Exporting Asset Management to Asia – Navigating the Regulatory ‘Maze’

The importance of diversifying Australia’s exports away from commodities is well understood.  To be the ‘knowledge economy’ Australia needs to identify and compete in areas of expertise where it has a natural competitive advantage.  In this context, the export of investment management expertise consistently ranks as a high opportunity for a number of reasons.

1. The size of its asset pool driven by compulsory superannuation means that Australia ‘punches above its weight’ in terms of scale. Superannuation has been a key driver for investment management becoming a sizeable industry relative to the size of the Australian population.
2. Its regulators, generally, have adopted compliance models that are forward thinking and have investors’ interests in mind.  A focus on risk areas, such as unit pricing errors, has resulted in regulatory approaches that in many respects have led thinking amongst global peers.  Unlike other regulatory regimes, Australian regulators, ASIC and APRA, have generally not succumbed to political pressure to use regulation as a means of artificially fostering the local industry through prohibitive regulations around data sharing and offshoring.
3. It has developed complex investment products and distribution mechanisms.  The number of industry participants in Australia relative to the number of customers has heightened competition across the whole investment value chain as investors strive for better risk adjusted returns, improved access to products and greater insights via reporting.  The complexity of Australian product and distribution channels exceeds many Asian markets that remain rooted in the distribution of traditional unit trust and life insurance type products with conventional exposures to assets.  Furthermore, like the UK, Australia has been a leader in the removal of commissions from investment products through the implementation of its FOFA reforms.

So does this mean Australia is poised to be a leading exporter of asset management products and services to Asia?  Well, not quite….

The unique and divergent regulatory regimes of Asia present some daunting challenges.  However, having worked with clients on gaining approvals across many regulator regimes in Asia, Shoreline has some unique insights on the practical challenges and how they can be addressed.

Addressing the regulatory challenge in Asia is a multi-dimensional problem:

1. There is virtually no harmony between regulatory rules and approaches across markets. So you have successfully navigated the regulatory challenges of say, Japan, and want to expand to, say, Korea.  As they are neighbours that should be just about applying the Japanese approach to Korea, right? Wrong!The regulatory environments for each market have generally been developed in relative isolation and, in some cases, may reflect political pressures to support the local investment management industry.
2. There is a lack of prescriptive regulatory guidance.  Whilst generalisations are often dangerous, especially when it comes to regulation, the general observation is that regulators in less developed markets (Vietnam, Malaysia, Indonesia) have less prescriptive rules about what can be done, resulting in significant judgement residing with the regulators.In many cases the regulatory approval sought is highly complex and the regulator may not be familiar with the topic.  As a result, developing deep and trusted relationships with local regulators is critical in order to both educate them on the topic and also to obtain their trust and informed consent.
3. Regulation discourages global entrants. For more mature markets (Japan, Taiwan and Korea) the rules are far more prescriptive but are often not friendly to global interests.  For example, in seeking approval with the Taiwanese regulator, the asset manager will often need to explain how the initiative helps to support the local industry in terms of bolstering employment and upskilling resources.  Further the issue of data protection and sovereignty are particular ‘hot button’ issues in these markets.  Regulators such as Korea and Indonesia are highly protective of financial data being accessible outside of the country. This often is a material limitation to global entrants and, in the case of Korea, has been a key factor against the roll-out of global systems and outsourcing to offshore based providers.

However, challenging as it may be, there are ways to navigate this regulatory maze.

1. Read the regulations! Often the perception of the regulator’s view is amplified based on mis-understanding and conjecture.  In many cases, where regulation is prescribed, the actual prohibitions are far less severe than the perception.  Here are some examples:
   1. Indonesia – All financial data needs to reside in-country.  Wrong – this generally only applies to data that is publicly consumed such as retail banking information. Other financial data such as investment information etc. is generally not subject to this prohibition.
   2. Taiwan – No outsourcing permitted. Wrong – some activities such as the management of local securities for local funds must be undertaken and dealt with locally. However, there are broad areas that permit outsourcing.
2. Constructively engage the regulator on the proposal and benefits – Ultimately regulators are interested in 3 things:
   1. Protecting investors from risks
   2. Minimising costs to investors
   3. Providing investors with improved risk-adjusted investment returnsDialogue with regulators should be focused on these points and how your proposal has these front of mind.  This is especially useful in instances where the rules are not prescriptive (which is often) and judgement is required from the regulator.  Asset managers familiar with the Australian regulatory environment should be well versed in these areas.
      
      
3. Educate the regulator – Increasingly regulators are interested in best practice trends and approaches that are adopted globally, especially where it relates to reduced risk and cost to investors.  Outsiders to individual Asian markets are uniquely placed to provide these insights, and Australian firms will often have leading insights over matters such as investment risk management.
4. Balance approval vs. notification – Whilst consultation with the regulator is important in the context of the overall relationship, the focus should be on what items require explicit approval vs notification.  To illustrate this I am reminded of a quote from a senior manager with a firm that we were engaged to:

“Be very careful about asking for approval. In many cases even the regulator doesn’t want you to ask because then they need to give you an answer. In these situations the safest answer is then ‘No’!”

Knowing when to ‘ask’ vs ‘tell’ is often not clear but the driving principle should be whether the regulator would reasonably expect that permission should be sought.  This does not mean a lack of full and transparent notification, but care must be taken to avoid forcing the regulator to opine, especially when it is difficult for them to make an objective assessment.

Shoreline has spent spent significant time in many of these markets helping firms navigator the regulatory maze involved with rolling out global operating models and products.  Whilst the regulatory challenges are signficiant, they are not insurmountable and with practicial guidance we believe Australian firms are well placed to seize this opportunity.

Bruce Russell

Director