March newsletter comments

Here is the comments section from our March newsletter:

March was an interesting month on the regulatory front.

In Australia, ASIC began a public awareness campaign on financial scams. It never ceases to amaze us how many members of the public still get caught up in advance fee frauds, boiler room operations and other illegal predatory activities. This is an area that deserves continued regulatory focus as those who lose money are often least able to absorb the loss.

Also in Australia a number of court actions were published involving prosecutions or investigations relating to fraud, dishonest behaviour, conducting a regulated activity without a license and even and insider dealing case.

In Hong Kong we noted the SFC alerting market participants on the need for sound hedge fund valuation practices. Hedge fund valuation is an ongoing concern of the SFC and even though the issue is a fund, rather than a manager issue, those firms who do not have third party valuations for all of their fund should be looking at how they can document their existing valuation procedures and what conflicts may arise from those procedures.

On the enforcement side we noted a number of prosecutions of firms and individuals who were found to be conducting regulated activities without a license. Licensing is a critical part of the financial landscape in Hong Kong and the SFC has repeatedly warned participants to ensure that they are properly licensed for the activities they conduct while physically present in Hong Kong.

We welcome the Hong Kong SFC clarification regarding the use of serviced offices by licensed entities and firms applying for a license in Hong Kong. The clarification was issued in March and follows on from several specific instances in 2006 where the Commission was refusing or objecting to license applications where a firm selected short term office space, typically serviced. This despite the fact that a number of reputable firms in Hong Kong were already licensed and operating from such locations. The previous ‘informal policy’ position of the Commission caused not only delays in licensing applications but significant extra costs associated with establishing a permanent office and then awaiting approval to get the license – something which is of itself very time consuming in Hong Kong.

We have felt all along that the appropriate concern of the Commission should not be whether an office is short or long term but rather the actual controls in place at the office as per the internal control guidelines so this develop is positive.

We see this clarification as part of a general improvement in the commerciality of a number of decisions being made on licensing issues and part of the recognition by the Commission that new market participants are by and large good for Hong Kong.

All firms should note the Commission’s requirements regarding licensed premises which we set out in the main body of this newsletter.

Various rumours are circulating in Singapore that the financial regulators are considering a tightening of the rules that have allowed a major influx of niche asset managers, including hedge funds, into the country. There has been no statement to this effect from the MAS.

While the rapid growth of the sector is bound to have attracted a couple of less scrupulous operators and the sheer number of funds suggests that not all will succeed, there are a number of major firms who have established or who want to establish a presence in Singapore to take advantage of a lighter regulatory touch. We expect that the MAS will want to be very careful to ensure that it continues to attract serious hedge funds to Singapore as well as providing a venue for Asian start ups to flourish. Institutional investors are aware of the lighter regulatory regime and tailor their due diligence accordingly. The real concern, in our view, should be the micro funds that establish without any industry experience and drag into their operation family and friend investors.

We mention continued fallout in Thailand from last year’s coup and the investigations into the business interests of former PM Thaksin. Singapore’s purchase of a stake in Shin Corp from Thaksin’s family immediately prior to the coup continues to be a hot button political issue that is effecting investor confidence across a number of sectors in Thailand. Consistent enforcement of securities regulation has never typically been a Thai strong point. Further politicisation of the process due to the coup is going to make the regulatory environment even less predictable.

Comments from February Newsletter

Here is the comments section from our February regulatory newsletter:

In February, AUSTRAC in Australia released new rules for discussion in relation to AML and CTF. The 57 page draft can be found by clicking on this link.

For firms in Australia the rules set out proposed AML and CTF programs including minimum information collection requirements to support KYC, a requirement to conduct prospective employee due diligence, a requirement to provide AML / CTF training and a requirement to have your AML / CTF program reviewed by an independent party.

For firms who conduct business with Australian firms in the financial industry you should expect to have to provide more details about the nature of the foreign company including names of directors and beneficial owners.

As mentioned in a previous comment about the Australian legislation, AUSTRAC has the power to visit a business in Australia and inspect its AML records without a warrant. It may also fine a business that does not comply with the act in addition to other general prosecutorial powers. These new rules set out the type of AML / CTF program that AUSTRAC wants to see and hence the type of program that must be in place to avoid either a fine or a name and shame action.

The proposed rules and the legislation are likely to be an added compliance burden on both Australian firms and firms wanting to transact business in Australia.

In practical terms the act and its rules are more likely to be quite effective tax collection and anti avoidance measures rather than simply anti money laundering provisions.

At the time of going to print with this newsletter, the Hong Kong SFC has clarified that it does not specify the precise type of premises that a licensed entity can use in Hong Kong. In 2006, the SFC had informed a number of license applicants that it would not accept a serviced office address, this despite the fact that a number of previously licensed firms were operating quite properly from these locations.

Reason has prevailed however, with the SFC clarifying that in fact they are only concerned with the internal control implications of any premises used by a licensed entity, serviced, leased or otherwise. This is a welcome change of policy and means that firms can indeed apply to commence smaller scale operations in Hong Kong provided they have appropriate internal controls in place relating to whatever they choose as premises.

There are other continued indications from the Hong Kong regulator that they are becoming more receptive to new applicants entering the Hong Kong market and we hope this trend continues.

The last month has seen new budgets released by both Singapore and Hong Kong. In broad terms company taxes are coming down and both locations continue to compete to lure regional head offices. Investment management and advisory companies will find that the budgets, and associated tax policy, continue to encourage the location of these firms in Hong Kong or Singapore.

The Nikko Cordial drama continued to unfold in Japan with Citigroup making a tender offer for all of the company’s shares at the time of going to print. The bid is interesting as it appears to us to be indicative of the opening up of the Japanese financial sector to much greater foreign involvement.

Firms with investment advisory operations in Japan should note the upcoming implementation of parts of the new Financial Instruments and Exchange Law that may affect their business. We understand from Japanese counsel that provisions relating to the registration of a number of firms previously unregistered will come into force in the second half of 2007.

Unlike Hong Kong and Singapore, Japanese tax authorities appear to be strengthening a number of provisions that may have the effect of taxing financial businesses previously exempt or largely exempt from Japanese taxes. Firms with operations in Japan may wish to get advice on this topic if they have already done so.