Fund companies will stand to gain by understanding how cross-border sales, technological advancement and evolving regulatory environments impact their businesses.
THE year 2017 has been a transitional period, not only for Asia’s fund industry, but globally. Fund passporting schemes, new financial technologies and regulatory support for fintech development have all gained momentum.
Next year will also bring developments such as additional cross-border mutual recognition agreements, broader robo-advisory adoption by investors, the Markets in Financial Instruments Directive (MiFID II) and General Data Protection Regulation (GDPR). From client-facing interactions to back-office operations, fund companies must preemptively recognise how these changes impact their businesses. These initiatives and rapid technological advancement set the foundation for 2018.
Widening fund recognition
In the summer of 2017, Hong Kong’s Securities & Futures Commission (SFC) and France’s Autorite des Marches Financiers (AMF) signed an agreement to expedite the approvals process for retail fund distribution across the two markets. This was the first mutual recognition of funds (MRF) framework to be agreed between Hong Kong and a European Union member.
Although the MRF channels connecting China to global markets is developing at a muted pace and asset flows are relatively low, Hong Kong leaders are using these channels as blueprints for agreements with other jurisdictions. As a result, we could see Hong Kong and other Asia markets sign cross-border fund agreements in 2018.
A broader scheme is the Asia Region Funds Passport, which involves some half a dozen countries including Singapore. It is still in the early stages, but is expected to go live in early 2018.
The implementation of these frameworks that allow for cross-border fund sales will create jobs as new back- and middle-office operational hubs emerge. By increasing the range of options for clients, sales and client service personnel will need to adapt and become familiar with new investment solutions.
Ongoing FinTech development
As a technology business committed to enabling friction-free trading by connecting trade partners through global fund transaction networks, Calastone is excited about continued fintech innovation in asset management. Advancements in robo-advisory, blockchain technology and artificial intelligence are expected to reduce operating expenses, decrease risk and introduce efficiencies for fund managers.
Robo-advisers are a great example of a new technology that is gaining traction. In August 2017, Taiwan’s Financial Supervisory Commission reversed a ban on robo-advisers. Similarly, assets managed via robo-advisers in Japan are forecast to grow 28 per cent per annum through 2021. Across the Asia-Pacific, robo-advisers are expected to account for US$2.4 trillion in assets under management by 2020.
The driving force behind this trend is two-fold. From the retail investor perspective, a robo-advisory offers a convenient way to access personalised investment advice even if they do not have a large amount to invest. Meanwhile, for fund providers, robo services improve the efficiency of complying with Know Your Client (KYC) and anti-money laundering regulations.
Similarly, distributed-ledger technology applications are likely to begin emerging across the financial industry, affecting fund companies, distribution partners, custodians and regulators. In June, Calastone announced the completion of phase one of our distributed market infrastructure proof-of-concept, which illustrated the feasibility of using blockchain to trade and settle mutual funds in one shared, global marketplace. This month, the company announced that 2019 will see the technology underpinning the core of its network, moving to a private and permission-based blockchain infrastructure.
Burgeoning government support
As exemplified by its rapid progress towards a cashless society, China has aggressively welcomed fintech, especially in retail payments. Many financial services in the country, including savings, bookkeeping, insurance and wealth management, are moving towards technology-based solutions.
As fintech adoption presses ahead in China, governments in other markets are encouraging homegrown innovation through public-private sector initiatives. Further to its previous commitment of US$225 million towards fintech development, the Monetary Authority of Singapore (MAS) signed an agreement with the Hong Kong Monetary Authority (HKMA) in October to strengthen fintech co-operation between the two cities and foster development in the region.
These commitments have also led the HKMA, SFC and the Insurance Authority to introduce regulatory sandboxes. These sandboxes enable financial institutions and financial technology companies to test innovative technologies. The idea is to help them detect risks and identify potential regulatory challenges during the development stage rather than introducing new solutions commercially and subsequently having regulators clamp down.
Adapting to transformation
These initiatives send a message that government officials across the Asia-Pacific realise the importance of embracing change. Fintech development, however, will not be uncontrolled. Regulators will continue putting the needs of the general public first.
For example, the second iteration of the European Union’s MiFID will go into effect in January 2018. MiFID II aims to increase market transparency, improve best execution, explicitly outline trading and execution costs and offer investors greater protection. Consequently, greater responsibility and accountability will be placed on fund managers in order to ensure their compliance when marketing investment solutions.
Similarly, the May 2018 implementation of GDPR will standardise and strengthen data security for individuals within the EU. It also controls the export of personal data outside of the EU, and thus firms operating across borders will need to ensure they are in compliance wherever they operate.
Against this backdrop, many fund providers are actively improving their in-house technologies. While client-facing technology has seen significant improvement over the past few years, less attention has been paid to upgrade middle- and back-office technology. In 2018, companies will need to explore how operational procedures in these areas can be automated to double-check trade orders, perform compliance checks, produce internal management reports or transmitting information to external parties.
Fund companies will benefit by recognising in advance how cross-border fund sales, rapid technological advancement and evolving regulatory environments impact their businesses. Initiatives driven by the private sector, industry bodies, government agencies and regulators will strengthen the fund industry and are why we have an optimistic outlook for 2018.
This was first published in The Business Times on 27 Dec 2017 http://www.businesstimes.com.sg/opinion/2018-a-year-of-optimism-for-the-global-fund-industry