Regulatory Challenges of Wealth Management in Asia

We take a look at how regulations are impacting wealth management trends across Asia

Wing Chan 4 February, 2020 | 3:02PM
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Rising income and wealth levels, the opening of China’s financial markets, and rapid growth in aging populations mean that investors in Asia are seeking out additional, increasingly sophisticated investment products and solutions.

And while wealth managers are focused on improving client offerings to meet these demands, they also face tightening regulatory scrutiny to improve the transparency, suitability, and governance framework used in distributing funds.

Here, we break down these trends and what they mean for wealth managers in Asia.

How Regulations Complicate Wealth Management in Asia

Recent regulations have focused on enhancing investor protection, but one challenge facing Asian wealth managers is that the specifics tend to differ across markets. Recent examples include:

  • In Hong Kong, the Securities and Futures Commission has set out a product due-diligence regime that requires distributors to have a clear understanding of an investment’s features before marketing and distributing it to a client. The regulations also include a specific set of guidelines for online distribution and advisory platforms, which aim to align the regulatory requirements between online and offline distribution of funds. As part of these guidelines, operators are required to categorise investment products as either complex or noncomplex, and ensure the suitability of distributing complex products.
  • In Japan, the Financial Services Agency, or FSA, has introduced “fiduciary duty” principles for fund distributors and asset managers, requiring these parties to act in the best interest of clients. The FSA has also introduced the concept of common KPIs—a set of measurements that allow customers to compare the performance of funds across different distributors.

As regulatory regimes differ across countries and markets, Asian wealth-management firms face a far greater challenge to set up and maintain a product-governance framework that satisfies regulatory requirements across Asia.

3 Effects of Regulatory Scrutiny

Increased regulation is important to ensuring financial professionals act in the best interest of investors, but it also comes with a number of side effects. Regulatory scrutiny can lead to:

  1. Business impact. To ensure regulatory compliance, wealth managers need to focus on internal processes, such as bolstering their back office and support units. But at the same time, wealth managers are motivated to dedicate their resources to delivering improved services and accommodating clients’ growing sophistication. These competing demands mean wealth managers need to either prioritize these goals accordingly or invest in additional resources to pursue both objectives.
  2. Product impact. The environment of offering numerous products means that wealth managers face the challenge of having to select the most suitable products for their clients. Additionally, the heightened regulatory focus on product suitability requires wealth managers to conduct in-depth investment and product due diligence, as well as to bolster their suitability framework. These trends, alongside an industrywide trend toward lower-cost investments, mean that wealth managers face ongoing pressure to consolidate their product lineup and focus on their strong ideas.
  3. Impact on investors. Heightened regulations around the distribution of funds are centered on the idea of enhancing investor protection. Wealth managers have the fiduciary responsibility to make sure investors thoroughly understand the fund products that sit on their platforms, and their suitability for each client.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Wing Chan  Wing Chan is director of manager research practice, EMEA & Asia at Morningstar

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