Regulation
of the financial sector in Hong Kong does not properly protect retail investors
and should be tightened, said a lawmaker who oversaw the drafting of the
relevant legislation more than a decade ago.
Sin
Chung-kai, who was chairman of the legislative committee responsible for the
Securities and Futures Bill, published in late 2000 and enacted in 2003, says
the city's two-tier system of regulation has created gaps, leaving the
potential for unlicensed products to be sold undetected.
"I
do not have any intention to escape my responsibilities. Supervising these
selling activities seems to be insufficient," Sin told the South China
Morning Post when asked about a clutch of mis-selling scandals that have
reverberated through the expatriate-focused wealth management industry in
recent years.
Some
US$10.3 billion in new money was invested in licensed funds last year,
according to data from the Hong Kong Investment Funds Association, which does
not track unlicensed funds.
Many
unlicensed funds are marketed directly to retail investors by firms that take
advantage of a two-tier regulatory structure that gives investors different
types of protection depending upon which regulator oversees their adviser and investment account.
Hong
Kong's rules assign supervision of certain investment products, known as
investment-linked assurance schemes, to self-regulated insurance bodies with
limited authority, rather than the Securities and Futures Commission, which has
search and seizure powers.
This
means the SFC's safeguards governing the sale of unlicensed funds to ordinary
retail investors do not apply to savers using an investment-linked assurance
schemes account, known as a portfolio bond.
Some
HK$7.4 billion was invested in single premiums, including portfolio
bonds, in 2012, according to the Insurance Commissioner. Many investors
were unknowingly exposed to the risk of near total loss without any regulatory
defence to help them get back their cash.
One
such example is the collapse last year of Australian fund house LM Investment
Management, which had a reported A$3 billion (HK$21.7 billion) in assets before
its implosion. Its flagship Managed Performance Fund is now valued at 5
Australian cents on the dollar. The firm is under investigation as Australian
authorities work out what happened.
LM
products were sold in Hong Kong via investment-linked vehicles, exempting them
from the regulatory scrutiny they would have received if they were marketed to
ordinary investors.
SFC
rules require Hong Kong resident investors to sign a form and prove they have
HK$8 million in liquid assets before buying such a fund. These rules do not
apply to portfolio bonds.
ILAS
products combine insurance, investment, and estate
planning structures and are especially targeted at expatriate
investors.
"ILAS
are expressly captured as insurance contracts under the Insurance Companies
Ordinance," SFC senior director Stephen Tisdall said.
"The
regulatory design is clear and deliberate, with the Securities and Futures
Commission neither having the power to license intermediaries conducting ILAS
business, nor having the powers to inspect, investigate or discipline them in
connection with the manner in which they conduct that business."
Since
the financial crisis, more than 80 unlicensed funds marketed via ILAS products
have been suspended. Affected are fund houses including LM, Glanmore, Frontier
Investments, Castlestone and Capricorn, as well as student accommodation funds
from Brandeaux and Mansion.
In
several cases, investors said they were not told the funds were unlicensed
before sale, a breach of insurance regulations.
While
a fund's suspension does not always denote problematic behaviour by fund
managers, it can result in investors waiting years to get their money back.
LM's
collapse is especially pertinent, as its funds were marketed as low-risk and
sold to savers approaching retirement. The Managed Performance Fund paid 9 per
cent commission to advisers and started delaying payouts to clients from 2009 -
four years before its collapse - advisers and LM founder Peter Drake said.
The
firm's generous commissions, roughly three times the industry average for
similar products, encouraged financial planners to promote the fund, advisers
said.
Investors
were never told about the redemption problems, said Graham Smith, founder of
the LM Investor Victim Centre, which helps represent LM investors in Hong Kong
and overseas, many of whom had large holdings in the fund house, with little or
no diversification.
In
many cases, the advisers disappeared the moment LM failed, Smith said.
Hong
Kong's rules put the responsibility for completing due diligence checks on such
products squarely on the advisory firm. This assumes each firm has the
capabilities to do the legwork needed to review an unlicensed fund.
"You
have to go in and kick the tyres," said Mark Konyn, the chief executive of
Hong Kong-based institutional investment firm Cathay Conning Asset Management.
"If
it's a company you have not really heard of and it's a long way away, the onus
is to do extra due diligence at the outset to make sure you are not buying a
lemon."
A
beefed-up Insurance Authority is set to take over regulation of the insurance
sales sector by next year.
Sin
welcomes the move but encourages the government to look again at the regulation
of investment advice in the insurance sector. "After 13 years, it is time
the government should review," Sin said.
HK's
two-tier regulation puts some investors at risk, especially
with insurance-linked funds, says lawmaker who helped set up framework.
No comments:
Post a Comment