With the level of regulatory change reaching new highs and regulations – ranging from Europe’s Markets in Financial Instruments Directive (MiFID) II to Basel affecting firms around the globe, Thomson Reuters’ ASEAN Regulatory Summit 2017 held in Singapore earlier this month provided an apt opportunity to hear from experts about key changes and how to manage them.
Financial and regulatory themes
Kicking off this year’s event, Thomson Reuters’ managing director region head, Asia, financial and risk, Sanjeev Chatrath, highlighted several major themes across Asia in both financial markets and regulatory developments.
On the financial side, although the past year has seen major geopolitical changes such as the UK’s Brexit vote and the unexpected victory of Donald Trump in the US elections, volatility over the period has been unprecedentedly low. Amidst the uncertain environment, however, people are ready for markets to go “any which way”. Key trends that he anticipates include financial firms focusing on how they can leverage technology; the pace of regulatory reforms reaching a new high – following more than 50,000 regulatory changes last year; a need for greater social inclusion; and a rise in nationalism.
From a regulatory point of view, Chatrath sees banking continuing to focus on basics, such as compliance with the know-your-customer (KYC) requirements. Other key themes include a greater focus on trade-financed anti- money laundering (AML) and tools that enable efficient tracking; a shift towards enterprise risk management (ERM) rather than operating in silos; more institutions – even in Asia – waking up to the reality that MiFID II affects them; a greater emphasis on how to get ahead of cyber-crime and collaboration among regulators across borders. So-called ‘SupTech’, whereby supervision leverages technology, is coming in as well.
Asia Securities Industry & Financial Markets Association (ASIFMA) chief executive officer (CEO) Mark Austen turned to the global regulatory point of viewpoint. The capital adequacy regime introduced by Basel III was focused on the 2008-09 global financial crisis – one primarily centred in the west – and emphasised capital market regulation and reform.
For Chris Humphrey, executive director of the Singapore-based EU-ASEAN Business Council, changes in the US have to be good for Asia too as “you’re going to need a different type of regulation,” he told his audience As far as Brexit goes, he expects there to be little difference in the short term, since all current regulation will be enshrined in UK regulation and it will take years to change.
In Asia, Austen identifies the real risk as overreliance on bank lending, causing Asian regulators to respond by pushing back against the global reforms, led by Japan and supported by Singapore, Hong Kong, and Australia.
Regulators in Asia also have nationalistic interests, according to Frederick Shen, head of business management at Oversea-Chinese Banking Corporation, better known as OCBC. He agrees that Singapore, Hong Kong, Australia and Japan have been at the forefront of regulation, with the first three in particular aligned in regulation and implementation.
Regulation has also led to the high level of hiring in compliance, due to banks having legacy systems, no enterprise data warehouse, and manual processes. “Automation will help,” Shen added. “With automation, you don’t need as many people”.
In an audience poll, Summit delegates were asked what advice they would off someone who wanted to pursue a career in the finance sector; 56% would recommend software development, while 22% would pick legal compliance and 15% advisory services. However, less than 5% apiece would suggest trading, fund management or branch management.
MiFID II: the impact on Asia
MiFID II comes online at the start of January 2018, with increased data gathering and reporting for buy-side and sell-side firms and all participants must have policies to achieve compliance. While the European directive might appear to be of only limited relevance to Asia, panellists said MiFID II will have profound impacts on the region.
Marion Leslie, managing director of Thomson Reuters’ pricing and reference services (PRS) business, called MiFID II the most interventionist regulation in recent times. “The difficult thing is figuring out how you’re impacted,” she suggested. “If you have a European headquarters, a branch, Asian clients who interact with Europe or trade in anything European, there’s impact. Everybody is impacted.” Barclays’ managing director and head of regulatory and government relations for Asia Pacific, John Laws, added that anyone planning going to deal with someone based in the EU will experience the impact from MiFID II.
Austen said the unbundling of research will also have a big impact on the ASEAN (Association of Southeast Asian Nations) region. If asset managers unbundle research and ask clients to pay for it separately, clients will be unwilling to do so for ASEAN. That means the volume of research will go down and people will be less likely to invest, especially for markets such as Vietnam or Indonesia.
Combating financial crime
The challenge created by financial crime continues to be a major focus for the region’s firms; both because of the impact of crime and because of potential fines. “We’re starting to see a push to get greater efficiency by reducing costs via automation,” reported Barclays’ Apac regional head, Richard Carrick. “We’ve seen transaction monitoring systems. The pain point is how much money management could save. We spent a huge amount in fines; now it’s time to increase our performance and reduce our fines.”
Another key issue for financial institutions is whether a compliance officer has the expertise to understand the nature of the products, noted Nizam Ismail, a partner of Singapore-based law association RHTLaw Taylor Wessing, while Phil Rodd, Apac financial crime solutions leader for accounting group EY said: “We’re seeing more action by regulators, we’re getting more focused on the individuals running these institutions. Senior management are front and centre.”
Cost should be everybody’s first thought, advised Nigel Morris-Cotterill, head of international body The Anti- Money Laundering Network. “You’re being put to an enormous amount of cost for an outcome we can’t predict, and it’s not going to save you. Second, there is far too much prescription. It discourages people from thinking. Encourage people to think, to become more aware of what they’re looking at,” he suggested. “Understand the nature of suspicion.”
Financial technology’s role
“We’re beginning to see financial technology (fintech) and regulatory technology (regtech) embedded into all discussions in the region”, said University of Hong Kong professor and scholar in economic and financial law Douglas Arner.
The key themes in Asia’s financial markets, he believes, are financial access, financial inclusion, China’s process of financial internationalisation, and the role of technology. “Technology in this region is very important. We have a disparate level of financial sector development. Vast differences in levels of development can be turned into an advantage, through technology.”
The speed of technology development and new entrants – ranging from Alibaba and Microsoft to Apple and Facebook – entering into the financial services arena are providing a different set of competitors for traditional financial institutions and start-ups alike, he said. “The speed with which something can go from ‘too small to care’ to ‘too big to ignore’ and then ‘too big to fail’ is unprecedented.”
These ideas of fintech require regtech in three areas, he suggested: financial institutions using technology to reduce compliance costs and control regulatory risk; the necessity for regulators to use technology better; and an explosion in reporting obligations. “We need to go one step further,” he proposed, “by rethinking the financial system and building something better.”
Regtech: the future is now
The financial market has shifted from a ‘light touch’ regime to ‘not-so-light-touch’, according to Deutsche Bank’s head of market advocacy, Apac, Chan Boon Hiong. “There is a greater requirement for reporting. There are hundreds of regulatory notices relevant to Asia, in various languages. There is liability, responsibility, personal accountability. How do we identify new potential regulations and manage that?” He suggested that regtech can offer a solution, especially if financial institutions can break down the regulatory cycle into stages and technology can offer compliance.
While regulatory costs have indeed risen, said David Scott, EY’s global compliance and reporting – Apac enablement leader, the cost of failure is higher. Looking forward, the key is sustaining compliance without enormous headcount. Firms need to move beyond this, however, to see value from a risk management perspective and gain insights. “We have fundamental changes around digital, greater use of data, financial technology initiatives, to increase the opportunity to gain benefit from compliance.” The important point for the revolution to take place, he added, is the mindset.
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