Hong Kong’s position as a leading financial services hub has never been in question. But with several forces affecting the fund management ecosystem, a change in approach is inevitable. Hong Kong’s fund management industry is changing. Alongside ongoing global macroeconomic uncertainty, the region is also facing local challenges such as increased competition, rising compliance costs and downward pressure on fees. We spoke to Jeff Floro, our Head of Asia Sales in Hong Kong to find out more about the challenges and opportunities they face.
Jeff, what are the main challenges facing the fund management industry in Hong Kong?
Hong Kong has several key challenges:
Regulators are demanding greater transparency, which generates a need for accurate data and reporting solutions from both the buy side and sell side of the market.
At the same time, distributors want to work with fewer fund providers, and this change will create winners and losers. Asset managers will need to offer flexible products and tools that help advisers and private bankers offer value-added services to their end clients.
The ETF industry in Hong Kong has experienced several challenges despite growing annual inflows. Vanguard has shut its Hong Kong and Tokyo office and is now focusing on China and Australia, and BMO Global Asset Management has delisted their ETFs. The US-China relationship and the outbreak of Covid-19 in 2020 weighed on ETF investor sentiment. This affected inflows and outflows to ETF’s exposed to China’s onshore equities market.
ESG investing is finally gaining more traction at the institutional level, but we’re not at European levels yet. It will need to become the ‘new normal’ as investors start to demand that asset managers integrate ESG into their investment processes and offer more sustainable products. The Securities and Futures Commission is starting to look closely at investable ESG products available for sale in Hong Kong.
The launch of the Greater Bay Area (GBA) Wealth Management Connect will see banks and finance companies in Hong Kong expanding the channels to sell their financial products. This will mean a focus on investments within the China Greater Bay Area which comprises Hong Kong, Macau, Zhuhai and Shenzhen.
How has the Hong Kong territory changed over the last few years?
As asset managers and private banks catch up with technology, we’re starting to see advances impact the classic distribution workflow. The introduction of new paradigms allows for cost reduction and improved operational effectiveness. RegTech solutions (which manage regulatory processes) plus technologies such as Artificial Intelligence and more recently Blockchain, are starting to change the way things are done here. For example, one RegTech provider, Investment Navigator, uses FE fundinfo Static Data and Documents to help private banks perform suitability checks for their clients.
How might regulation affect the industry moving forward?
New regulations are pressuring banks and financial advisors to redefine their role and take a more holistic approach to financial planning and investment management. This means they will need to rely on certain specialist services to ensure they have solutions that keep pace with constant regulatory change.
We will also see a trend in more M&A activity across the industry. Private banks will see consolidation because of the cost of wealth management. Asset Managers have been subject to this activity because of downward fee pressure. Even fund platforms have seen consolidation in the last few years. Ultimately, though, investors will benefit from lowering of fees and product diversification and innovation.
What do you see as the biggest problems faced by fund managers?
A multiple regulatory landscape will mean the relationship between manufacturers and distributors will need to change. More frequent contact between the two parties, larger exchanges of information, and a better reporting capability from a product governance perspective will be necessary as the value chain evolves and becomes more complex.
What do you see as the biggest problems faced by fund distributors?
Fund distributors are required to have a deeper knowledge of the investor in order to provide suitable investment options. This increases compliance and reporting costs and reduces the distributor’s margins. The market is now demanding digitalisation with modern financial planning, portfolio construction, due diligence, ongoing monitoring, and reporting tools to improve efficiencies and reduce costs. They need to re-establish their margins, while also adding value to the end investor.
How have recent world events affected the financial services industry in your territory?
As mentioned before, the US–China trade war has influenced investment flows via Hong Kong. But Hong Kong’s future role in the Greater Bay Area gives potential for wealth management growth with increased AUM gathering opportunities. Meanwhile, the COVID era is pushing distributors and fund houses to achieve full digitalisation in their processes.
What are the main areas in which FE fundinfo helps your clients?
We help our clients improve efficiencies, reduce risk, and save money in the fund distribution and regulatory space. We provide deeper, up-to-date, and superior quality fund information. We also provide digital solutions and reporting tools that are aimed at improving the relationship between asset managers and fund distributors, while supporting the industry to meet its full digitalisation needs. Our Global Funds Registration service assists managers navigate the requirements of the SFC, therefore smoothing the way to distribution of their funds.
