It's taking considerably longer to open new wealth management accounts in Hong Kong as tougher regulations bite, but bankers hope to reverse the trend in time by upping their digital capabilities.
The findings of a joint report by the Hong Kong Private Wealth Management Association (PWMA) and consultancy PWC reveal that on average client onboarding now takes 36 days to—six days longer than it did around the same time last year.
In the report published last Thursday, which surveyed 33 PWMA members in July, 64% of respondents said they had spent most of their budget for regulatory compliance on anti-money laundering (AML) and know-your-client (KYC) initiatives. An exact figure was not provided but some industry observers said they were unsurprised.
“KYC norms have been systematically getting more stringent since the global financial crisis,” Steven Seow, head of wealth management for Asia at consultancy Mercer, told AsianInvestor. “More recently, those norms have tightened even further because of the 1MDB scandal.”
1MDB (1Malaysia Development Berhad) hit global headlines in 2015 after the state investment fund came under investigation for alleged impropriety, following investigations that indicated millions of dollars had been funnelled into Prime Minister Najib Razak’s bank accounts.
The scandal, which continued to make headlines well into late 2016, implicated some private banks as well, most notably in Switzerland and Singapore. The Monetary Authority of Singapore ordered the shut down of BSI and Falcon Bank in 2016, while UBS, DBS and StanChart were each fined for AML and KYC breaches.
Private banks in Hong and Singapore, both regional financial hubs, have tightened their AML/KYC requirements even more since.
Under current KYC rules, prospective clients need to provide documents that both show how their money was made and prove that it came from legitimate sources.
But that can be extremely tricky because many high net worth individuals have inherited their wealth.
And for clients with any sort of political connections it can get even trickier, extending the client onboarding process well beyond even 36 days, Seow added.
"It's difficult to become a private bank client in Asia today," he said.
According to an independent panel survey conducted last year by Scorpio Partnership, covering 800 responses from HNWIs across Asia, the account-opening process is one of three top areas identified by clients as key to their entire private bank experience. The other two are the alignment of bank solutions and offerings with client needs and the expertise of advice offered.
“This means that banks have to step up their onboarding process to make it more efficient and quicker,” said Pathik Gupta, consultancy firm Scorpio's head of wealth management for Asia Pacific.
And yet the digital onboarding capabilities of most wealth managers ranks at the bottom of the top-10 areas they invest in, the Scorpio study found.
“This creates a significant gap between what clients are demanding and where wealth managers are investing digitally, Gupta said, adding that the longer on-boarding times can lead to frustrating delays for clients.
There is some hope on the horizon: Mercer’s Seow believes that over the next few years, wealth managers and fintech firms could soon team up to offer digital KYC services that could be shared across firms.
Open to interpretation
Some 82% of respondents in the PWMA-PWC survey named regulatory compliance as one of their top-three concerns, albeit down from 96% last year.
In terms of what specifically bothered them, 61% of respondents cited the need to provide significant judgments on regulations as the top challenge.
In board terms, the regulations that private banks are primarily grappling with are the investment product suitability regime—knock-on effects from Europe's looming Mifid II regime and the Foreign Account Tax Compliance Act, or Fatca, industry experts said.
Investment suitability norms are seen as particularly taxing; although the Hong Kong authorities have issued guidance on several occasions, some wealth managers remain perplexed on the details.
“Regulations by HK authorities are usually principle-based. While they do offer guidance on which situations the regulations kick in, there is still a need to make judgement calls,” Peter Stein, managing director of PWMA told AsianInvestor.
“For instance, if a firm sends a note to clients with a list of high conviction investment ideas, does that trigger suitability norms even if there is no specific solicitation made to clients?”
Unlike Singapore’s central bank, which typically issues consolidated documents on a regulation, the Hong Kong Monetary Authority and the Securities and Futures Commission tend to issue circulars and notices on a piecemeal basis.
“Banks are expected to infer, in some instances by going through case studies, what is permissible and what is not,” Seow said, adding that it can be tough for wealth entities to figure out whether they fall afoul of the regulations or not.
The senior management of some member firms also told the PWMA survey that there were limited means for getting clarification from the Hong Kong regulators.