Controlling client advisers is a greater source of debate and concern than ever before as private banks continue to struggle with the complex and uncertain regulatory and compliance landscape which is the new reality in Asian wealth management.
Date: Apr 13, 2012
Tags: Regulation, Compliance, Tax, Suitability
Controlling client advisers is a greater source of debate and concern than ever before as private banks continue to struggle with the complex and uncertain regulatory and compliance landscape which is the new reality in Asian wealth management.
The spotlight on the industry is shining brightly from all sides. And it is fuelled by a combination of the economic needs of many Western governments, the greater attention on investor protection globally, and an ever-growing cross-border intolerance for any hint of money laundering or tax-related crimes.
While policies and measures of all kinds can be proposed and put in place internally, the extent to which the private banks can feasibly monitor them on an ongoing basis is, in practice, limited.
As a result, the fear that the actions and behaviours of front-office staff especially might lead to them falling foul of the regulators lurks constantly in the minds of senior management as well as the legal and compliance departments.
These were some of the main messages and talking points from two recent behind-closed-doors gatherings in Hong Kong and Singapore, involving some of the most senior legal, compliance and operations professionals within Asian private banking and wealth management.
Growing complexity
Practitioners in both locations were united in their acknowledgement of the overwhelming challenges in complying with the various requirements being placed on industry in Asia.
This is simply an extension of what is happening around the world. One practitioner, for example, said he was aware that there were 11,000 regulatory changes globally in 2011.
Plus, this is happening against the backdrop of a business environment where margins are tight, meaning IT and other budgets – traditional ways to tackle the challenges – are being squeezed.
This poses big hurdles for regulators, too. Not only do they need to get a better understanding of the size of the cross-border issues impacting private banks, but with many jurisdictions facing various fiscal and economic stresses, the pressure on regulators to help protect domestic markets is creating a potential danger of some degree of regulatory arbitrage, explained practitioners.
While trying to offer a level playing field, for example, they said regulators may look to complete in certain niche areas to attract specific, boutique segments of the wealth management landscape.
The focus in Singapore, for example, is about demonstrating it is robust, to be one step ahead of other markets in Asia to create a competitive advantage. And Hong Kong has more recently made public its intentions of becoming a regional private banking hub.
However, neither jurisdiction wants excessive inflows, especially from Europe, where given the tax developments, any new money inevitably comes with a question-mark over its origin.
Practitioners said they further fear that regulators want to now be seen to be flexing their powers to show they are willing to use the enforcement tools available to them. This may translate to them looking for isolated cases where they can make an example of individual firms in specific cases.
From the perspective of the institutions, however, this can cause yet more confusion and, therefore, concern.
Problem areas grow for private banks
For global private banks, the increasing complexity of compliance impacts the thousands of accounts involving shared relationships between different offices – for example Hong Kong, Singapore and Zurich – which are subject to different approaches by the various regulators.
Trying to keep abreast – let alone ahead – of everything their own banks do is a significant task for practitioners, they said, especially given that systems were not designed to deal with a lot of the requirements under new rules.
Indeed, cross-border issues are among the biggest concern for global private banks, given the tension between the business and control functions in terms of what is and what isn’t allowed.
Problem areas can stem from issues such as the fact that tax evasion is now a predicate offence for money laundering – a trend which is spreading rapidly. Singapore, for example, is one of the most recent jurisdictions to announce moves in this direction.
Depending on how it is enforced by various regulators, legal experts said this threatens to be a big challenge to institutions. For instance, they explained, a lot of firms receive money from individuals which are resident in jurisdictions where the firm is unlikely to glean any knowledge about whether or not those clients are reporting properly in their home jurisdictions.
Trying to keep “clean” means turning away potential customers. Compliance officers said it is very challenging to determine whether certain European clients want to open bank accounts in Singapore or Hong Kong because they are genuinely concerned about the future of the Eurozone, or because they still have the misconception that they can hide non-tax compliant money elsewhere.
There is also a risk with some of the inflows from markets like Thailand, Malaysia and Indonesia – where there are question-marks over the compliant nature of these funds. So the worries extend beyond non-compliant funds from Europe.
Further, given the complexity of many regulations, there can be situations where individuals innocently fail to comply.
Compliance officers feel their banks cannot be expected to be tax advisers and to police this. And going through the motions of requesting clients to sign forms to get basic comfort is not an approach which actually helps identify instances of tax evasion.
Instead, a more practical approach could be that the banks look more closely for indicators during the client onboarding process as to whether they think a client might be moving money for tax-related reasons.
This means scrutinising aspects such as what percentage of their assets is being moved, whether the reasons seem legitimate based on the rest of their portfolio and lifestyle, and the complexity of the structures the client has.
