The Financial Services Development Council (FSDC) is confident that Hong Kong can become the leading fund distribution centre in Asia Pacific in the medium term, and globally in the longer term.
In order to achieve this, the FSDC has recommended that the government leverage Hong Kong’s financial reputation, promote and facilitate the creation of diversified fund platforms, and allow investors to buy funds smoothly.
Challenges
However, unlike other global markets, fund distribution channels in Hong Kong are largely concentrated in the banking sector and with a small number of banks.
In addition, unlike in the UK and the US, no significant IFA industry has developed.
Other barriers include the size of Hong Kong’s market. In order to become a major fund centre with economies of scale, the FSDC believes that Hong Kong needs to expand through the sale of funds to overseas investors, while keeping fixed costs at a reasonable level.
Client on-boarding is also viewed as unnecessarily burdensome, costly, and discouraging to investors. The process often requires a face-to-face identification process, which can be problematic for online platforms in particular. As a result, the uptake of online platforms has been faster in more developed markets.
Additionally, having no central repository for performing ‘Know Your Client’ (KYC) and ‘Anti-Money Laundering’ (AML) checks means that each financial institution must build their own system, at a significant cost.
Opportunities
Despite these hurdles, the FSDC has made four recommendations that it believes could strengthen Hong Kong as a fund distribution centre.
The opportunities in Asia are immense, the report stated. Assets under management in the region are set to grow faster than in the developed world over the next decade, driven by a shift in economic power, growing pension funds, and a growing proportion of high net worth individuals.
Alternative distribution
Fund distribution in Hong Kong is dominated by the banking sector, with an estimated 78% of retail funds distributed through this channel, according to figures from PwC.
While many large existing asset managers have been able to enjoy strong relationships with the large distributors in Hong Kong, the newer entrants to the industry struggle.
Alternative distribution channels available to the newer entrants are limited, as banks have been able to capitalise on their existing retail distribution network, making it difficult for new entrants or distribution channels to take hold.
The FSDC is calling on policymakers in Hong Kong to follow similar examples in Korea and Australia and champion or initiate the setting up new distribution platforms.
