26
Country ProFILE hong kong
Playing by new rules
The aftershock of Lehman Brother’s collapse continues to affect Hong
Kong, as IFAs and insurance companies brace themselves for new
regulations aimed at avoiding another financial meltdown
andrew eden, director,
ernest Maude
By helen Burggraf
Still reeling from a particularly
gloomy nine months
that began with the collapse
of New York’s
Lehman Brothers investment
bank last September,
Hong Kong financial advisers,
bankers and insurance
industry executives are
openly speculating on
what Hong Kong’s investment
landscape will look
like in 12 months’ time.
True, the Hang Seng
Index had leapt 27.7% in
the first half of 2009 from
its year-end 2008 level. But
this encouraging sign was
weighed by the news that
GDP fell by 7.8% in real
terms in the first quarter of
2009 from the same period
a year earlier, on top of a
2.6% GDP drop in fourth
quarter of 2008.
itive: mutual fund assets
were $37.7bn at the end of
the first quarter, down from
$40.3bn at the end of 2008
and $70.2bn at the end
of 2007. But most worrisome
to many in the financial
services industry is talk
of changes in regulations
aimed at preventing future
crises like the fallout from
the Lehman collapse,
which according to Cerulli
Associates saw as many as
48,000 Hong Kong resi-
dents lose hk$20bn, mainly
from investments in
Lehman’s Minibond structured
products.
A dramatic run on the
Hong Kong-based Bank of
East Asia, amid rumours of
high Lehmans exposure –
which had panicky depositors
queuing outside its
branches in late September
– also did not escape the
notice of the regulators.
l Disclosure threat
Of a number of recommendations
from the Securities
& Futures Commission and
Hong Kong Monetary
Authority at the end of last
year (see box out), intermediaries
last month seemed
particularly concerned
about one that would
compel them to disclose
the commissions, fees and
other benefits they received
from product sales.
It is not that they object
to disclosure per se; but if
“
If I go to a feebased
system but
insurance companies
l Regulatory worries
The latest funds industry
data was also far from pos- banks and insurance com-
the financial crisis.
hong kong financial facts
do not, an insurance
agent can say [to my
Financial services industry
share of GDP (2007)
19.5%
clients]: ‘Why do you
pay him a fee, when
Corporate income tax
Personal income tax
16.5%
0% to 15%
you can get the same
Inheritance tax none
product from me for
VAT/sales tax none
nothing?’
”
Capital gains tax none
panies were not bound by
the same obligations, as is
considered possible the
way the recommendation
is currently worded, they
may be unable to compete,
several advisers told
International Adviser.
What is more, although
there is talk of moving away
from commissions in favour
of a fee-based remuneration
system for IFAs – and
some firms have already
gone in this direction –
many whose businesses are
still dependent on the commission
model say it is too
soon, given the Hong Kong
market is still years behind
that of the UK and others
that are swiftly moving in
this direction.
“If I go to a fee-based
system but insurance companies
do not, an insurance
agent can say [to my clients]:
‘Why do you pay him
a fee, when you can get the
same product from me for
nothing’?” explains Andrew
Eden, a director for advisory
firm Ernest Maude.
That said, he believes the
fundamentals for IFAs in
Hong Kong remain sound –
as might be expected for a
city that is the officially-designated
go-between of an
industrial juggernaut like
China and the rest of the
world. But this is not to say
Hong Kong investors have
not changed their approach
to investment as a result of
Financial services industry 192,700 (5.55% of total)
employment (2007)
Depositors’ compensation all bank deposits guaranteed until end
scheme 2010, after this will revert to previous
compensation of up to hk$100,000
Source: Various, including www.gov.hk
l Back to basics
Ernest Chan, chief commerce
officer of Convoy
Financial Services, says one
enduring lesson of the
Lehman collapse for investors
is that they should
avoid putting their money
into anything they do not
understand – and he notes
that in Hong Kong this has
come to mean structured
products, which many
locals now associate with
the Lehman mini-bond.
Instead, “people are getting
back to the basics, like
simple unit trusts, simple
mutual funds, and stocks,”
says Chan.
He added that the
Lehman experience has
meant that Hong Kong
investors are rediscovering
insurance products.
INTERNATIONAL ADVISER [www.international-adviser.com] AuguST 2009
To view a Ceros magazine you need to have JavaScript enabled in your browser and have the flash player 8 or higher installed. To install the latest flash player, click the icon above, install the flash plugin and then click here to refresh this page.