Helping Asset Management Firms in Hong Kong Face Regulatory and Operational Challenges

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1 Helping Asset Management Firms in Hong Kong Face Regulatory and Operational Challenges Regulatory Advisory Services February 2012

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3 Introduction While the economy has shown signs of improvement, global market volatility and transient regulatory reform continue to pressure asset manager firms in Hong Kong. The global chaos of the past few years has yielded to relative financial stability and modest economic recovery. Key industry findings from our recent Global CEO Survey revealed that asset management CEOs are among the most optimistic CEOs in our survey, though this confidence is tempered by a keen awareness of the challenges of increasing regulation, competition for talent and evolving investor expectations. At the same time, the expectations of asset management firms have never been higher. Key stakeholders including investors, clients and prospective clients are demanding greater transparency and more assurance that the manager has strong compliance and internal controls. Recent frauds and compliance failures have only heightened their concerns and expectations. Senior management also needs confidence that their firms have no unintended and undiscovered compliance problems. Existing or legacy compliance programs may not be adequate to meet these expectations. Heightened regulatory expectations place additional pressure on asset management firms. A more aggressive approach in inspections and enforcement actions, as we have seen recently with the SFC, is the new norm. Regulators expect a comprehensive, tailored, state-of-art compliance program with full testing, use of technological tools, and expertise. The consequences of non-compliance are front-page news, and a compliance failure can be fatal to a firm s business. With the foregoing in mind, it is imperative to have a professional services firm that understands the dynamics of today s regulatory landscape and has the tools and resources necessary to assist asset managers in Hong Kong; PwC can help asset management firms of all types address regulatory compliance issues and manage regulatory risk effectively. PwC has a local (and extensive global) network of asset management professionals with extensive industry and regulatory experience ready to assist you in meeting your operational and regulatory needs. Included in this publication are themes and related business issues that represent what we believe to be the key challenges facing the industry today. Our mission is to assist asset managers in addressing and managing the broad spectrum of these, and other business issues in an efficient and cost effective manner. We customize our engagements and work with our clients to develop custom solutions that address the key challenges facing your organisations. Helping Asset Management Firms in Hong Kong Face Regulatory and Operational Challenges 3

4 Offering deep industry knowledge and distinctive resources PwC is the leading professional services firm serving the global asset management community. In Hong Kong, we have a committed and dedicated regulatory advisory team to provide regulatory, operational, risk and control services. We bring a unique combination of integrated services, people and technology to provide valuable knowledge and experience to meet the growing needs of our clients. We work closely with PwC s global network of asset management professionals, providing access to extensive industry and regulatory experience in locations all over the world. We provide professional services to every major segment of the asset management industry. PwC provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients. More than 160,000 people in over 150 countries across our network including people from 16 offices in China and Hong Kong share their thinking, experience and solutions to develop fresh perspectives and practical advice. PwC China, Hong Kong, Singapore and Taiwan operate on a combined basis, subject to local applicable laws. Taken together, we have more than 620 partners and the strength of 14,000 people ,000 partners people worldwide ,000 countries 16 offices in China and Hong Kong people in China, Hong Kong, Singapore and Taiwan PwC provides professional services to every major segment of the asset management industry. Our major focus in Hong Kong includes: Traditional Investments Alternative Investments Service Providers Open-and close-end funds Institutional and retail funds Exchange-traded funds Pension funds Family offices Hedge funds Private equity funds Venture capital funds Fund of funds Real estate investment funds Infrastructure funds Sovereign wealth funds Insurance company and bank-advised funds Investment advisors Investment managers Fund administrators Prime brokers Custodians Transfer agents 4 PwC

