On 7 December, the Financial Services Development Council (FSDC) advised that in order for Hong Kong to fulfil its potential to become the leading Asian, and later global, fund distribution centre, it needs more IFAs and better fund distribution channels.
The next day, however, the Securities and Futures Commission (SFC) announced that financial intermediaries will be open to client damages claims if they are found to have sold or recommended a product that is not reasonably suitable.
The threat of increased liability could deter many IFAs from entering the Hong Kong market and drive others out to regions with more IFA-friendly regulations, cutting the legs out from under the FSDC’s proposals.
For Annette Houlihan, managing director, Carey Suen & Associates, the changes implemented over the past few years have happened too quickly: “[The number of IFAs] has reduced since the start of 2015, and the speed under which new regulatory changes took effect has not helped.”
“The changes were imposed over a five month period in Hong Kong (announced August 2014 to be imposed in January 2015) as opposed to the UK which took nearly 10 years and for Australia, over five years; and in both cases included a lot of industry consultation.”
For Houlihan, the changes have meant increased costs, a slowdown in business, and greater difficulty attracting new advisers to the market.
“This year’s regulatory changes in Hong Kong were well-intentioned but carry consequences which still need repair and simplification,” she said.
For Phil Neilson, chief executive of Just Service HK, however, the Hong Kong market needs a complete overhaul to be able to fulfil its potential.
In complete agreement with the proposals put forward by the FSDC, Neilson doesn’t believe that Hong Kong’s IFAs stand much of a chance until the regulators level the playing field between the IFAs and the big institutions.
“The industry is numbed to the whole thing,” Neilson said. “The whole regime, the way that it is structured, there is not a chance that the IFA sector can grow. It needs major structural rethinking.
“The SFC handles all securities – so that should cover everything. But several years ago they chose to carve out any securities that sit within an insurance product.
“So what we commonly call a unit-linked product, a portfolio bond product, they all have portfolios of mutual funds in play. But the SFC has chosen to interpret the ordinance that, if they sit inside an insurance policy, they are not actually owned by the investors, they are owned, technically, by the insurance company. [Effectively saying] that they’re not securities.
“So you’ve got a world of IFAs that sell savings plans and investment portfolios, but they only can sell it with an insurance policy because they only have an insurance licence. If they want to sell other securities, they have to have an SFC licence, which is several million Hong Kong dollars.”
For Neilson; this separation of the insurance and securities markets and the prohibitive costs and regulation imposed on SME IFAs gives “agents inside of an institutions a blatant advantage over the SMEs”.
“Insurance agents have less compliance than insurance brokers because they are representatives of a company and that’s just the way it’s evolved – they have less compliance, fewer processes, and less paperwork than a broker,” he said. “So why would you want to be a broker?”