The plans could have a negative impact on the sales of hedge funds or alternative funds, which generally have high management fees, traders fees and commissions, Stewart Aldcroft, Asia Pacific senior adviser for markets and securities services at Citibank, told our sister publication Fund Selector Asia.
The Securities and Futures Commission (SFC) in Hong Kong last week rolled out a three-month consultation on independence and fee disclosure.
Under the new proposals, intermediaries cannot refer to their firm as “independent” if they are receiving commission from distributing funds, and they need to state the fee amount at the point of sale.
“Some small-scale private banks might find it a bit more difficult to explain [the fees],” Aldcroft said.
"I think what the SFC is doing now is to prepare the Hong Kong market for new regulations, [in line with] the evolution we've seen in other jurisdictions"
Large banks should be unaffected, as the proposals do not disadvantage the banks in the distribution field, he added.
IFAs elude SFC
Aldcroft expressed concern that IFAs selling investment products such as investment-linked insurance policies, with underlying investments including mutual funds, are not facing the same standards as they are not regulated by the SFC and therefore not affected by its proposed rules.
Fund distribution in Hong Kong has been dominated by a handful of large global banks, with only up to 3% of retail fund distribution in the Special Administrative Region through the IFA channel, according to data cited by the SFC in the consultation paper.
Singapore has a ban on the word “independent” in the description of a financial adviser if the firm is receiving commissions.
Yet the dominance of banks in Singapore distribution did not change at all, Aldcroft said.
“My biggest concern for the fund management industry is whether it will reduce the overall volume of business. At the moment, it appears that it’s not likely.”
Sally Wong, chief executive of the Hong Kong Investment Funds Association, thinks it is difficult to generalise about the possible negative impact on fund sales.
“Having greater visibility about the fees being paid is a global trend and the HKIFA is in full support as we believe that investors are fully entitled to know what they are paying, what the fees are for and who gets what,” she said in a email reply to FSA.
“Ultimately, what is most important is to demonstrate to clients that there is value for money, and as long as the managers and distributors can demonstrate to investors that they can provide value added (e.g. through alpha or through quality advice), investors are ready to pay,” she added.
Aligning Hong Kong regulation
The Association of Independent Asset Managers Hong Kong (which is comprised of wealth managers) also supports the SFC’s proposals as a positive and logical move toward greater fee transparency, said Harmen Overdijk, one of the founding members.
Among the association’s 18 ordinary members, roughly half are currently adopting a fee-based model, which does not charge commissions, he said.
Some are already using a lot of ETFs, he added, which do not involve sales rebates.
“I think what the SFC is doing now is to prepare the Hong Kong market for new regulations, [in line with] the evolution we’ve seen in other jurisdictions. Even in the UK, where the regulations are the strictest of all, it is not necessarily bad for wealth management industry,” Overdijk said.
The proposal might also mean that independent asset managers (IAMs) need to drop the word “independent”, he said, as they fall under the “intermediaries” category regulated by the SFC.
“The term is quite common, but it means more that we are independent from a big bank or financial institution,” he noted.