Asian Regulation in the Year of the Tiger: Pussy-Cat or Man-Eater?

By Alan Ewins, Partner, Allen & Overy, and head of Allen & Overy's Asian Financial Services Group (02/03/2010)

After a traumatic year or so in the global financial markets, there now appears to be general agreement that the market turmoil is essentially over. How has the financial crisis and its aftermath manifested itself in Asia, and how will the regulatory landscape change going forward, now that we are approaching the Chinese Year of the Tiger? Will the markets be mauled by excessive regulation?

It is clear that a fine balance needs to be reached among various competing pressures and political wishes in the region in terms of market reform of regulations. The various political obligations created by the G20 and the Financial Stability Board processes, and the increased prominence of IOSCO, have worked their way into Asia by various means. There is an underlying fear of protectionism and regulatory arbitrage across the Asian markets, given the need for Asian jurisdictions to maintain their competiveness on the world financial stage.

Overlaying all of this are two additional considerations, both major: firstly, the need to recognise that for the most part the fall-out from the market crisis related to different areas of concern – in the ‘Western’ jurisdictions (principally the United States and Europe, particularly the United Kingdom), the greatest pain arose from prudential issues relating to capital and liquidity and the systemic issues created by a range of factors. The international response has been highly focused on this: pro-cyclicality, capital reform (more changes to Basel), accounting and the identification of villains of the piece along the lines of Christmas pantomime rascals.

In contrast, the main issues in Asia have related to the mis-selling of products to retail customers. The market turmoil meant large numbers of investors losing money on a range of financial products. For example, in Hong Kong, there were massive public protests in the wake of the Lehman debacle, culminating in the settlement reached with the distributors to compensate large numbers of the affected investors (even that settlement is currently subject to challenge, by way of judicial review in the Hong Kong courts, showing the depths of feeling generated by the crisis).

Accordingly, conduct of business issues, as opposed to prudential issues, has been at the forefront of the debate across Asia, and the differences in the nature of the two issues cannot be ignored in relation to the responses.

Second, there is a perceived need to ‘seize the moment’ in relation to making changes to the regulation of markets to head off as far as possible similar calamities in the future. How does that stand in relation to not hampering the economic position of the various jurisdictions? There is a degree of regulatory cat-and-mouse which can be discerned in the ways that various of the Asian regulatory regimes have started to address the bigger picture issues in play internationally.

Hong Kong

Hong Kong is a case in point.

At the end of 2008, the main regulators – the Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA) – produced reports to the Hong Kong Financial Secretary which were designed to provide insights into the Lehman minibonds case and how the regulatory regime could address the issues raised by it. No mention was made of capital requirements or other prudential issues, for that was not what they intended to address: the Lehman mis-selling aspects were centred in the regulators' radar screen.

Since then, following a ‘soft’ consultation process with certain industry participants, a full-scale, multi-pronged consultation programme has emerged which is intended to  address issues in relation to sales of structured products (such as minibonds) in Hong Kong. There are, coupled with potential regulatory changes, potential changes to the legislation as well as the relevant codes and guidance. The investor protection regime is also set to be enhanced by the mooted introduction of an Investor Education Council and a fully-fledged Financial Ombudsman scheme, intended to provide a swifter and cheaper means of redress for investors along the lines of a number of other jurisdictions.

The HKMA has been consulting in relation to the risk management aspects of the remuneration policies of banks (the first Asian jurisdiction to tackle this issue full-on).

A significantly tougher stance on market misconduct, including insider dealing, has led to a raft of convictions over the past year or so, including the recent convictions in the Asia Standard Hotel Group case (the largest market manipulation case in Hong Kong judicial history). When combined with the anti-money laundering consultation exercise just completed to meet Financial Action Task Force requirements, it seems clear not only that Hong Kong is taking firm steps to deal with its own perceived regulatory issues, but it is also striving to meet its international obligations with an eye to future conditions on the international regulatory landscape.

What of elsewhere in the region? Set out below are views on other major financial centres in Asia and how they have reacted to the crisis.


Singapore took a fairly similar approach towards the crisis as Hong Kong, having had its own significant share of minibonds problems. Its moves toward market reform in relation to structured products have mirrored Hong Kong’s developments in many respects, covering such things as product summaries and cooling off periods.

The enforcement approaches in the two jurisdictions as regards arriving at a resolution of the minibonds problems have, however, differed markedly. Hong Kong procured monetary settlements from distributors while investors were required essentially to ring-fence the problem, cauterise the wound and move on; the Monetary Authority of Singapore (MAS) took a different path, disciplining the distributors for their failings and leaving it to investors to seek their own redress.

Not surprisingly, the MAS has also issued guidelines in relation to fair outcomes for investors (mirroring, for example, the Financial Services Authority developments in the UK), together with enhanced licensing and notification changes designed to improve investor protection.

It is worthy of note, again by way of resonance with Hong Kong, that Singapore has recently commented on the bankers' pay debate essentially by rolling its response into the incoming corporate governance measures to be adopted early this year in Singapore. The issue has been marked on the MAS ‘to do’ list, but without having gone through a public consultation process as such.


