A senior Asia-based figure at Mercer, a consultancy, reflects on how fintech is both helping solve compliance challenges and creating new ones.

Crowdfunding and other new channels of financing are in part being driven by regulatory costs that have hit more traditional models, but also are creating new compliance challenges themselves.

That is the view of Steven Seow, head of wealth management, Asia, investments, at Mercer (Singapore). Compliance needs are both a driver of fintech and other forms of financial innovation, and new laws are likely to come into being because of some of these new business arrivals, he told this publication in a recent interview.

“Crowdfunding clearly presents new challenges for the regulator,” Seow said, referring to one form of the “alternative investment” market that has taken wing in recent years in Europe, North America and, to some extent, Asia. He also touched on areas such as peer-to-peer lending.

Seow is generally an enthusiast for a lot of this innovation, seeing the entrepreneurial vigour it represents as precisely what economies require and as helping to deal with some of the regulatory and structural changes brought about since the global financial crisis erupted.

As capital rules have tightened, squeezing traditional bank lending, this has opened gaps that alternatives, such as funds, peer-to-peer platforms, crowdfunders and other entities, have sought to fill. Separately, a flood of regulatory requirements on wealth advisors in Asia, Europe and the Americas, such as limits or bans on sales commissions for advisors, has prompted banks to lift minimum asset requirements for clients, creating the “orphan” client. Those castaways are now being courted by “robos” and other fintech firms claiming they can do the job more cheaply. These are exciting if bewildering times.

Although a hotspot in many ways for fintech, Asia is, to some degree, some way behind Europe and the US in terms of crowdfunding, according to Seow. In Singapore, the regulatory landscape is, however, in flux. The city-state is something of a global leader in some areas of fintech. (It was perhaps an indication of this that Credit Suisse, when it rolled out its mobile private banking offering a year ago, chose Singapore for the launch venue.) However, explicit Singapore regulation on crowdfunding has not taken final shape, while regulation of peer-to-peer lending appears, as far as this publication can find, to be subsumed under general provisions about the responsibilities for holders of deposits. A similar situation appears to be the case for peer-to-peer and crowdfunding in Hong Kong, although the picture is evolving rapidly.

There is plenty to suggest that the two major wealth hubs of Asia are getting into the fintech and alternative finance game as fast as they prudently can, while regulators strike notes of caution too. The Monetary Authority of Singapore, the regulator and central bank, is sponsoring a week-long fintech festival in November. In February last year the MAS published a consultation paper setting out proposals and clarifications to encourage securities-based crowdfunding. Proposals include lifting some financial requirements on intermediaries involved in securities-based crowdfunding (SCF); the regulator also warned, however, that there are “considerable risks” to investors in this area. As for Hong Kong, the central bank there has issued proposals and documents about crowdfunding and peer-to-peer, but not yet adopted sweeping regulatory measures.

In a recent speech, Norman Chan, chief executive of the Hong Kong Monetary Authority, said his organisation adopts a “risk-based and technology-neutral” approach to oversight of this sector. The HKMA has created a body with the tongue-twisting name of the “Fintech Facilitation Office” to help guide and drive development in this space. Chan warned that his organisation must prepare for “worst-case” situations, citing mainland China’s recent saga of online finance Ezubao, which was was seized by the authorities after it was found that 95 per cent of the projects financed through the company were scams.

Robots and humans
Seow also spoke about how some Asia-based clients are looking at the world of robo-advisors, perhaps the fintech animal that is causing most of the stir in wealth management at present.

“A lot of people are of the view that these types of advisors are relevant to the mass affluent...with high net worth individuals, they are resistant to dealing with `robo advisors’,” he said.

One point he has been reminded of by firms, he said, is that in difficult market conditions, there remains a desire among clients for private bankers to “hold their hands”.

On this point, MyPrivateBanking Research recently noted in a report in February the likely growth of a hybrid robo/personal contact service. In this model, automated processes deliver many wealth management functions for a client but the role of a human advisor is not removed. The study expects that these hybrids will grow by size to $3.7 trillion of assets globally by 2020. The total market size for robos will stand at $16.3 trillion by 2025 and that number will be 10 per cent of total investable wealth around the world by that date, it predicts. In contrast, “pure” robo advisors – where no human advisors are involved – are predicted to hold only 1.6 per cent of total global wealth by the middle of the next decade.

Seow argued that there is plenty of Asian interest in robos such as UK-based firm Nutmeg. The Asian market is hotting up for robos: in September last year, a fintech firm called Infinity Partners said it was launching Smartly, a robo-advisor based in Singapore. Japanese firm 8 Securities has launched a robo advisor, serving Japan, Hong Kong and other places.

“There is a quite significant rise in the number of firms bringing out robo-advisors,” Seow said. If private banks co-operate and work with fintechs, this could increase bankers’ productivity and ability to help clients, he added.

Seow also noted how banks have been more visibly recruiting people from the tech world to speed up their fintech prowess.

One example is Credit Suisse, which recruited former PayPal senior figure Holger Spielberg to be its innovation boss. And of course PayPal is arguably one of the biggest, most important fintechs of them all.

In the case of Emirates NBD, its recently-appointed chief executive, Shayne Nelson, has said “complacent” banks have themselves to blame for the disruption caused by fintech. Nelson's comments are bolstered by some industry-wide research. According to McKinsey & Company, in its annual review of banking, lenders could lose up to 60 per cent of their retail profits to fintechs.

Separately, it seems all the rage for banks such as Citigroup, Deutsche Bank and Commonwealth Bank - to name just three - to create their own innovation labs or support such facilities. Public authorities such as MAS in Singapore, and the city-state’s business schools and its universities, see digital innovation as business priorities. Keeping abreast of all this work will be a challenge.

So, as Seow says, while fintech has helped wealth managers overcome some of the more expensive compliance challenges of recent years, it is going to give regulators and firms alike a new list of issues to think about.