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KPMG
New regulations can help enhance the local landscape but a diverging approach globally also creates challenges for asset management firms, a new KPMG report has said.

According to the 13th edition of KPMG’s annual report, Managing Divergence: Evolving Asset Management Regulation Report 2023, jurisdictions, including Hong Kong, are rolling out new rules and guidance for asset managers in areas including ESG and investor protection.

Such regulatory refinements will help to strengthen Hong Kong’s status as an asset management hub. At the same time, however, asset managers in the city will need to consider how to manage the diverging landscape as regulators globally take different approaches to dealing with common requirements and priorities, it said.

The report took information from over 11,000 publications by regulators across over 30 jurisdictions, and consolidates the insights and knowledge of KPMG specialists around the world on common regulatory themes, challenges, and market opportunities in asset management regulation.

“Given the cross-border nature of the asset management industry, effective management of regulatory divergence is only going to become more important over time,” Andrew Weir, global head of asset management at KPMG, said. 

“To respond effectively to these challenges, asset managers need robust and flexible business models, with strong governance, intelligent risk management frameworks, state-of-the art technology, good oversight of service providers and appropriate distribution strategies. Firms need to manage their own costs and ensure that the costs and charges borne by investors are transparent and justifiable,” he said.

There has also been a notable increase in regulatory efforts around the world to protect retail investors, the report continued. Besides traditional themes such as product governance, there is a significant focus on value for money and transparency, reflected in new fair value considerations and disclosure requirements.

In some jurisdictions, funds are required to have licensed depositary entities, which act independently from the fund management company, to provide a better safeguard for investors. Hong Kong, for example, plans to introduce a new “Type 13” regulated activity covering fund depositary services, starting in October 2024.

“Asset managers in Hong Kong should review their firm’s strategy, culture and purpose to ensure it continues to serve their customers’ best interests amid the growing global regulatory focus on customer protection and increasing access to information,” Vivian Chui, head of securities and asset management, Hong Kong, KPMG China, said.

Regulators around the world are continuing to create new fund vehicles or amend existing products, to offer flexibility and compete for market share. China has continued to open its markets to foreign investors by expanding the scope of existing regimes, the report said.

Jurisdictions are also opening their markets to foreign investors. Authorities are aiming to bolster investment from professional investors, and in infrastructure to assist economic recovery.

In addition, integrating ESG risks into the risk management process is vitally important for all financial undertakings. The SFC supported a consultation issued by the Stock Exchange of Hong Kong on proposed climate-related reporting requirements for listed companies in Hong Kong, the report continued. Additionally, the SFC plans to review how Hong Kong fund managers use ESG ratings and data providers – this will result in guidance for the industry. In addition, some cross-border collaboration on sustainable finance is evident, such as through the green finance taskforce that has been established between the Monetary Authority of Singapore (MAS) and the People’s Bank of China to facilitate greater public/private sector collaboration.

Meanwhile, distributed ledger technology (DLT) is underpinning cryptoassets but is also being put to good use in market infrastructure initiatives, including fund unit tokenization and settlement. The MAS is working with the industry in Singapore to explore the potential of DLT, and to facilitate tokenizing financial and real economy assets. In Hong Kong, fund tokenization is not presently allowed, but the regulator is open to discussions, the report concluded.