The ASIAN Decade! Asset and wealth management industry in a state of preparedness for growth!

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1 The ASIAN Decade! Asset and wealth management industry in a state of preparedness for growth! The global asset & wealth management industry has experienced a rapid growth in assets, and shows little signs of slowing down. According to PwC s estimates, mutual fund assets globally have grown from a base of USD16.1 trillion in 2004 to USD36.3 trillion in 2016, and will breach the USD50 trillion mark by In Asia, mutual fund assets totalled USD5.5 trillion just last year, and demand for new investments continues to be fuelled by demographic and economic shifts. At the same time, market regulators have also been working hand-in-hand with participants to promote growth not only in their local markets but also regionally. In the inaugural edition of our Asset & Wealth Management Market Research Digest, we will illustrate how the emerging Asia Pacific economies are opening their floodgates to foreign asset managers and their product offerings despite being once completely shut to foreign asset managers and products. 2.3 T 518 B New Delhi 340 B The asset managers who have long bemoaned the fragmented nature of the region are now also looking forward to an era of bi-lateral and multi-lateral agreements to access each other s markets. The recent and upcoming Asia Region Funds Passport designed to emulate the success of the Undertakings for Collective Investments in Transferable Securities (UCITS) in Europe is slowly coming to fruition. We observed that the three key factors which led to these changes are regulatory support, as well as digitisation, and jurisdiction wide utilities which will profoundly change the way investment products will be bought and sold in the region. Hong Kong Bangkok Beijing Kuala Lumpur Singapore Jakarta Seoul Taipei Manila Tokyo Financial Centres Total AuM of mutual fund in USD as at end of T 5.5 T Sydney Auckland PwC 1

2 Exploring Untapped Opportunities Increased local access Developing economies in Southeast Asia have seen a rapid liberalisation of regulations to allow foreign managers with broader access, and also for local players to invest more flexibly in offshore markets. Feeder freedom With the exception of Singapore, foreign managers making their foray into Southeast Asian markets are required to partner with a local asset manager to launch feeder products. Before 2016, offshore fund managers entering Thailand only had two entry options: setting up an onshore office or partnering with a local asset management company to launch feeder products. Today, distributors are now allowed to distribute foreign funds directly to accredited and institutional investors. Likewise, plans are underway in the Philippines to allow fund houses to launch feeder funds. Currently, feeder funds can only be launched by banks with trust businesses through Unit Investment Trust Funds (UITFs). Greater investment flexibility Asset managers in Indonesia have cheered when the 15% overseas investment cap on locally-domiciled Shariah funds was lifted in 2015, allowing asset managers to invest up to 100% in overseas assets. Since the announcement, asset managers including a few global players have launched global Shariah funds. Increase in market liquidity In Vietnam, where liquidity has been a key issue of contention, restrictions on foreign ownership in public companies were finally lifted in This has allowed foreign investors to take up to 100% stakes in certain sectors, and has helped to inject more liquidity in the market. While sectors including banking remain restricted, the authorities have indicated that greater liberalisation of the market is likely to follow. Larger investor base With ageing population plaguing the region, it is inexorable that Asian governments have been actively promoting new retirement plans. These retirement plans often offer investors with investment options, presenting asset managers with an enlarged pool of asset to leverage on. At the same time, digitisation has also removed the physical barrier of fund sales, allowing asset managers to tap on investors beyond Tier-1 cities in larger countries such as India and Indonesia. More retirement assets In Japan, where population growth rate has been negative, the Nippon Individual Savings Account (NISA), was launched in an attempt to promote a shift in individual savings into investments, including mutual funds. To encourage subscriptions, capital and dividend gains from investments made through NISA accounts are exempted from taxes up to a maximum of five years. Three years into its inception, NISA already has over 96,000 accounts, and assets of USD94.8 billion. On the other hand, provident funds, which are employer-funded retirement funds, will also be made compulsory for private companies in Thailand starting While provident fund assets only totalled USD30.0 billion in June 2017, the new ruling is likely to significantly boost the pool of private retirement assets in the country. Reaching peripheral cities through mobile platforms The wave of demonetisation in India has spurred the growth of e-wallets, with the country s largest e-wallet provider, Paytm, predicting that it will have 500 million users on its platform by Alongside the proliferation of e-wallets, investors are also now allowed to make mutual fund subscriptions through these mobile accounts. Though Nascent, the ease of transaction is likely to draw investors, especially if they are looking at parking money in the money market or certain short term fixed income products. PwC 2

