Norman T L Chan: Hong Kong as a private banking hub - a regulator's
vision
Speech by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at
the HKAB - HKIB Distinguished Speaker Series and HKIB Fellowship Conferment
Ceremony, Hong Kong, 12 June 2012.
* * *
Peter (Wong), Anita (Fung), Patrick (Fung), Julia (Leung), Ashley (Alder), distinguished
guests, ladies and gentlemen,
Good afternoon. I am most honoured to be conferred a Fellowship by the Hong Kong
Institute of Bankers (HKIB) and would like to thank HKIB for recognising my contributions,
which are in effect contributions of the HKMA, to the banking sector.
The achievements of Hong Kong's banking industry are attributable to the efforts of many
stakeholders. Among them is HKIB, which has been providing quality education and training
to the banking industry for decades. Many industry practitioners, and the banking industry as
a whole, have benefited from the good work of HKIB.
On this special occasion, I am also honoured to be invited to speak in HKAB-HKIB
Distinguished Speaker Series. I will be speaking on "Hong Kong as a private banking hub -
A regulator's vision". I have chosen this topic because over the past few months, the Hong
Kong Monetary Authority (HKMA), together with the Securities and Futures Commission
(SFC) and the Financial Services and the Treasury Bureau, has been working very closely
with the Hong Kong Association of Banks (HKAB) on what Hong Kong should do to take the
private banking industry to the next higher platform. I would like to take this opportunity to
share with you my views on the steps Hong Kong needs to take to develop as the premier
private banking hub in Asia. To start with, I want to talk about some facts relevant to
Hong Kong's realisation of this aspiration.
Hong Kong's strengths to be a leading private banking centre
Wealth in Asia-Pacific is growing exponentially. According to industry research, the region
accounted for half of the growth in global wealth from 2010 onwards. In particular, China was
the second top contributor to the growth in global wealth after the US.1 In 2011, there were
about 30 million millionaires worldwide. Among these, about 20% were from Asia-Pacific.1
This trend is likely to continue. It is estimated that global wealth will rise 50% further by
2016.1 This is hardly surprising in that the International Monetary Fund forecasts that,
emerging Asia, led by China, will contribute almost 60% of the world's GDP growth by 2016.
By 2020, the estimated number of millionaires in Mainland China and Hong Kong together
will be 3.7 million, with an accumulated wealth of US$14 trillion.2
So it is beyond doubt that the expanding affluent population in China and the rest of Asia will
generate ever increasing demand for private banking services for high-net-worth individuals.
While it is clear that there will be increasing number of wealthy people in Asia looking for
private banking services, the question we need to ask is: "Will they choose Hong Kong?".
This begs the question on what Hong Kong can offer over and above the other centres that
are equally keen to gain market share as a private banking hub. In this regard, there are
several fundamental attributes that make Hong Kong exceptionally well placed to become
the leading private banking hub in Asia:
• Hong Kong has a robust legal framework with an independent judiciary that
safeguards property rights. We have a simple, low and predictable tax system. Only
profits and income derived in Hong Kong are subject to Hong Kong tax. There are
no withholding tax, estate duty, and tax on capital gains, dividends, interests and so
on. We have well established laws to protect the confidentiality of customer
information. These advantages not only facilitate the creation and accumulation of
wealth in Hong Kong but also make Hong Kong a very attractive place for people
outside of Hong Kong to park and manage their wealth in Hong Kong.
•
Hong Kong is also a leading IPO centre, ranked Number One globally for the third
consecutive year. In 2011, there were more than 100 newly listed companies in
Hong Kong, which together raised a total of US$36 billion equity funds. IPO
activities help the private banking industry to flourish in at least two ways. Apart from
providing opportunities for private banking clients to invest in promising businesses,
IPO activities also create wealth for entrepreneurs who will then become important
clients of the industry.
•
What is more, Hong Kong benefits from being the most important gateway for
capital flows into and out of China. Hong Kong has always been the largest source
of Foreign Direct Investments (FDIs) into China since the beginning of the Reform
and Opening Programme in 1979. And in the last few years, Mainland investors
have been using Hong Kong as their main platform for Overseas Direct Investments
(ODIs) to reach out to the world. This clearly demonstrates that Hong Kong, under
the "One Country, Two Systems" framework, is serving the needs of Mainland
customers for offshore financial services.
It is therefore natural to see the rapid growth of Hong Kong's private banking business in
recent years. From mid-2010, 7 new private banks have been set up in Hong Kong, taking
the total number of private banks to 39. Further, the HKMA is seeking to modify the licensing
requirements for banks so as to facilitate a broader range of financial institutions, including
those specialised in private banking, to establish an operation in Hong Kong.
