Two veterans of Asia’s funds industry have flagged concerns that over-stringent regulation is hindering rather than protecting retail investors.
Kerry Ching, Asia managing director at Australia’s AMP Capital, and Blair Pickerell, former Asia chairman of Japan’s Nikko Asset Management, are well placed to comment, with 50 years of industry experience between them.
Ching has held senior roles at Fidelity, UBS Global Asset Management and Invesco – but has also done a stint at Hong Kong’s Securities and Futures Commission.
She told AsianInvestor that, eight years on from the global financial crisis (GFC), regulation has not softened as it might have done in the past after initial post-crisis tightening; if anything, it has hardened.
"Regulators took appropriate steps during the global financial crisis to stabilise the vulnerable system and to protect investors,” she noted. “But as the global economy and markets recovered, that position has been maintained and more detailed rules have been rolled out over time.”
She said regulators usually had three objectives: to preserve the security and ensure the smooth operation of the financial system; to help promote market development; and to protect investors.
But the third aim “has become such an overriding concern that it may have overshadowed the other objectives”, argued Ching (pictured left).
Nowadays, when new regulations are issued, they tend to be very prescriptive, she noted. “I think Hong Kong is rather unfortunate because of a lot of the things that happened here. The Lehman minibond incident during the financial crisis has put regulators on high alert since then.”
Minibonds were a series of structured financial notes issued in Hong Kong and Singapore backed by now-defunct investment bank Lehman Brothers. They caused big losses for retail investors and complaints of mis-selling after Lehman collapsed in September 2008.
"Obsessed" with regulation
“I tend to look at regulation as a swinging pendulum,” added Ching. “At certain times more stringent regulation is required and at other times regulation will be more pro-market. Since the GFC, the weight of regulation has not swung back.
“We are becoming so obsessed with regulation and thinking that it can cure any problem and eliminate any risk. Sometimes, we may have to stand back and ask, do these rules really address the risks?”
One thing on Ching’s wish list is for regulators to allow investors access to more products, including real-asset funds. “In this market environment, where there is no safe haven, people would cherish the consistency of income streams from real assets,” she noted. AMP Capital, it should be noted, has a big real-asset arm.
Pickerell (pictured below right), who semi-retired in July last year after running several investment businesses in the region, echoed many of Ching’s concerns.
“We have reached the point in much of Asia that government restrictions and compliance requirements make buying a fund a time-consuming and often frustrating process,” he told AsianInvestor.
These are issues Pickerell has raised before, and ones that are coming more into focus as digital distribution of investment products grows in prominence.
“The current environment in some markets has so much focus on KYC [know your customer], AML [anti-money laundering] and, most painfully, ‘suitability’ that bank staff can only sell a fund to a retail investor after spending an hour asking a wide range of questions about investment experience, risk tolerance, knowledge of derivatives, etcetera,” he noted.
Impact on online distribution
While this sounds good in principle, Pickerell said, in practice it makes it near-impossible to build a meaningful online fund distribution vehicle.
“We need to find a way as an industry to qualify investors into certain ‘buckets’ and then deal freely and un-bureaucratically with them [online] if the Asian market is going to remain vibrant.”
Ching suggested that investors should be trusted to make appropriate decisions for themselves, given “adequate and appropriate disclosure”.
“Including every possible risk in the disclosure may not necessarily make it adequate and appropriate,” she said. “In fact, it may deter investors from reading them and thereby defeat its own purpose.”
Of course some will argue that retail investors need protection from unscrupulous salespeople looking to sell them unsuitable products or that investors will often not read all the small print, no matter how clear or understandable it is.
Investor education programmes have not been very effective in Asia, noted Ching. Taking the example of Hong Kong’s Mandatory Provident Fund, she said the city's tax rate was low, meaning people didn’t have any incentive to save.
Moreover, since Hong Kong doesn’t tax capital gains, investors often take a short-term view in the belief that they can make a lot of money from stock trading, she added, “so why would they bother with saving and investing long term?”.
Asset management executives don’t often publicly speak up about policy-makers, and when they do, they tend to speak for many of their peers. Ching and Pickerell are to be applauded for putting their opinions up for debate.
Ching has previously shown that she is not afraid to speak her mind; for instance, she recently gave candid views on the relative attractiveness of various Asian markets to fund managers. She was speaking in September at a seminar in Hong Kong organised by the Association of the Luxembourg Fund Industry.