Hong Kong Bucks the Regulatory Trend by Relaxing Private Banking Regulatory Regime – At a time when in most of the world regulation is getting inexorably tighter, it seems that Hong Kong is bucking the trend.

Unlike most major international finance centres, Hong Kong is one of the few that currently does not regulate its fiduciary service providers, but banking business is of course regulated. Plans are now afoot to ease the regulatory burden on the private banking sector in the territory, to make it more internationally competitive.

HK Monetary Authority chief executive Norman Chan has announced that Hong Kong aims to become the “premier private banking hub in Asia” and particularly to attract more business from mainland China. In order to achieve this, the territory will introduce a more “user friendly” regulatory environment for the private banking sector, which it sees as catering to more financially literate clients than the retail banking sector.

The HKMA proposes that a “Private Banking Customer” can be defined as a customer with either

• (a) at least US$1 million of assets under the management (AUM) with the bank concerned or
• (b) total investable assets of at least US$3 million.

The current banking regulatory regime is based on requirements for banks to make adequate disclosure in documentation about the features and risks of investment products and for intermediaries to assess the product suitability for individual clients and clearly explain products to them.

These fundamental principles will remain, but under the new regime for private banks there will be a reduction in the number of times intermediaries will be required to assess their clients suitability for certain products, the assessment will not need to be done each time a new investment is made, and the risk profile re-assessment, which is normally required every two years, will be scrapped unless the client indicates that there has been a “material difference” to his circumstances.

The underlying rationale behind the changes was explained by Chan to be that in private banking, customers often look to their private bankers for investment advice on a continuous basis having regard to the customers’ entire portfolios or balance sheets. This is quite different from the retail end of the market in which one-off sales transactions are common. HKMA therefore considers that suitability assessment for private banking customers can be conducted on a holistic or portfolio basis.

For example, as long as the portfolio allocation and the overall risk level agreed with the client is adhered to, a low or medium risk tolerance client buying high risk products that only constitute a minor proportion of his portfolio is not necessarily a “mismatch”. The same principle applies to some other aspects like investment tenor and concentration risk of AUM with any individual private bank, because the entire portfolio of the customer will be taken into account.

Chan claimed that despite the changes, the regulatory focus of the HKMA remained on investor protection.

These moves lay down a clear marker that Hong Kong aims to secure its position as the jurisdiction of choice for Asia-Pacific in general, and China in particular. The reason for this focus is clear – Chan observed that according to industry research, Asia-Pacific accounted for half of the growth in global wealth from 2010 onwards, and China was the second top contributor to the growth in global wealth after the US.

In 2011, there were about 30 million millionaires worldwide, 20% of which were from the Asia-Pacific region. It is estimated that global wealth will rise 50% further by 2016, and the International Monetary Fund forecasts that, emerging Asia, led by China, will contribute almost 60% of the world’s GDP growth by 2016. By 2020, the estimated number of millionaires in Mainland China and Hong Kong together will be 3.7 million, with an accumulated wealth of US$14 trillion.

Clearly these are spoils worth battling for, and Hong Kong believes that reducing the regulatory burden on private banks its key to winning the battle.

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