Deloitte posits regulatory outlook for APAC financial services sector

16 February 2018 Consultancy.asia

Big Four assurance and advisory firm Deloitte has set out the leading regulatory themes that it believes will dominate this year’s financial services agenda in the Asia Pacific, with issues surrounding global regulation, accountability, and technological disruption among the prominent topics.

In its latest regulatory outlook for the region’s financial services sector, the Deloitte Centre for Regulatory Strategy Asia Pacific has put the spotlight on areas of upcoming concern, with the forecasted focal points including emerging issues around digital disruption and cyber resilience, as well as an increased supervisory interest in managing the potential impact of climate change and certain ageing populations.

Other challenges for firms in the upcoming year according to Deloitte include uncertainty and the potential for divergence from global regulations, the growing strategic and regulatory demands from technological disruption and e-commerce ventures into finance, and pressure with respect to data security, infrastructure, governance and transparency. The professional services firm further believes that culture and conduct will remain a priority, with industry codes and individual accountability high on the agenda.

While the report notes that the significance of its identified themes will vary from location to location and between different institutions and sectors, it contends that all of the areas highlighted will be of at least some relevance to financial service firms operating across the Asia Pacific, with the paper stating its intention to “rise above the noise and provide a framework for discussion.”Deloitte posits its regulatory outlook for APAC financial services in 2018Although the report suggests that minds will be firmly fixed on the future with the finalisation of Basel III (the strengthened international regulatory framework for banking), and an expected subsequent slow-down in international rule-making, it also draws attention to the long tail of implementation ahead, while further noting that activities such as the EU’s MiFID II (designed for greater market transparency and protection for investors) will still have an impact in the Asia Pacific due to the integrated nature of the financial system.

As for the regulatory future, and broader issues which gain traction by the day, the report looks at several specific areas surrounding innovation and digital disruption, including improving risk data capabilities, enhancing data protection, management, and transparency for clients, and developing greater cyber-security measures at both the organisational and systemic levels – the report noting concern expressed by regulators as to a 'cyber crisis in the system.'

Cybersecurity

Just recently, management consulting firm A.T. Kearney issued an impassioned plea for a more cohesive approach to cybersecurity in the ASEAN bloc, warning of the $750 billion threat posed without urgent and coordinated remedial action, while an earlier study from Oliver Wyman suggested that the Asia Pacific was a breeding ground for cybersecurity breaches, with the report stating; “Reasons for the relatively higher cyber threat potential in Asia Pacific (APAC) are twofold: the growing speed and scope of digital transformation, and the expanding sources of vulnerability stemming from increasing IoT connectivity.”

At the financial services industry (FSI) level, the Deloitte outlook notes the growing concern among regulators both globally and within APAC. “Regulators are increasingly thinking beyond cyber risk management within individual firms, with some voicing concerns about a cyber-crisis in the system… According to the Monetary Authority of Singapore’s Ravi Menon, ‘it is not inconceivable that the next financial crisis is triggered by a cyber-attack’, while former Australian Securities and Investment Chairman Greg Medcraft said cybercrime could be the next black swan event.”

Yet, as the ‘resilience of the system is only as good as its weakest link’ the report contends that the widening of the regulatory focus will not necessarily mean a lessening of the onus placed on individual firms. “An important element of systemic resilience is consistently strong and active cyber risk management on the part of all players within the ecosystem. Firms should expect regulators to continue their scrutiny of internal cyber security practices, but there will likely be more requests for data and information on cyber threats, as well as for participation in industry-wide simulation exercises and standards development.”

Technological disruption

In terms of innovation and technological disruption, the authors also zoom in on the problematic rise of ‘TechFins’ – those e-commerce and tech giants such as Amazon, Alibaba and Tencent which have strayed into the field of financial services – with concerns over the potential abuse of market power and when exactly they should fall within the remit of FSI regulation. As to this encroachment in relation to the existing industry, the report hints at an inevitable market evolution;

“With their rich data sets, strong brand recognition, customer trust and greater pull on talent, TechFins pose a much more real threat to established financial services firms than FinTech start-ups. Regulators appear supporters of TechFins entry into the financial services sector and are encouraging a merging of technology and finance. In this context, it will be tougher for firms to find a competitive advantage. A focus on customer care, tailored experiences, building tech skills, as well as developing partnerships for access to new data sets will be important.”

Looming issues

Finally, scanning the horizon, the Deloitte Financial Service Regulatory Outlook for 2018 foresees two looming issues which could attract increased regulatory attention; ageing populations and climate change, stating; “At first, these would not appear to be concerns with which financial services regulators have traditionally grappled, but they will, increasingly, be considered in supervisory approaches and work plans. Here, there are both risks to manage and opportunities to harness for firms.”

