Getting to grips with the complexities of compliance in Asia

June 24, 2024

Key Takeaways

  • Industry faces regulatory, environmental, competitive pressures
  • Managers must offer differentiated services to stand out
  • Modern solutions can optimize costs and streamline operations

Asia is jurisdictionally heterogeneous, and when it comes to keeping abreast of regulations, asset managers must assimilate disparate information to operate effectively and provide a first-class service to customers across the region.

Assets under management (AUM) in the region grew from 7% of the global market in 2010 to 17% in 2022, with a compound annual growth rate (CAGR) of +15%. However, evolving compliance requirements, fee compression and market volatility make for strong headwinds, which might explain why AUM growth tailed off last year.

The challenges are numerous, but so are the opportunities. Practitioners who employ cutting-edge technology to help manage risk and operations through seamless front-to-end workflow are better placed to reap the benefits.

Regulatory environment

In Asia, like elsewhere, asset managers must contend with demographic shifts, environmental concerns, geopolitical upheavals, and changing market dynamics. Tighter regulatory oversight as authorities focus on systemic risk stemming from financial markets adds complexity.

Asset managers must be agile enough to respond to changing requirements in different countries and ensure their internal governance and risk-management procedures are robust.

Environment, Governance and Society (ESG) concerns are high priorities for regulators, investors and asset managers despite market turmoil dampening the adoption of ESG investing standards among Asian institutions last year.

Still, according to a Coalition Greenwich report, 7 in 10 Asian institutions use ESG criteria when choosing new investment managers. That share differs widely across the region. For instance, most institutions in Thailand check ESG metrics, while the number is lower in South Korea.

The region’s leading financial hubs—Hong Kong and Singapore—are leading the way with mandatory ESG regulations for financial institutions. The latter, for example, is advancing its sustainable finance strategy with a range of rules and policies, including a green taxonomy and mandatory ESG disclosure requirements.

Asset managers must align with these regulations to contribute to the goal of achieving net zero emissions before 2050 and to attract clients who are obliged to adhere to sustainability parameters.

The squeeze on fees

The industry in Asia is undergoing significant changes, with asset managers reducing the fees they charge for their services. The rise of passive investment strategies plays an important role.

Interest in low-cost mutual funds and exchange-traded funds (ETFs) has spurred fierce competition and displaced conventional investment strategies.

Nowhere highlights this better than India, where at the end of November 2023, the Indian ETF industry had 190 ETFs and assets of USD 73 billion versus USD 36bn four years earlier. Regulatory changes have helped the growth of ETFs in India, where the 10-year compound annual growth rate is 45.9%.

The squeeze on fees has impacted the profitability of asset managers who expanded their cost base with rising AUM over the past few years.

Seeking alternatives

To maintain competitiveness and counter the challenges of fee compression, market participants in Asia need to offer differentiated and value-added services.

Pivoting to provide non-traditional products to meet client demand, such as multi-asset strategies, private equity investment, or niche solutions, could help asset managers generate revenues.

Moreover, there are opportunities in ESG. Asset managers who effectively assess the risks and costs related to ESG concerns may have the leverage to charge premium fees despite the prevailing trend of fee compression. ESG should also be a priority for practitioners looking to lure investment from institutional investors.

Disruptive technology, big opportunities

Disruptive technologies such as AI and machine learning present significant opportunities in areas like customer relations, data governance, and risk analysis.

Technology plays a critical role in managing costs, too. It’s not just a question of slashing expenses but optimizing costs and streamlining operations.

More efficient internal processes, leveraging a combination of cloud-based solutions and APIs, will enable more nimble risk management and monitoring of regulatory requirements. This is critical to avoid fines, reputational damage, and income loss.

Firms must deploy automated, streamlined compliance workflows. Optimizing costs and relying on technology to do the heavy lifting of mundane and repetitive tasks will enable market participants to create value.

ION Markets

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