.”

But one issue where there is universal agreement is what regulation asset managers would like to see next in Hong Kong: the introduction of the proposed Hong Kong-China mutual fund recognition scheme.

“Let’s move on and work out how to further capitalise on the opportunities from both the industry perspective as well as from the investors’ perspective,” suggests Wong.