At a time when in most of the world
regulation is getting inexorably tighter, it seems that Hong Kong is bucking
the trend.
Unlike most major international
finance centres, Hong Kong is one of the few that currently does not regulate
its fiduciary service providers, but banking business is of course regulated. Plans are now afoot to ease the regulatory
burden on the private banking sector in the territory, to make it more internationally
competitive.
HK Monetary Authority
chief executive Norman Chan has announced that Hong Kong aims to become the
“premier private banking hub in Asia” and particularly to attract more business
from mainland China. In order to achieve
this, the territory will introduce a more “user friendly” regulatory
environment for the private banking sector, which it sees as catering to more
financially literate clients than the retail banking sector.
The HKMA proposes that a
“Private Banking Customer” can be defined as a customer with either (a) at
least US$1 million of assets under the management (AUM) with the bank concerned
or (b) total investable assets of at least US$3 million.
The current banking regulatory regime
is based on requirements for banks to make adequate disclosure in documentation
about the features and risks of investment products and for intermediaries to assess
the product suitability for individual clients and clearly explain products to
them. These fundamental principles will
remain, but under the new regime for private banks there will be a reduction in
the number of times intermediaries will be required to assess their clients
suitability for certain products, the assessment will not need to be done each
time a new investment is made, and the risk profile re-assessment, which is
normally required every two years, will be scrapped unless the client indicates
that there has been a “material difference” to his circumstances.
The underlying
rationale behind the changes was explained by Chan to be that in private
banking, customers often look to their private bankers for investment advice on
a continuous basis having regard to the customers’ entire portfolios or balance
sheets. This is quite different from the retail end of the market in which
one-off sales transactions are common. HKMA therefore considers that
suitability assessment for private banking customers can be conducted on a
holistic or portfolio basis. For example, as long as the portfolio allocation and the
overall risk level agreed with the client is adhered to, a low or medium risk
tolerance client buying high risk products that only constitute a minor
proportion of his portfolio is not necessarily a “mismatch”. The same principle
applies to some other aspects like investment tenor and concentration risk of
AUM with any individual private bank, because the entire portfolio of the
customer will be taken into account.
Chan claimed that despite the
changes, the regulatory focus of the HKMA remained on investor protection.
These moves lay down a clear marker
that Hong Kong aims to secure its position as the jurisdiction of choice for Asia-Pacific
in general, and China in particular. The
reason for this focus is clear - Chan observed that according to industry
research, Asia-Pacific accounted for half of the growth in global wealth from
2010 onwards, and China was the second top contributor to the growth in global
wealth after the US. In 2011, there were
about 30 million millionaires worldwide, 20% of which were from the Asia-Pacific
region. It is estimated that global wealth will rise 50% further by 2016, and the
International Monetary Fund forecasts that, emerging Asia, led by China, will
contribute almost 60% of the world’s GDP growth by 2016. By 2020, the estimated
number of millionaires in Mainland China and Hong Kong together will be 3.7
million, with an accumulated wealth of US$14 trillion. Clearly these are spoils worth battling for,
and Hong Kong believes that reducing the regulatory burden on private banks its
key to winning the battle.
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