Commentary - 13 June 2017

Juggling the fine line between compliance and transparency

Andy Yong and Leanne Ho comment on how the CRS are impacting the financial services industry in Hong Kong

Author of article:

Leanne Ho

Managing Director, Hong Kong

Andy Yong

Head of Private Client Services, Asia

Opening a bank account should be an easy process. For example, India’s central bank, the Reserve Bank of India, has amended its know your customer (KYC) rules to allow banks to open new bank accounts using one time pins (OTPs) on mobile phones. The net effect is that opening bank accounts can become a relatively painless process for citizens as long as banks comply with the government’s KYC rules.

The effort is part of the government’s financial inclusion strategy and while it may seem like the simplification of account process may open up a can of worms when it comes to money laundering, the central banker has put caps on bank accounts that make use of eKYC and appropriate policies in place to track potential black money movement in the country’s banking system.

Post the global financial crisis of 2008, there is a concerted effort by governments and regulators to reign in money laundering and funding of illicit activities including terrorist activities and tax evasion. One such effort is the Common Reporting Standard (CRS) which sets forth reporting and due diligence requirements. The CRS is part of the OECD (Organization of Economic Cooperation and Development) new global standard for automatic exchange of financial account information between governments. The other component is the Model Competent Authority Agreement (CAA) which contains details of how the proposed exchange of information can be effectively executed.

One of the side effects of this effort is an increased difficulty in opening up bank accounts whether it is personal or as a business entity.

Under the CRS, the information to be reported include details of the account holder and information relating to the investment income, account balances and sales proceeds from financial assets associated with the account.

Hong Kong joins over 100 countries that have declared commitment to implementing the standard. According to PwC, as a second wave participating jurisdiction, Hong Kong financial institutions are to collect information beginning 2017 and report this to the Hong Kong Inland Revenue Department in 2018 to facilitate the commencement of information exchange by the end of the same year.

Fintech Innovation reached out to business management consultancy Hawksford to get clarity on how these new standards are impacting financial services in Hong Kong.

What is the state of banking transparency in Hong Kong? How does this compare to markets like Singapore, the US or the UK?

Andy Yong, Head of Private Client Services for Asia, is of the opinion that when it comes to banking transparency Hong Kong probably has one of the highest standards amongst other financial centers in the world. This is required given that Hong Kong’s economy depends on a robust financial system. The need to provide confidence to the financial world – that it is the place to do business – will continue to motivate Hong Kong to maintain the highest banking transparency standard.

Hawksford Managing Director for Hong Kong, Leanne Ho further added that as a leading financial hub, Hong Kong has always been known to have a robust and transparent banking system. In recent years, global financial markets, encompassing Hong Kong, are blurring traditional banking boundaries.

Financial institutions, in particular banks, are expanding beyond their geographic and traditional product boundaries to seek and exploit new market opportunities, in order to meet intensified competition from non-bank financial institutions and customer demand for new products and services. In doing so, it is extremely essential and important for banks in Hong Kong to maintain a clear and balanced transparency system, taking into account that such steps will not be too onerous and costly to maintain in a competitive business environment.

From a wealth management perspective, what are the challenges faced by (1) industry players; (2) regulator; and (3) clients when it comes to compliance and the need for transparency and privacy?

Andy Yong: In the wealth management space, industry players such as banks and independent financial advisers will have to spend more – on systems, people and time. Every transaction needs to undergo thorough scrutiny before it is approved. This poses a huge financial burden and administrative (monitoring) challenges to sustain profitable level in the long run. Regulators will continue to impose new rules and policies to mitigate risks that may cause systemic failure in the global financial system. For their part, clients would perceive transparency as an intrusion of privacy despite the fact that transparency may actually benefit them.

Leanne Ho: Getting clients to meet the compliance requirements is challenging as some, if not most, view such an exercise as an intrusion to their privacy. Generally, we note that Asians are not comfortable in revealing their sources of wealth. Nonetheless, through a well-informed and educated process, clients have been more receptive in doing so.

Can you elaborate on your views about maintaining compliance measures?

Andy Yong: Maintaining compliance measures will constantly change in view of the financial products and services demanded by clients. The financial landscape will remain dynamic as industry players continue to be creative in their product offerings to maintain existing clients and bring in new ones. For their part, we expect regulators to continue to demand strong compliance from industry players.

Editor’s note:

The 2015 Secrecy Ranking, which ranks jurisdictions according to their secrecy and the scale of their offshore financial activities, lists Hong Kong as second and Singapore as fourth in the world. The Index estimates that between US$21 to US$32 billion in private financial wealth is located, untaxed or lightly tax, in secrecy jurisdictions around the world.

As Yong pointed out, private banking clients are reluctant to divulge their financial assets. In the interim, governments and countries will continue to struggle between facilitating financial business and mitigating the risks of illicit business growing in their own backyard.

Opening a bank account in Hong Kong continues to be a formidable challenge for individuals and businesses. Speaking at a briefing on bank account opening and maintenance, Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority, point to a global tightening on customer due diligence requirements as leading to de-risking efforts by "a small number of" banks.

He asserts that the HKMA is working with banks and various stakeholders to tackle the issue [opening and maintaining bank accounts] while ensuring that Hong Kong maintains a robust AML regime without undermining access by legitimate businesses and ordinary citizens to basic banking services.

He also pointed to persistent news of difficulties in opening and maintaining bank accounts in Hong Kong, particularly by foreign companies, as creating negative image of Hong Kong as not a welcoming place for business. To stem this perception that HKMA launched a dedicated webpage on its website to provide the public and business community with a way to feedback directly to the HKMA.

While recognizing the effort as work in progress, Yuen is hoping that the public would feel the customer experience improving.

In the interim, emerging markets like China, India and Thailand may actually show by example how technology can support the need for transparency without sacrificing the right of individuals and businesses to basic banking services. The 2016 Edelman Trust Barometer for financial services report may actually be proving Yuen's fears. Among surveyed markets, there is greater trust by the general public of financial services in China, Indonesia and India compared to Hong Kong and Singapore

Originally published by Fintech Innocation. Read the original here.

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