The financial landscape has changed dramatically over the last five years. The shifting environment is due to a confluence of complicated and interrelated factors – challenging conditions in the global economy, increased regulatory pressure, and the growing importance of technology. It can sometimes be hard to keep on top of all the latest developments.
How best to make sense of the various factors influencing the financial industry, both globally and in Asia, was the subject of Ian Banks’ keynote address at NeMa Asia in November 2016. As the Head of HSBC Securities Services in Asia, he was well-prepared to highlight the industry trends that really matter.
Perhaps the biggest difference between now and the period that immediately followed the global financial crisis is the cause for optimism. “It feels that we can start looking at opportunities,” said Mr. Banks. “But back then it felt as though we were only looking at threats.”
The main challenge for all participants in the securities industry was managing a flood of new regulations that were introduced after the crisis. The focus was on integrating new rules into pre-existing processes and making sure that investors fully understood how the new regulatory framework would impact their business. There are still more new rules to come in the future, but many of the most important to result from the crisis are either already in place or anticipated by the industry.
One of the most important purposes of regulation is to protect investors. But Mr. Banks asked two questions to put regulation in a fresh perspective: “Will the implementation resolve all the major problems in the financial industry? And is asset security the only demand of investors today?”
Now that the industry has had several years to digest and implement the new regulations, all the parties that play a role in post-trade execution – including the exchanges, the custodians, and the central securities depositaries – can look once again at providing innovation to investors, rather than solely on protection.
“There is no question about the necessity of these regulations,” said Mr. Banks. “But we’ve been concerned with risk in a way that has been all consuming to the industry, and that has moved us away from what we should be doing – providing value to the customer base and looking for new ways of doing things to grow our business.”
The effect of regulation on industry participants is an increase in the cost of doing business, yet at the same time pricing has remained relatively stable or even declined. Technology is playing an important role in offsetting these costs, but it is not enough on its own. The industry needs to start a process of self-reflection and look more broadly at the way it does business.
“We need to look at the operating models and the profitability of the business in order to provide real long-term growth and security,” said Mr. Banks.
For companies doing business in Asia, the growing costs will be partly counteracted by the region’s attractive economic outlook. Mr. Banks pointed to a number of factors that paint a healthy long-term picture for Asia – a young population, an increasingly skilled workforce, and high levels of affluence. This young demographic is already used to interacting with the financial industry via a range of digital channels, which increases the pressure on asset managers and their service providers to satisfy customer demands on an almost instantaneous basis.
Mr. Banks said that as Asian economies transition to the middle income bracket, the number of high net worth individuals will also continue to grow rapidly. The new levels of wealth are already present in growing purchases of homes, cars, and education. The next step will be increased investment in financial products, which will prove to be a huge opportunity to the entire financial industry.
The biggest story in Asia at the moment is China. The ongoing liberalisation of the country’s economy is such a compelling narrative, said Mr. Banks, that not only attracts capital into Hong Kong and Shanghai, it also generates interest in the region as a whole.
China illustrates both the heterogeneous and dynamic nature of Asia, which consists of many different countries, each with their own way of doing things. Foreign access to China’s equity markets for example, has typically been limited to investors that participate in three schemes that each create an investment channel into the country – namely the Qualified Foreign Institutional Investor program (QFII), its renminbi equivalent RQFII, and more recently the Stock Connect schemes in Shanghai and Shenzhen.
“What we tend to see among our clients, is that they have a large number of different structures within their China portfolios,” said Mr. Banks. “Investors do not know how these different channels will develop in the future, so what they are doing is making certain that they have a stake in each of the structures that they think will be relevant.”
The most significant changes in market infrastructure are often incremental, and tend to fall under the radar of many observers. There are many minor changes occurring in Asia that sometimes puts it ahead of the US and Europe. Mr. Banks cited China’s early adoption of XBRL reporting (Extensible Business Reporting Language) for its equity markets way back in 2004, a standard that took as long as 2008 for the US to fully implement.
“The paradigm shift takes place when you start changing the operating model, and to some extent some of this is invisible” he said. “The behaviour of investors is also changing, and as an industry, we have to come up with new ways to facilitate their activities and make their experiences more rewarding.”
The trick will be for the industry to change its thinking away from regulation and towards providing innovative solutions to its clients. While regulatory changes will continue to impact us, Mr. Banks said that the industry is starting to look for fresh opportunities, leaving a future that is open to be captured by market participants that are able to create new products that meet the needs of investors today. Data, for example, will likely be an area of innovation – as the decreased costs of storage allows everyone in the value chain fresh ways to provide value to their clients.
“Regulation no longer feels like our biggest issue but rather a natural, highly intense and integral part of our operating models,” he said.
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