Private banks in Hong Kong have identified regulatory compliance as out-and-out the biggest challenge to their business operations, amid a rising tide of global rules emanating from foreign jurisdictions and international trade bodies and regulators. Talent sourcing has been highlighted as another major issue.
In a survey conducted by Hong Kong’s Private Wealth Management Association (PWMA) and consultancy PwC, 96% percent of respondents cited as their main worry the tightening of regulatory requirements and the cost of managing compliance. They also voiced concerns about the ability to adapt to such changes. Thirty-five firms participated in the poll out of a total of 46 PWMA members.
The three areas of regulatory reform of biggest private banks are those related to investment suitability; anti-money laundering/ know your client (AML/KYC) requirements; and the upcoming financial common reporting standard (also referred to as automatic exchange of financial account information).
Hong Kong's Securities and Futures Commission (SFC) will from June 2017 require a suitability clause to appear in certain client agreements with intermediaries. When intermediaries fail to comply with the suitability requirement, investors will be able to seek damages, separate from the SFC’s right to pursue the intermediary for failure to sell investment products suitably. Intermediary firms have started reviewing their client agreements in preparation.
Meanwhile, Hong Kong's AML/KYC laws have increased the complexity and thus the length of the account-opening process, given their stringent requirements on private banks to ascertain the sources of wealth.
It typically takes private banks up to 30 days to onboard a client, but this can extend to six months for Chinese individuals. Mainland high-net-worth investors are often entrepreneurs, whose sources of wealth cannot always be easily traced, noted an industry observer.
In fact, Wendy Tsang, head of private banking at Bank of China (Hong Kong) and vice-chair of the PWMA, has suggested the SFC should expedite the process of account opening for mainland clients, arguing that they are unfairly disadvantaged.
In the PWMA survey, respondents cited specific issues related to client onboarding, including: that there are too many manual-process steps (65% of respondents); the complexity and volume of forms (48%); and the limited functionality of tools supporting onboarding (42%).
Common reporting standard
Lastly, Hong Kong aims to implement the common reporting standard in 2018. The CRS, agreed in 2014 by the OECD Council, requires jurisdictions to obtain certain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
The PWMA is working with the regulators on developing a guideline to implement the new requirement, which is expected to be issued next month.
Antoinette Hoon, private banking advisory services partner at PwC, said it would not affect private banks' business apart from the resources it would cost to implement.
“This requirement is a global one as it provides a level playing field for all intermediaries," she noted. "Some smaller jurisdictions may opt not to participate, but financial hubs such as Hong Kong are participating."
In light of the looming wave of regulations, Hoon said the search for risk management and compliance expertise had become more challenging.
And finding talent was a key area of concern to private banks in the survey: 78% of respondents said the industry should increase investment in talent management and development