5 PwC can assist asset management firms in Hong Kong from start up to those that are well established Our mission is to assist asset management firms in addressing and managing the broad spectrum of business and operational issues regardless of where they are in the development stage. We customize our scope of services and work with our clients to develop solutions that address the key challenges facing your organisations. With our broad experience in advising and assisting asset management firms to meet compliance obligations and regulatory changes, we understand the needs of your business. Our regular participation, leadership roles and general involvement in various committees formed by the regulators, asset management and professional associations bring you the most up to date industry insight and perspective. The diagram below summarises the major services which we provide to our asset management clients in Hong Kong at different stages of their business cycle. New start up asset management firms Established licensed corporations Ongoing compliance Assist management in applying for the relevant regulatory licenses and authorisations Review and compilation of the required licensing application documents (e.g. compliance manual) Advise on the appropriate and applicable regulatory requirements Conduct controls and compliance review with reference to the relevant regulatory obligations Perform periodic regulatory health check to assess whether the asset management firm is complying with the regulatory obligations Perform desktop review of the computation of the draft Financial Resources Returns and the other regulatory filings Provide insight on regulatory changes Perform gap analysis on the asset management firm s existing compliance program with the relevant rules and guidelines Perform mock regulatory compliance exams Provide regulatory and internal control advisory services, in particular in relation to trading practices, valuation, conflict management, insider dealing etc Helping Asset Management Firms in Hong Kong Face Regulatory and Operational Challenges 5

6 Top industry issues The following themes and related business issues represent what we believe to be the key challenges facing the industry today: Licensing requirements Issue Business drivers How PwC can help Company may require licenses approved by regulators in the relevant jurisdictions to carry out their business activities. It is common for a new start up asset management firm to seek assistance with the licensing application. For existing licensed asset management firms or licensed person, on-going compliance with the relevant regulatory obligations is crucial. Asset management firms (or a person) who carry out regulated activity in Hong Kong must be licensed by Hong Kong Securities and Futures Commission (SFC). It is illegal for any person to carry out regulated activity as defined in Securities and Futures Ordinance without the appropriate SFC license. The US Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank), which is now effective, brought a significant number of non-us asset management firms under US Securities and Exchange Commission (SEC) oversight. The asset management firm licensed with the relevant regulatory bodies has an obligation to comply with the relevant regulatory rules, guidelines and filing requirements on a continuous basis. The licensed asset management firm in Hong Kong has to satisfy all relevant SFC filing requirements, including the financial resources returns, business risk management questionnaire, etc. Assist with the application for relevant licenses and authorisations for the asset management firm or investment product. Review and assist with the compilation of the required licensing application documents (e.g. compliance manual). Advise on the fit and proper criteria and competency requirements for the asset management firm and the individual applicant. Advise on the preparation of the application forms and documents for submission to the regulators to ensure all information that is required by the regulators is appropriately addressed. Perform regulatory health check for the asset management firm on a periodic basis to ensure the compliance program and related policies and procedures are in line with the existing regulatory expectations and to satisfy all required compliance obligations. Perform desktop review of the computation of the draft financial resources returns and the process for preparing other filings to minimise deficiencies related to disclosure and interpretation errors. 6 PwC

7 Regulations Issue Business drivers How PwC can help All asset management firms face new regulatory obligations and higher expectations from regulators around the world. In addition to new regulatory requirements, the consequences of noncompliance with the existing regulatory obligations are serious, and key stakeholders, such as investors, boards of directors, regulators and the general public, demand effective compliance programs. New measures introduced by the regulators to enhance protection for the investing public. In Hong Kong, the SFC has strengthened a number of regulatory rules and guidelines. For example, consolidated SFC handbook was issued in 2011 and various SFC Codes in relation to the conduct of licensed corporations were recently revised. In the US, continued rulemaking alters the regulatory landscape for financial services firms and affects SEC registration and reporting requirements for certain investment advisers. The regulators are more vigilant in monitoring the misselling of investment products and malpractices of the licensed asset management firms. This is evidenced by the increase in both the severity and volume of related SFC enforcement actions. Increased frequency and severity of regulatory inspections/ examinations and surveillance of asset management firms both in Hong Kong and globally. Aggressive civil and criminal investigations of white collar crime, including insider trading, and offering fraud continue. Assist with evaluation, design and implementation of compliance programs, including policies and procedures. Perform gap analysis on the asset management firms existing compliance program, policies and procedures compared with the relevant regulatory rules and guidelines. Conduct specialised reviews of compliance in a particular area. Perform mock regulatory compliance examinations. Assist directors and/or management in developing outsourcing and service providers oversight programs. Provide insight on foreign regulatory changes through the global regulatory network of PwC member firms. Helping Asset Management Firms in Hong Kong Face Regulatory and Operational Challenges 7