However, legacy issues are very difficult to identify and uncover, agreed practitioners. There is often uncertainty over whether a suspicious transaction report needs to be filed, or whether it should be investigated by external experts.
The general compliance challenges for the private banks also arise from a suitability perspective. Practitioners in Hong Kong, for example, said the local regulatory environment has continued to struggle to balance an appropriate level of controls in terms of suitability for “sophisticated” investors.
This is inevitable, they explained, given that private clients might include the whole spectrum of individuals – ranging on the one hand from an individuals who has US$10 million and has been working on an equity trading desk in an investment bank for their entire career, to people who have won US$100 million but lack any financial experience or expertise on the other.
The rules don’t give private banks the ability to make the distinction themselves, bemoaned compliance specialists, so they have to treat all investors equally.
Part of the problem legal and compliance staff said they face is the fact that the Hong Kong Monetary Authority (HKMA) has its own set of rules in terms of the selling process, without any influence from the Securities and Futures Commission’s (SFC’s) criteria.
As a result, practitioners said private banks in Hong Kong have to deal with a complicated matrix of selling processes. So, said one compliance expert, even if an individual according to the SFC’s guidelines has enough money, has the knowledge, has the training, and does sufficient trading, there are still certain warnings that institutions need to provide to clients as a result of what the HKMA’s regulations stipulate.
Such room for interpretation can put institutions in a difficult position, said compliance experts.
In this area, in Hong Kong, practitioners said their wish-list for reforms would include a greater distinction in regulations to recognise the differences in serving typical private banking clients – to help determine what is more appropriate for them as opposed to retail investors.
The rationale is not to avoid any compliance requirements, said practitioners, but rather focus on what is appropriate for specific individuals and which is in their best interests.
Linked to this are calls for streamlined regulations in terms of the selling process in Hong Kong, to create a clearly-defined rule-book to enable institutions to more clearly identify and define what is required to ensure compliance.
The danger of relying on advisers
Ultimately, compliance officers said the main weak link in anti-money laundering efforts, ensuring suitability, avoiding tax-related ambiguities and other compliance priorities is employees.
In particular, practitioners said the behaviour of individual relationship managers (RMs) is a big concern.
This is for various reasons. First, said compliance officers, there might be a lack of a real understanding among RMs about why the new compliance issues matter.
Secondly, there is also a conflict with some of the other requirements the compliance functions place on RMs. For example, the bank might ask an RM get clients to sign certain documentation to meet a specific regulatory request – yet under cross-border guidelines an RM might not be able to send that form to the client.
Thirdly, practitioners said they are cognisant of the fact that RMs have to spend a lot more time dealing with compliance issues, yet while they are under pressure to deliver net new assets and revenue in an environment of low client activity.
For their own comfort, some global banks require RMs to complete various tests, read relevant internal manuals and get approval from their market leaders to be able to travel to a certain jurisdiction. On their return, they then have to fill in detailed call reports.
But ultimately, banks cannot know what an individual RM does on a trip; there can never be a compliance officer looking over the shoulder of each RM.
Getting the message across to the frontline
The fundamental message that legal and compliance practitioners said they try to get across to RMs is that compliance is common sense, ethical behaviour. As a result, those advisers who are sensible will almost always be in compliance automatically with most regulations.
One practitioner added that RMs who don’t understand this, or don’t want to follow internal rules, should no longer be working in this industry.
Yet this is a difficult viewpoint for legal, compliance and risk personnel to put to senior management – especially in such a competitive business environment, and especially given the relatively small number of RMs with experience and who are familiar with what is required from a regulatory perspective today.
Improving the compliance culture therefore needs to rely on more of a carrot-and-stick approach, said some practitioners, with more systematic disciplinary action.
This has changed from the previous approach of using only “carrots” to encourage the right behaviour, said one of the compliance officers at a global bank.
This “stick” translates to enforcing consequences, for example impacting their bonuses, so that it starts to matter to RMs.
Practitioners also acknowledged there are more and more indirect ways to ensure front-office staff are more careful. These include the fit-and-proper and various ethical requirements. At the same time, there are circulars (published in Hong Kong, privately circulated in Singapore) which state that a particular individual shouldn’t be hired for a certain number of years as a result of previous activities.
Such potential punishments raise the alertness and awareness of staff, both to sanctions as well as the way that regulators are now approaching any breaches, said compliance officers. This might help in preventing some activities from taking place, plus it ensures staff make more effort to understand what is required.
It is also getting more difficult to move clients from one back to the next and open new accounts. Often equally-challenging internal policies and controls at other firms are therefore contributing to a certain amount of RM stickiness which wasn’t there until recently – where RMs realise they might not be able to jump employers and take clients with them because getting account-opening approvals at a new firm within today’s new regulatory environment might not be possible for certain accounts which they perhaps opened 10 years ago.
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