What kind of regulatory framework Hong Kong needs to support the sustainable
development of private banking?
While Hong Kong is fortunate enough to be endowed with many underlying competitive
advantages, these advantages are not enough, in my view, to sustain the healthy
development of our private banking industry in the long run. Hong Kong also needs a
regulatory framework that is user friendly to private banking clients and yet sufficiently robust
to provide appropriate investor protection.
The regulatory framework in Hong Kong is basically a disclosure-based regime, supported by
suitability assessment by intermediaries at the point of sale. In a nutshell, product issuers
have to make adequate disclosure in product documents about the features and risks of
investment products. Intermediaries, when making a recommendation or solicitation in
respect of an investment product, must assess the product suitability for individual clients,
and clearly explain to clients the key product features and risks.
A proper suitability assessment starts with a robust Know-Your-Client (KYC) process and
client risk profiling. These processes not only help to fight money laundering and the
financing of terrorism, but also enable private banks to obtain relevant information to better
understand their clients, including their background and, most importantly, their risk appetite
and investment needs. By doing so, private banks can agree on an investment strategy with
clients and provide suitable products and services that fit their needs.
As we all know, private banking clients cover a wide spectrum of individuals. At one end of
the spectrum there are clients who are highly seasoned investors, at the other end there may
be unsophisticated clients with only very basic investment knowledge, notwithstanding that
they have substantial wealth. While our regulatory framework is aimed at providing
appropriate investor protection to all clients, regardless of the size of their wealth, it does not
mean all investors have to be treated in exactly the same way in the process of making
investments. In other words, the HKMA agrees that private banking and retail banking clients
can and should be treated differently in the investment process.
This being the case, we need to have a clear and practical definition of "Private Banking
Customer". After consulting the industry and the SFC, the HKMA is minded to agree that a
"Private Banking Customer" can be defined as a customer with either (a) at least
US$1 million of assets under the management (AUM) with the bank concerned or (b) total
investable assets of at least US$3 million. This is an expanded definition to cater for the
operational needs of private banks. Once we have defined who qualifies as a "Private
Banking Customer", the next step is to consider specific measures that would help make
private banking more "user friendly" without compromising the need to accord appropriate
protection to private banking customers.
First of all, let's talk about suitability assessment. The HKMA agrees that private banks need
not mechanically match their client's overall risk tolerance level to product risk level. This is
because in private banking, customers often look to their private bankers for investment
advice on a continuous basis having regard to the customers' entire portfolios or balance
sheets. This is quite different from the retail end of the market in which one-off sales
transactions are common. We therefore consider that suitability assessment for private
banking customers can be conducted on a holistic or portfolio basis, taking into account all
the relevant circumstances of the customers. For example, as long as the portfolio allocation
and the overall risk level agreed with the client is adhered to, a low or medium risk tolerance
client buying high risk products that only constitute a minor proportion of his portfolio is not
necessarily a "mismatch". The same principle applies to some other aspects like investment
tenor and concentration risk of AUM with any individual private bank because the entire
portfolio of the customer will be taken into account. Also, we agree that the documentation of
rationale for recommendations need not be on a per transaction basis. It can be done on a
portfolio level at the outset, subject to some conditions being met. These conditions include
the preparation of an Investment Mandate stipulating the types, risks and allocation of
investments after taking into account all relevant circumstances of the client. The Investment
Mandate should be explained to and agreed by the client, and a copy of the Mandate should
be provided to and acknowledged by the client. The Investment Mandate should of course be
reviewed and, if necessary, modified whenever there are material changes to the relevant
circumstances of the private banking customer.
Usually the review of client risk profile is expected to be conducted at least once every two
years. However, we appreciate that private banks need to minimise demand on the time of
customers and have regard to the fact that private banking services are normally conducted
on a continuous basis. As a result, the HKMA agrees that private banking clients need not go
through the biennial reviews if they can confirm that there is no material change in their
circumstances that warrants updating or modification of the Investment Mandate. Moreover,
private banks may choose to document the rationale for recommendations in writing instead
of audio-recording a face-to-face interview with the clients.
I am pleased to say that the above-mentioned measures, which are aimed at making private
banking more user friendly, will be promulgated in an HKMA Circular to be issued later today.
While I believe these measures would be welcomed by the private banks and their clients as
they offer greater convenience and flexibility, I must remind everybody that the core objective
of our regulatory framework continues to be investor protection. So private banks must
ensure that they have in place the necessary systems and internal controls to implement the
portfolio based approach and other related measures to facilitate the investment process.
