Hong Kong Regulator Bows to Private Banking Demands

Paul J Davies in Hong Kong

Hong Kong’s banking regulator has bowed to private banking industry demands to cut red tape in a bid to help the Chinese territory compete better with Singapore.

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Norman Chan, chief executive of the Hong Kong Monetary Authority, told bankers in a speech that was made public on Wednesday that his “vision” was for Hong Kong to become “the most competitive and dynamic private banking hub in the region”.

Private bankers in Hong Kong had sought rule changes to address concerns that the city is falling further behind Singapore – the leading Asian wealth management center – particularly as more wealthy Chinese look to move their money outside the mainland.

Singapore, with 48 private banks, is the main base for private banks seeking to gain market share in Asia, according to Celent, an arm of consultancy Oliver Wyman. This is partly because of the city-state’s privacy protection laws, in addition to its lack of estate duties, which Hong Kong only repealed in 2010.

Mr Chan announced key rule changes and in a separate letter sent to chief executives pledged to make the regulations “more user friendly”.

But he warned the changes could not be an excuse to compromise investor protection, particularly when it came to making sure clients understood the products they were buying. He told bankers in the predominantly Cantonese-speaking city that they needed to improve their Mandarin Chinese skills to ensure they could communicate properly with mainland clients.

“It is hard to imagine that quality service can be provided to a mainland customer who does not speak English or Cantonese if the account manager cannot communicate in Putonghua [Mandarin],” Mr Chan said.

He added that it would be “helpful if important contracts or documents are written in bilingual forms”, again to help mainland Chinese clients.

Silvan Colani, deputy chief executive of Liechtenstein’s LGT Bank in Asia, welcomed the efforts to clearly distinguish private banking from retail banking.

“We fully agree with the HKMA that Hong Kong has the potential to be a leading private banking hub for Asia, given that Singapore is arguably at a more advanced stage,” he said.

The pressure for rule changes has grown since widespread losses among retail investors on Lehman Brothers-related investments led to a regulatory crackdown that hampered private banks’ dealings with wealthy clients.

Alongside making clearer the distinction between wealthy clients and ordinary retail customers, the HKMA has relaxed requirements for the wealthy to undergo suitability assessments for every product, saying they could instead be assessed for a portfolio of investments when they first became a client.

Alan Ewins, a partner at Allen & Overy in Hong Kong, said the adoption of the “portfolio” suitability assessment standard, and the classification of private banking customers, were key developments for the industry. But he said wealth managers outside of the banking sector could now be left at a disadvantage.

“[Mr Chan’s letter] shows the need for a co-ordinated approach by regulators, given the existence of private wealth arms of non-banks where there clearly needs to be a level [regulatory] playing field. They were not catered for here,” he said.

More than $5 trillion of the roughly $11 trillion of assets held by non-Japanese wealthy people in Asia is in the hands of people with $1 million-$5 million each. According to Oliver Wyman, this is exactly the population of private banking clients that were not distinguished under the current Hong Kong rules.

Mr Chan said such people could be highly seasoned investors or “unsophisticated clients with only very basic investment knowledge, notwithstanding [their] substantial wealth”.

“Private banks must ensure that their account managers take extra care in offering investment advice and marketing investment products to the less sophisticated clients,” he said.