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Western-led G20 reform agenda called into question by recovering Asian economies

HONG KONG – 13 October 2009 - Signs of recovery in Asian economies could slow the momentum of the G20 regulatory reform agenda as Asian markets start to question the Western focus on what are seen in Asia as sideshows to the underlying issues presently facing the global economy, according to a survey published by Allen & Overy and Complinet, a leading provider of risk and compliance solutions to the financial services community, today.

Alan Ewins, Head of Financial Services in Asia who led the survey, commented: "It has been widely acknowledged that Asia was caught up in a crisis not of its own making — a fact that has led some observers to argue that these reforms are not entirely relevant in the region. This is compounded by the fact that the US and European focus is on prudential problems, while Asia’s primary concerns have tended towards "conduct of business" issues. Regardless of the merits of these views, the ripple effect from the international reforms will flow through the Asian region, even more so now that Singapore has been brought to the G20 table. The message from our survey respondents is that change is coming, and Asian countries need to be ready to contribute to the discussion and respond accordingly."

The survey consisted 54 interviews with senior legal, compliance and business executives, representing most of the major financial institutions that operate in Asia. Overall, respondents said that while Asia had responded well to the financial crisis and is well placed in relation to a global recovery, regional regulators are still more likely to react to reforms initiated in the West than stake out their own course. They also expect compliance costs to increase with the expansion of staff and systems in response to new regulatory developments. Here is a summary of the key findings:

On regulatory structure

1. 61 percent of respondents felt that there was a need for a consolidation or restructuring of the regulatory authorities in their home-state jurisdictions. Respondents from Hong Kong were the most in favour of a regulatory reshuffle where respondents in Singapore felt there was little need for an overhaul of the regulatory structure.

On dealing with the global financial crisis

1. 52 percent agreed that some constructive steps had been taken, and there was uncertainty over whether they were sufficient to avoid a repeat of the crisis.
2. 79 percent said the G20 had been an important driver for tackling regulatory reform on a global basis, but there were concerns that the G20 would have trouble maintaining the momentum for change over the coming year, especially in a rebounding market like Asia.

On regulation of structured products

1. 69 per cent of respondents saw a clear need for tighter regulation of sales of structured products to the retail sector, especially in areas surrounding disclosure and suitability.
2. Others pointed to a lack of adequate product knowledge among sales staff, and highlighted the need for a clearer separation of banks’ deposit-taking and investment services operations.

On insolvency issues

1. 75 percent respondents supported a cross-border insolvency regime, although there were mixed views about governments being able to cut through established legal principles.
2. A majority of respondents said governments and regulators should step in to rescue systemically important institutions — in order to avoid a "domino effect" — but institutions with low systemic risk should be allowed to collapse.

On regulatory pressure

1. 71 percent were content with the level of regulation in their home-state jurisdiction, but they expected a raft of new rules and regulations to be implemented in coming years.
2. A strong majority of respondents predicted Asia is under increasing international pressure to loosen bank secrecy laws, and will have to cooperate more with Western counterparts on tax evasion issues.

On cost of compliance

1. 87 percent of respondents said they expect compliance costs to increase over the next 12 to 18 months, on staff and systems needing to be expanded in response to new regulatory developments.
2. Compliance was one of the most resilient areas of the financial services industry in terms of job security during the financial crisis, with most firms being reluctant to lay off compliance personnel for fear of increased regulatory scrutiny.
3. Salaries for senior compliance officers are increasing in Asia due to an under-supply of locally based professionals with sufficient industry experience.

For further information, please contact Alan Ewins, alan.ewins@allenovery.com, on +852 2971 7151, Sharon Fung, sharon.fung@allenovery.com, on +852 2974 7091 or Nathan Lynch, nathan.lynch@complinet.com, on +61 (0)2 9994 8099.

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