The figures tell the story; over 160 million people in Asia are expected to join its senior citizen ranks by 2027 – more than five times the number estimated for Europe and North America – and by 2042 the local over-65s population will exceed that of these other regions combined. The paper cautions; “Ageing populations create new risks and also new opportunities, and regulators will be thinking about both… Demographics could significantly impact the make-up, riskiness and ageing of portfolios (e.g. longevity risk for providers of defined benefit pension plans, ability of borrowers to service loans once they retire).”

The authors cite Australia, China, Singapore, Thailand, and Korea as having ageing demographics which could soon face the same issues as apparent in Japan, where the median age has now reached 47.1 and triggered a response from both government and industry as to the shifting landscape. Recently, global consulting firm Mercer, which holds over $200 billion in assets under management, acquired the Japanese asset management company BFC, with a specific eye for the firm’s alternative investment record for Japanese pension plan sponsors.

Climate change

As for the regulatory response to threats from climate change, the signs are encouraging from both a cultural perspective and the potentially consequent impact of shifting investments in terms of environmental redress, with regulators looking more closely at opportunities and risks; “On the ‘upside’, regulators are providing incentives for firms to pursue green financing, facilitating the development of green bonds, green assets and green products. On the ‘downside’ (the risks), regulators want to ensure firms are adequately disclosing their exposure to climate risk across their portfolios and also incorporating it into risk management frameworks.”

IPO capital market shift to China slower than expected against US growth

08 April 2019 Consultancy.asia

While the Chinese market is set to become increasingly popular for initial public offerings, new analysis from PwC shows that growth has been slower than expected with the US continuing to dominate.

The financial crisis saw financial markets come close to a complete collapse, with a credit crunch taking hold that derailed much of the coming years in terms of economic growth. The period following the crisis saw IPOs take a backburner. However, as company values increased, a relative boom in exits took place during the middle of the decade, which included a large number of companies going public.

Now, the coming decade is likely to see rapid growth in the developing world – bringing increased interest in the regions’ share-markets for new listings. Looking into the current and future landscape of the global capital markets, PwC’s latest ‘Capital Markets in 2030’ report takes in the views of 370 executives working at some of the world’s largest organisations and examines market developments since 2011.

Ten largest exchanges by market capitalisation for year 2018

 

The previous survey suggested that emerging market exchanges would rapidly outperform, and thereby displace, developed market exchanges. This prediction however has not come to pass. The further prediction that Chinese markets will be larger than US markets by market capitalisation by 2030 also now looks unlikely with developed market exchanges continuing to grow.

By-and-large, the world’s largest exchanges, the NYSE and NASDAQ, saw significant growth over the years since 2011. The NYSE nearly doubled in size, while the NASDAQ more than doubled. Meanwhile, emerging market exchanges have been relatively slow to grow, with Shanghai up around 50 percent of its 2011 market capitalisation and Hong Kong growing at a similar rate.

When comparing growth, the combined markets of the US – at $30.4 trillion – are now three times the size of their Chinese counterparts on a market capitalisation basis, up from 2.7 times greater in 2011. In terms of the value raised through IPOs on the respective markets since then, the US remains the leading contender, with almost half a trillion raised, while major Chinese markets saw around $300 billion raised.

Projected major regions for IPO issuers by 2030

 

The respondents were asked to predict which country would see the highest level of capital raising in 2030. China took the number one spot, attracting 55 percent of responses, followed by India at 45 percent and the US at 41 percent. This is well below the previous survey, where 80 percent said China would be the top issuer by 2025, with the downgrade in expectation reflecting the political and economic constraints of China and India.

With Singapore (12%), Indonesia (8%) and even Thailand (1%) attracting attention – as well as the ongoing presence of Japan and South Korea, the relative diminution of China since 2011 could also reflect increasing interest in the broader region, the report citing HKEX’s Head of Streagy James Fok; “We need to look at the development of the economies around Asia. There are significant opportunities for companies in the Southeast Asian time zone.”Markets beyond home exchange considered for IPO in 2030

Furthering the dip in Chinese market sentiment, the survey also found that respondents now think differently about future preferences for cross-border IPO exchanges. The NYSE took the number one spot, by a margin, at 37 percent, followed by the NASDAQ at 26 percent. London remains a strong contender in 2030, at 3rd equal with Hong Kong, both on 24 percent. India then comes in fifth followed by Shanghai, at 21 percent.

This collective response contrasts significantly with the previous survey, which showed China, India and Brazil were predicted to be the markets of choice for cross-border IPOs in the future – in the first, third and fourth spots in voting respectively. One reason given for the shift is that many companies have different avenues to raise their profiles in overseas markets, with local indices often preferred for better valuations.

“Although the growth of emerging market exchanges has been more subdued than anticipated in 2011, Chinese and Indian companies are still expected to dominate future new issues,” concludes PwC IPO Centre lead Ross Hunter. “While further progress in the key emerging market economies will support the growth of their exchanges, the pace of the shift in balance to these exchanges has perhaps moderated.”