As one of Asia’s three main financial hubs alongside Hong Kong and Tokyo, Singapore – specifically its regulatory reaction to Lehman Brothers' collapse five years ago – is significant, not least because the crisis has had a substantial impact on rule-making with regard to investment products across Southeast Asia.

Perhaps the clearest and highest-profile example of the problems caused to investors – in the retail market at least – is that the almost 10,000 investors who lost more than S$500 million ($394 million) in products linked to Lehman Brothers. (AsianInvestor examined the situation five years on from the crisis in Hong Kong on Friday.)

The Monetary Authority of Singapore (MAS) found a number of lapses in the sales practices of distributors involved in the case and took regulatory action against them. It also reviewed its regulatory framework during 2009 and 2010 and introduced proposals to safeguard the interests of retail investors.

Among other things, MAS sought to improve the competency of individuals selling complex investment products, promote more effective disclosure for retail investment products and require intermediaries to formally asses a retail customer’s investment knowledge and experience before selling them more complex products.

The regulator introduced an enhanced regulatory regime for fund management firms on August 7, 2012 that increased compliance requirements, particularly for smaller managers that previously might have been exempt from being registered.

More recently, in April this year MAS reintroduced the requirement for offers of collective investment schemes to accredited investors to be accompanied by an information memorandum with salient information about the scheme.

And it is in the process of overhauling the rules regulating the financial advisory industry under the Financial Advisory Industry Review proposals, although some suggest the proposed changes may not go far enough.

One result of the changes is “marked improvements in the quality of disclosures required of institutions over the years", says Wong Kok Hoi, founder and chief investment officer of APS Asset Management in Singapore. “The concept of investors’ protection has also evolved to embrace greater emphases on consumers’ awareness and financial literacy.”

One benefit, he argues, is that before the crisis investors would not pay a premium for firms with robust infrastructure and risk controls that were already fully compliant with the new regulations. “Today, investors have developed an allergy for firms with weak infrastructure.”

But Wong is realistic about what also needs to be done and what is in fact possible.

Regulations must continue to be fine-tuned to ensure that safeguards are adequate against risks to investors, he notes. “Regulating the fund industry is like frying anchovies – you must neither over-fry nor under-fry it.”

Wong feels regulatory changes post-crisis have made the market safer, but does make a caveat. “So long as regulators are able to ride on the reform agenda and implement non-politicised and smart regulations, at the same as industry participants are able to reflect on their experiences and remedy their weaknesses, we should expect a more resilient financial system in the future.”

Nevertheless, he says, there will always be financial crises and “unscrupulous asset managers and distributors selling scam or ‘undeserving’ products”.

A current initiative Wong sees as very important is the is the review of ‘shadow banking’ by global regulators, whereby the latter are deciding on the financial entities to bring within the regulatory perimeter in this regard. “We hope that in doing so, regulators will not apply a broad-brush approach, and be targeted to address their specific concerns in a balanced manner.”

Turning to fund markets elsewhere in Southeast Asia, it is clear they suffered from the crisis, but not generally as a direct result of, for example, the minibonds affair, since they had negligible exposure to Lehman-backed products.

Countries such as Indonesia, Thailand and Vietnam even before 2008 were relatively restrictive when it came to foreign funds and fund managers. And the crisis hardly made them keen to rush to allow more products with offshore – and potentially more complex or risky – underlying assets.

Regulators in Southeast Asia on the whole have responded with varying degrees of severity, with a relatively common response being to introduce tighter rules around customer risk profiling. And in some cases the authorities banned certain products altogether.

BNP Paribas Investment Partners in Indonesia (at the time Fortis Investments) was one firm to have suffered as a result. Tino Moorrees, Japan CEO at BNPP IP – who was in 2008 Indonesia CEO for Fortis Investments – says that, after the Lehman collapse, the regulator halted the approval of option-linked structured products. These had accounted for a substantial part of the firm’s assets under management and its growth plans, he notes, and the ban came in within two years of the launch of the first such products.

“Fortis Investments Indonesia therefore saw a significant amount of its assets under management evaporate and missed the opportunity to replace these maturing equity-linked structured products with similar products,” notes Moorrees. Such equity-linked structured products were not permitted within the local industry until recently, he adds.

However, some fund executives in Southeast Asia are fairly upbeat about where their industry stands now. For example, the regulators in Thailand “have actually been more liberal and more business-orientated during the past five years”, says Somchai Boonnamsiri, CEO of Krung Thai Asset Management in Bangkok.

The Bank of Thailand and the Securities and Exchange Commission have encouraged investors, including asset managers, to invest more overseas. As a result, funds introduced since 2008 have been more varied, notes Boonnamsiri.

He points out that the first exchange-traded funds have been listed on the Stock Exchange of Thailand in that time, and real estate investment trusts and infrastructure funds have been allowed for the first time.

Moreover, the Thai SEC has introduced and implemented the ‘accredited investor’ concept, meaning higher-risk/higher-yield funds can be offered to such investors. In addition, asset managers can also now apply for a trustee licence, potentially widening the scope of their business.

The regulator also made other changes, notes Boonnamsiri, such as that under the know-your-customer rule, sale agents must now evaluate investors’ risk appetite before recommending funds. The fund disclosure rule has also been revised to include details of associated risks and risk level of the fund, and it is also now compulsory to provide a fund fact sheet for products with complicated structures.

Looking forward, Boonnamsiri says he would like to see regulators of Asean Economic Community members lay down common fund rules so that each member country can see its funds within the AEC by the time the initiative starts in 2015.

Meanwhile, in Malaysia, the funds industry has been made safer from a risk management perspective, both industry- and firm-wide, argues Raymond Tang, regional chief investment officer at CIMB-Principal Asset Management.

The risk management culture has been spread to all levels at CIMB-Principal AM, he says, with risk management now embedded and integrated across the operating environment, products and processes. Since the crisis, the firm’s senior management has taken a “more comprehensive approach to understanding our clients’ needs and new products”, says Tang.

As for the wider market, he adds, “it will be great to see funds regulation evolve in line with industry shifts”.