Robo-advisers hit KYC roadblock in Asia

Investment platforms cannot sell offshore products such as ETFs for direct retail purchase in Hong Kong or Singapore, and this is proving a major obstacle to robo-advisory business.
Robo-advisers hit KYC roadblock in Asia

Robo-advisers have hit a roadblock in the form of know-your-customer rules in Hong Kong and Singapore, which do not allow the direct purchase by retail investors of offshore products such as exchange-traded funds.

This is not the only obstacle to the take-up of automated investment services, but it heavily restricts what they can do – and the regulations need to change, argue industry players.

Take the recent experience of one unnamed robo-adviser, which was offering US listed exchange-traded funds (ETFs) in an Asian jurisdiction. When the local regulator became aware of this, the robo-adviser was asked to halt business briefly to make corrections in its client-onboarding processes, said a source. It needed to segregate clients by scale and comply with KYC requirements before it was able to go back to using offshore ETFs.

In Hong Kong and Singapore, only authorised funds and locally listed securities can be bought directly online by retail investors. Only professional investors can directly buy offshore-listed ETFs.

Hence robo-advisers are being prevented from providing a wider range of products given the relatively limited range of ETFs listed in Hong Kong and Singapore.

During the ETF forum, panelists agreed that regulations needed to be adjusted to help accelerate robo-advice.

“The situation in Hong Kong and Singapore is that online distribution is currently not allowed,” said Stewart Aldcroft, Hong Kong-based senior fund advisor and a panelist at the summit. “There have been a couple of cases where fund companies were prosecuted and fined for not keeping up-to-date KYC [information] of customers who bought investment products.”

Hong Kong’s Securities and Futures Commission needs to make significant changes to allow individual investors to make direct purchases online and to automate the KYC process, he said.

“Once that happens, we might see real progress in the robo-advice segment,” noted Aldcroft. China is already moving to allow robo-advisors to sell offshore products, and this could easily be replicated in Hong Kong, he said.

Will Shum, portfolio manager at funds platform iFast Hong Kong, agreed that KYC requirements were strict in the region and that a robo-advice platform might not be able to satisfy them.

“All distributors need to complete the risk profile questionnaire or risk scoring system to determine a client’s suitability for a product,” he said. An algorithm – such as those employed by robo-advisers – is not sufficient to do all that, noted Shum. 

He pointed to other factors hindering the growth of robo-advice, such as the limitations of such firms’ algorithms in providing more complex solutions, as well as the reluctance of financial advisers to sell ETFs because they do not provide retrocession fees.

But he was generally optimistic that robo-advice would flourish in the long run, given that investors were looking for lower-cost investment alternatives. Affluent ‘millennials’, too, will look to online platforms for their investment needs rather than visiting bank branches, Shum suggested.

Indeed, if investors’ experience with robo advice is good, they will be more willing to upscale to higher-ticket solutions, said Phillip Yoon, managing director of Hong Kong-based Phinary Advisors, which provides robo-adviser products.

Other such firms in the region include Eight Securities, which started in Japan and expanded to Hong Kong; Smartly, which will launch in Singapore in mid-2016; and Mi Cai, a mainland Chinese firm providing offshore ETF investments.

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