3 Regional Collaboration Driving Transparency and Efficiency Market integration and product innovation Just as UCITS transformed the funds space in Europe, Asia is on the cusp of change with the introduction of regional passports and product innovation. Greater market integration There are currently three fund passport schemes available in the region the Hong Kong-China Mutual Recognition of Funds (MRF), ASEAN CIS, and the much anticipated Asia Region Funds Passport (ARFP). As of end 2016, the combined assets of funds in the five nations Australia, South Korea, New Zealand, Japan and Thailand which have committed to the ARFP was USD2.9 trillion. Interestingly, all five markets have remained largely closed to foreign asset managers. If successful, the passport is likely to provide qualified asset managers in these countries with an enlarged pool of opportunities. At the same time, investors in these markets, which have been accustomed to products with a strong local bias, can also expect a much more diverse suite of investment products. The joint committee of participating economies is in the midst of ironing out legal, regulatory and tax requirements, and will officially kick off the scheme when at least two countries have implemented the relevant frameworks. Product innovation In tandem with greater market integration, key regulators are also planning to introduce new corporate collective investment schemes which will enable asset managers to launch products with globally-recognized tax and operational frameworks. In Singapore and Hong Kong where UCITS are prevalent, regulators have the Singapore Variable Capital Company (S-VACC) and Open Ended Fund Company (OFC) structures, respectively, in the pipeline. These structures were long in demand and waiting is finally taking fruition and will be operational in a few months time. Enhancing market infrastructure through utilities On the infrastructure end, authorities have also stepped up to reduce redundancies in back-end operations, but also to provide a more transparent framework in the distribution of products. Operational efficiency In India and Thailand, authorities have launched fund service platforms to standardise back-end inconsistencies faced by asset managers and distributors. For instance, FundConnext was introduced in 2017 to create a uniform approach to operational processes including order routing and fund settlement in Thailand. Since its launch, five asset managers and three securities companies have joined the platform. Online distribution Though fund distribution is likely to remain a largely a face-to-face business in the short to medium term, local regulators have also launched comprehensive online distribution platforms to provide cost-sensitive and savvy investors with an alternative means to investing. In South Korea, where majority of investment funds are sold through securities brokerages or banks, the government launched an online supermart in collaboration with local asset managers. Utililisation of the channel remains limited, but the government has been proactive in promoting the use of the online platform. In fact, the Financial Services Commission (FSC) announced that asset managers will be required to have an online share class for all new funds launched, with the exception of ETFs. Similarly, Fund Rich Securities, a joint initiative by Taiwan Depository & Clearing Corporation and local asset managers also kicked off operations in The online fund platform houses over 1000 products, and is estimated to have a coverage of about 80% of funds available in the country. On the other hand, the Australian authorities are introducing the Corporate Collective Investment Vehicle (CCIV) scheme. Like the SICAV and OEICs, CCIVs will operate with a corporate structure compared to the commonly used trust-based structure the Managed Investment Scheme (MIS) which is uncommon outside the country. PwC 3

