Views on improving the integrity of global capital markets
24 February 2013

Give Hong Kong’s New Financial Services Development Council a Chance

Hong Kong’s financial services industry is one of the pillars of the city’s economy, and the industry’s continued competitiveness and sustainability matter greatly not only to Hong Kong’s reputation as a global financial center but, more importantly, to the livelihoods of its 8 million residents. Matters of taxation, ease of doing business, rule of law, and quality of life (Hong Kong’s pollution and lack of school spaces have been top concerns) influence financial firms’ decisions to establish or expand presence in Hong Kong over other financial centers in Asia such as Singapore, Tokyo, and Shanghai.

The newly created Financial Services Development Council is meant to preserve Hong Kong’s edge by finding opportunities in mainland China, promoting the region’s financial services industry overseas, training talent, further developing the financial sector, and encouraging the start-up of new and innovative businesses.

The council has been a long time coming. Still its formation, structure, and composition have been criticized for allegedly lacking checks and balances and for being a “platform for mainland heavyweights.” Five mainland Chinese professionals have been appointed to the 22-member council, including Levin Zhu, son of former premier Zhu Rongji and chief executive of the investment bank China International Capital Corporation. It’s a pity that critics have overlooked the expertise of the council’s members, including two highly respected professionals, Florence Yip of PricewaterhouseCoopers (PwC) and Mark Shipman of Clifford Chance, who are seasoned advocates of Hong Kong’s asset management industry and with whom I have the privilege of serving on the executive committee of the Alternative Investment Management Association (AIMA) in Hong Kong.

At a time when Hong Kong politics has never been more heated, the purpose and potential of the council to serve the greater interest of the industry seem to have gotten lost in the political divide.

What matters most is this: Does the council have the authority to shape Hong Kong’s long-term policy on the financial services industry? The city has dozens of organizations representing sections of the industry — from the chambers of commerce to think tanks to non-profit professional associations — and as a result, interests sometimes clash. This can lead to policies that do not necessarily advance the industry’s collective interest or that of Hong Kong’s people. Where there were good ideas, implementation fared poorly.

We do not need more of the same, especially at a time when changes to the world’s financial system are rapidly picking up pace. The wave of new international regulations, increasing market competitiveness and risks, and pressures on traditional business models demand that Hong Kong be on its A-game. In fact, if Hong Kong does not yet have a strategic plan to deal with this changing landscape, time is running out.

The council, therefore, should provide meaningful recommendations to the government on how to further leverage Hong Kong’s unique position as a gateway to China for the long-term growth and development of the city’s financial services firms — both local and international players.

For example, some in the investment industry have long pushed for cross-border distribution of Hong Kong-domiciled funds in the tightly regulated mainland China market and of mainland funds into the Hong Kong market. This would be the next breakthrough that would set Hong Kong up as an international asset management hub. It would allow Hong Kong Securities and Futures Commission (SFC)-recognized funds in Hong Kong, including those run by foreign asset managers, to tap the world’s largest savings pool, and mainland funds to sell in Hong Kong and attract international institutional investors that would otherwise be restricted from investing directly in China. For Chinese investors, this offers diversification from often highly speculative domestic assets — property and equities — or from low-yielding bank deposits.

In this we have a champion in Hong Kong Securities and Futures Commission Executive Director Alexa Lam, who recently called for the industry to “experiment boldly” in this new frontier on the back of the success of the Renminbi Qualified Foreign Institutional Investors program (RQFII) started last year. Mutual recognition seems a matter of when, not if. As in any regulatory breakthroughs in China, the pace will be cautious and major hurdles have to be overcome, which would include complex legal and taxation issues. As a tax partner at PwC, Florence Yip has been working closely with the government to develop Hong Kong as China’s asset management center, and Mark Shipman can lend his legal expertise in shaping the future successor of the QFII system. AIMA has been closely aligned with this initiative for many years and has long pushed for the necessary changes to companies and taxation legislation.

A China-Hong Kong mutual recognition program would also change the dynamic on the regulatory front, shifting from the current unipolar (Western-led) regulatory decision making towards a multipolar system and accelerating the maturity of Asian regulatory regimes. Often, regulators in Asia are at the receiving end of a barrage of new rules, such as Europe’s Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, and are faced with the challenge of reconciling them with local rules. In a shared fund management market between Hong Kong and China, regulators in both jurisdictions will have the power to dictate what and which rules apply. If foreign funds want to enter the Chinese market, they will have to play by local rules.

Will the Hong Kong government heed the council’s recommendations? Well, the proof will be in the pudding. Experience tells us that even the most obvious recommendations end up watered down upon implementation. The effectiveness of the council depends largely on the level of industry’s engagement. We should use the council, especially with its high-level cross-border representation, as a platform to push for big-ticket issues that are harder to tackle through ad hoc lobbying. Merely moaning about what the council can’t do without even giving it a chance to do its job, and without trying to actively contribute toward its mission, is counterproductive and will only further serve to undermine an industry which is under significant pressure as it is.

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About the Author(s)
Paul Smith, CFA

Paul Smith, CFA, is the founder of SustainFinance and the former president and CEO of CFA Institute. He has more than 25 years of relevant financial services leadership experience in many aspects of the investment management industry.

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