In this regard, it is hard to overstate the importance for private banks to have proper
documentation. Proper documentation helps bank management monitor staff's sales
practices and detect deficiencies. Proper documentation also provides audit trail and
evidence on the sales process. A bank with proper documentation will be in a much better
position to demonstrate that it has properly discharged its duties to its clients in the event of a
dispute or complaint.
Enhancing competency of industry practitioners
Let me move to another pillar that is necessary to support the continued success of
Hong Kong's private banking industry: namely the availability of professional talents.
Institutions can only be as strong as the people that make them up. How the world perceives
the standard of our financial services depends crucially on the quality of the people delivering
such services. Private banking clients now demand quality and efficient services that are
tailored to their specific investment needs. Meanwhile, the financial markets have become
more complex and volatile. To create value for their clients in this challenging business
environment, private banks need strong teams of professional staff, from the front end to the
back office.
Both technical competency and ethical standard form the basic components of the
professionalism of our industry practitioners. The HKMA encourages the industry to promote
a competency framework for new entrants and on-going professional training. The financial
market is very dynamic and rapidly changing. The industry therefore should ensure that staff
are well-equipped with the necessary technical and market knowledge and skills in
performing their jobs. It is also fundamental for private banks to act in the best interests of
clients at all times. The HKMA therefore encourages the industry to promulgate a set of
professional and ethical standards that are designed specifically for the private banking
practitioners.
I know that the industry is moving towards this direction. HKIB has been providing
professional qualifications like Certified Financial Management Planner. In 2011, the
Hong Kong Securities Institute (HKSI) also introduced the Certified International Wealth
Manager programme. These are well-organised programmes that help enhance the technical
competency of industry practitioners. On a separate front, we very much welcome the
industry's proposal to set up a new industry body called "Private Wealth Management
Association". I also support the initiative to further upgrade the professional standards of
industry practitioners by developing a new competency framework for wealth management. I
envisage that, under this framework, industry practitioners can take different courses
provided by professional bodies such as HKIB, HKSI, Treasury Markets Association and
other tertiary institutions, and ultimately acquire a professional qualification that is widely
recognised and accredited in Hong Kong and beyond. We in the HKMA will be pleased to
work with the private banking industry and other stakeholders to ensure that Hong Kong has
a large pool of talents with world class technical competence and professionalism.
Conclusion
Ladies and gentlemen, I would like to conclude my remarks today by posing the following
three questions. First, what are the prospects for Hong Kong to develop into the premier
private banking hub in Asia? The answer is clear. As Hong Kong possesses key and unique
competitive advantages in serving rapidly increasing number of wealthy population in China
and the rest of Asia, there will be exceptionally huge business opportunities and potential for
our private banking industry.
Second, does Hong Kong presently have an appropriate regulatory framework that can help
sustain a healthy development of the private banking industry in the long run? The answer is
"yes", but I need to qualify the answer because I am acutely aware that no regulatory
framework is perfect and can afford to remain static, bearing in mind the ever changing
market conditions and evolving expectations of the society on investor protection. Having
said that, you may rest assured that the HKMA is committed to continue its collaboration with
the SFC and the industry to make sure that our regulatory framework and rules remain
friendly to users without compromising investor protection as we go forward in the months
and years ahead.
The third and final question is: are private banks fully equipped and ready to capture the
rapidly growing business opportunities? The answer to this, I would say, is again "yes"
followed by a "but". This is because much more needs to be done by the industry if it wishes
to realise Hong Kong's full potential in the medium and long term. As I said earlier, the
adoption of a portfolio approach in private banking would be a move welcomed by private
banks and their customers, but private banks must ensure they have the proper systems and
controls in place. A portfolio based approach cannot be taken as an excuse to compromise
investor protection. For instance, when more Mainland clients open private banking accounts
in Hong Kong, our banks must have in place sufficient number of account managers who are
professionally competent and linguistically proficient. 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. Moreover, it would also be helpful if
important contracts or documents are written in bilingual forms so that Mainland customers
find it easier to understand what they have signed or bought. Lastly, private bankers must
also bear in mind that there is a very wide range of sophistication and investment experience
among private banking clients from Mainland China. So private banks must ensure that their
account managers take extra care in offering investment advice and marketing investment
products to the less sophisticated clients.
Ladies and gentlemen, private banking is just a special type of banking: it is all about trust
and service. It takes a private bank many, many decades to build up trust, but such trust can
be destroyed overnight. My vision, which I am sure is shared by many of you, is that
Hong Kong will become the most competitive and dynamic private banking hub in the region
in the years to come. This is a highly achievable aspiration if both the industry and the
regulators work closely together to develop, nurture and protect the reputation of the private
banking industry as well as the professionalism and ethical standards of its practitioners.
Thank you very much.