8 Enterprise risk management Issue Business drivers How PwC can help The financial crisis and resulting regulatory change have caused deep reflection on the effectiveness of risk management in its current form, and traditional approaches to risk management may no longer be appropriate or sufficient to meet investor and regulator expectations. Companies are focusing on strengthening the linkage between risk management and business strategy in order to create an enterprise-wide approach to risk management with a heightened focus on operational risk, compliance risk, vendor risk, fraud and liquidity risks, as well as balancing demands for increased transparency and due diligence. Need for clearer linkage between business objectives, risk management strategy and regulatory compliance requirements. Need for adequacy in identifying, planning for and monitoring risk events. Need for aggregating different types of risks across products and portfolios to assess the overall risk exposure to the asset management entity itself. Need for assessing severity of risks, and identifying metrics to monitor on an ongoing basis. Greater focus on transparency, risk disclosure and due diligence. Design an enterprisewide risk management framework for identification and management of financial, business and operational risks. Develop testing programs (including forensic testing) around key risk controls (e.g., use of models, content and quality of risk reporting and information). Assess/benchmark risk management function, organisation and framework. Assist with development of and implementation of risk management technology solutions. 8 PwC

9 Operational effectiveness Issue Business drivers How PwC can help Opportunities to increase operational effectiveness and efficiency continue to be evaluated by asset managers. At a time when investors, legislators and regulators are seeking improved governance, controls and transparency, having strong infrastructure is critical. Third party servicing relationships are allowing firms to leverage technology investment and spending as well as realign operations and eliminate costs while receiving high quality specialised services with established service levels. Increased demand from investors and regulators for greater transparency in all aspects from operations to financial reporting. Additionally, investors are increasingly demanding third party assurances over select areas of financial information, controls, and performance reporting. Increased need to evaluate infrastructure options significant internal development or outsourcing options as a result of years of underinvestment. Increased need for outsourcing to a one-stopshop has forced service providers to diversify their product support offerings. Increased need for tax functional integration, efficiency and optimization in order to fulfil the tax reporting requirements globally (e.g. Foreign Account Tax Compliance Act FATCA). Evaluate the effectiveness of the control environment, financial reporting and internal controls. Provide independent internal control reporting for investors and other interested parties that promote more effective and efficient controls transparency by providing visibility into the design and effectiveness of the control environment throughout the year and not just at year-end. Perform Mock Operational Due Diligence Assessment using similar methods as institutional investors and consultants in order to help improve the information provided to prospective investors. Helping Asset Management Firms in Hong Kong Face Regulatory and Operational Challenges 9

10 PwC Regulatory Advisory Service contacts To have a more in-depth conversation about these or other issues, please contact any of the following PwC Hong Kong partners: Marie-Anne Kong Asset Management Industry Group Leader marie-anne.kong@hk.pwc.com Anthony Evangelista anthony.evangelista@hk.pwc.com Rick Heathcote Regulatory Advisory Services Practice Leader rick.heathcote@hk.pwc.com Adams Chan adams.wf.chan@hk.pwc.com Helen Li helen.l.li@hk.pwc.com Duncan Fitzgerald duncan.fitzgerald@hk.pwc.com Shane Knowler shane.knowler@hk.pwc.com Tony Wood Director tony.wood@hk.pwc.com 10 PwC

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12 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. HK C1