4 South Korea Hong Kong SFC issued Consultation Paper regarding financial products offered on online platforms. Taiwan Fund Online Korea (FOK), an online platform connecting investors and independent financial advisors (IFAs); South Korea introduction of new share class for public mutual funds with lower distribution fees. One-stop fund distribution platform started operation in August Thailand The Stock Exchange of Thailand launched an online distribution platform, FundConnext. India Streamlined AML/KYC checks. MF Utility is an order-routing platform for mutual funds, that will aggregate mutual fund orders across all asset management companies. Indonesia Private companies are allowed to set up online platforms to distribute funds. Implementation of Payment Transaction Processing Regulation recognises providers of payment gateway and e-wallet services. Asia-wide platform-asia Fund Standardization Forum (AFSF) is a consultative body of Asia s Central Security Depositories, aiming to advance fund backoffice processing by standardising operations for cross-border fund transactions. Defining robo frameworks Robo-advisory remains in its infancy in Asia, but regulators in Singapore, Hong Kong and Malaysia have been working alongside market players to define the framework for digital advice. In these jurisdictions, the authorities have outlined the regulatory requirements for new entities, as well as put in place testing measures to ensure the robustness of the design and functions of algorithms used. Government initiatives and regulatory push Besides enabling asset managers, regulatory bodies have also stepped up on their compliance requirements in the wake of the global financial crisis. These requirements include a tougher stance on antimoney laundering as well as mis-selling practices. Commission bans In the Asia Pacific region, the push for transparency is most apparent in India and Australia. A few years ago, the Securities and Exchange Board of India (SEBI) banned front-end load fees for all mutual fund schemes. SEBI further enhanced disclosure requirements in 2016, mandating distributors to report the amount of commissions received on a semiannual basis to investors. Meanwhile, the Australian authorities had introduced the Future of Financial Advice (FOFA) reforms in 2012, which included a ban on conflicted remuneration structures, including commissions and volume-based payments. Move towards greater disclosure Most regulators in the region on the other hand, have opted instead for greater and more consistent disclosure of fees and commissions. In Singapore and Hong Kong, local regulators ruled out commission bans after reviews revealed the unwillingness of investors to pay fees in exchange for advice. However, regulations around disclosure, especially for products with embedded commissions have been made mandatory. In Singapore, private banks are expected to report all charges from product sales, and relationship managers are required to present clients with a complete fee schedule during their onboarding phase. On the other hand, Hong Kong authorities are also looking at standardising fee disclosures, starting from trailers retained from retail investment fund sales. Exchange listing of investment funds Lack of infrastructure Perhaps the most underexplored avenue to distribute and maintain liquidity of an investment fund would be to list the investment fund either for information or for trading purposes. There has been poor evidence of its success in Asia primarily due to limited opportunity in the past. This landscape is soon to change as there is significant opportunity for the exchange listing of investment funds now with the advent of defined contribution schemes with more empowerment to investors to choose investing options, introduction of robo advisory platforms and snipping of distribution fees. However, there have been limited initiatives on this by various stock exchanges in the region. PwC 4

5 Conclusion Driven by regulatory initiatives and increased digitisation, barriers to buying and selling of investment fund products will inevitably decimate over the next few years. Though investor pool is set to rise, the increased ease of conducting business and that too in multiple markets, Asia Pacific is poised for a successful trajectory. PwC estimates that just the mutual funds AUM will increase from today USD5.7 trillion to USD11.9 trillion by To stand out, managers will not only need to be innovative in creating new products, but also quick to tap on new channels of distribution. For many decades, the Asia Pacific region that was seen to be marred by inflexible regulatory regimes and heterogeneous market place now serves as an inviting opportunity to managers in the West who are hungry for growth and craving to offer their much more sophisticated products to a new market place. This truly can be called the Asian Decade for the asset & wealth management industry! Regulatory focus towards market utilities to ensure seamless and more efficient transactions. 01 Investor base broadening through introduction of voluntary retirement schemes and incentivising fund houses to penetrate beyond of metro-cities. Fund passports could consolidate distribution efforts spanning across the region. Listing of investment funds will open new avenue for distribution Fee bans are unlikely in most countries however there is increased focus towards disclosures. Better access to emerging and developing markets either through feeder funds or in future, through passports Look out for our next monthly edition of AWM Market Research digest to be released mid-may Contact Armin Choksey Partner, Asian Investment Fund Centre & Market Research Centre Leader PwC Singapore T: armin.p.choksey@sg.pwc.com 2018 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers and PwC refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as an agent of PwCIL or any other member firm.