A common platform as a standard source for product classification could potentially maintain the status quo for banks and wealth managers in Hong Kong while satisfying the regulator’s zeal to improve investor protection.
Come July, Hong Kong’s wealth managers will have to reckon with the new environment under the Securities and Future Commission’s (SFC) rules on «online distribution and advisory platforms».
One particularly thorny issue for many has been the requirement to classify all investment products distributed as either «complex» or «non-complex» under the regulator’s prescribed definitions. The exercise has been proven to be a formidable task, enough so to motivate the regulator to extend the deadline by three months from the planned effective month of April.
Though the dust will settle and wealth managers will properly define the product universe they wish to contend in, potential headwinds await for the industry due to the lack of standardization and reduced liberalization.
No Room for Ambiguity
Especially in the event of significant market losses, scrutiny of definitions will come into play and any ambiguity poses as a risk to the broader industry. One such example is the SFC’s distinction between complex and non-complex bonds – an extremely popular asset class in the recent years for the region’s renowned yield chasers.
For example, the SFC states that bonds can be classified as «complex» if they have «special features» such as loss absorption. Some are quibbling over what amount would constitute as «loss absorption» and whether or not to apply prudence with an academic lens. Others are being judicious and taking a blanket approach to bonds with «special features», regardless of magnitude.
Individual Security
The lack of a standardized classification at the individual security or product level could lead to unnecessary risks, most notably an avoidable potential hit to client trust in the wealth management industry. A shared definition could cut some short-term flows generated from regulatory arbitrage but save the industry a headache.
Although the industry has moved away from its product-pushing prime, accessibility to the universe continues to be a key factor, especially for diversification into more esoteric exposures – a growing need given the demand for alternatives.
Smaller Product Universe
Genuine reverse inquiry business from savvy, experienced investors are the biggest losers of the mandatory requirement for product classification. Bank reluctance to perform due diligence is often due to considerations about scale and business case, especially for smaller players that lack local resources and such a conundrum places all parties on a back foot.
With the exception of a handful, the wealth management industry is constantly grappling with issues of scale and sustainability. A common platform with a larger universe of defined products could yield exponential gains by eliminating regulatory arbitrage, (re)enlarging the accessible product universe and save costs.