China appears likely to forge its own path in terms of regulation, given its strengthening role in the international economy and the correspondingly weakened influence of Western regulators following the global financial crisis. According to the preliminary version of the OECD Regulatory Reform Review for China, (‘Defining the Boundary between the Market and the State’), “China’s regulatory reform has made impressive progress over the past decade and is gaining momentum. Much remains to be done, but a very good foundation has been laid”. Most commentators would tend to agree with this.

On one hand, there have been increased requirements for liquidity and credit control stress-tests for banks, derivatives documentation advances and other developments. (Interestingly, Chinese banking regulators have issued statements essentially requiring PRC banks to ‘top up’ their capital adequacy positions to cater for the increased lending and asset quality issues that have cropped up in recent months in the context of the market turmoil.) On the other hand, there is an element of ‘watch this space’ as regards disputes arising between Western financial institutions and domestic State-Owned Enterprises (SOEs) from loss-making derivatives contracts. The degree to which SOEs ultimately keep to the terms of their transactions, or otherwise reach an appropriate accommodation with their counterparties, will have implications going forward for business in the PRC. The recent accommodation reached between disputing parties has been given a guarded welcome.

A further point to bear in mind is the interaction between the Chinese and Hong Kong regulators in relation to information sharing, which has become a feature of regulatory developments in the two jurisdictions, and demonstrates the ability of regimes to pool ideas for the sake of broader cooperation.




Korea is one of the other major Asian jurisdictions which has proven to be hungry for further international recognition of its efforts to modernise its regulatory system. Early in 2009, Korea adopted a raft of financial market reforms, including a desire to liberalise the offering of financial products in Korea by broadening the range of those instruments allowed to be offered. Previously, only those products which were specifically permitted to be sold in Korea were catered for by the regime, whereas under the reforms there was the ability to move into other product areas so long as not expressly prohibited. This is a much more flexible approach for market participants, and was widely welcomed. It was unfortunate that the reforms, contemplated for some time, were implemented at such an inauspicious stage of the economic cycle. On a cautionary note, there have been rumblings internationally, including in Australia, as regards the attractiveness of expressly curbing the distribution of some types of product to certain types of investors (for example, highly complicated products to retail). As can be seen from this, there is never a single way forward on any of these issues, which can come down very much to timing as much as anything.

Ironically in the context of the planned enhanced role of Korea in the Asian markets, the controversy surrounding the issues created under the KIKO litigation (which related to instruments that took a view on the movement of the value of the Won, and which resulted in fiercely fought mis-selling cases in the jurisdiction) did not help the Korean cause.


Japan has previously indicated that it has, in general, no objection to any statement issued in the G20 process. The Minister of the Financial Services Agency, Mr Kamei, said that any capital-related issues under the Basel Accord, which is a central plank of the G20 reforms, should be applied to those Japanese ‘Mega’ banks that are carrying on international activities and not to the domestic banking market. The domestic banks are already catered for to some extent under Japanese regulations, but it is clear that this split will exercise the Japanese regulators going forward.

One of the more interesting aspects of responses to the crisis was the de-construction of ‘firewall’ regulations, allowing banking and securities groups to provide more homogenised services to clients. This was instigated with a view to increasing Japan’s competitiveness as an international financial market. However, it came at a time when much has been made, during the course of the development of international thinking on market reforms, of the need for greater differentiation during the product-selling process of ‘classic’ banking (i.e. deposits and vanilla deposit products) from so-called ‘casino’ banking (i.e. more exotic products). For example, Hong Kong and Singapore have made express stipulations as regards the need to ensure clear water between the sales of banking and investment products. However, there is a desire in various quarters in the market reform debate to ‘simplify’ financial conglomerates, so-called ‘living wills’ being a case in point – the need to plan for an orderly wind-down of a troubled bank and, as part of that, the concept of putting arrangements in place to streamline the structure of complex banks. In the US, this manifested itself, for example, through plans in proposed reform legislation to allow regulators essentially to break up complex banks (even when they are healthy) where it is considered that the institution may pose a risk to systemic stability. That in itself could have practical knock-on effects for Asian branches and subsidiaries as and when there is any such ‘streamlining’ of operations. These types of issue demonstrate the challenges of reaching broad consensus and implementation of reforms at an international level.


Arguably, Indonesia's response to the market turmoil has been somewhat protectionist, given the introduction of requirements for the use of the Indonesian language in ‘commercial’ documentation. Insofar as international documentation has been impacted by this type of measure, there was a clear risk of sending an unfortunate message to market participants. On a separate note, there are various derivatives cases currently on foot relating to suitability and mis-selling which tie into these general concerns.


Developments in India have not tended to align with mainstream regulatory reform, but as and when they do begin to focus on this area, the implications for Asia, and indeed  for international markets as a whole, are enormous.

Taiwan has been in a similar position to Korea in relation to derivatives contracts entered into by foreign institutions with Taiwanese entities.

Thailand is considering its options in relation to launching its own ‘Big Bang’, which would be designed to advance its interests as an international financial centre, but this seems to be in its early stages. In August of last year, the Bank of Thailand did implement some relaxations of the rules for investment in foreign securities and derivatives by permitting certain types of institutional investors (including Thai securities companies) to invest directly in foreign securities, allowing onshore banks to enter into certain derivative contracts and relaxing some of the restrictions on Thai residents entering into currency derivatives. However, it is fair to say from a more international perspective that Thailand’s involvement at the head of ASEAN in the G20 process has arguably been more in the context of the bigger picture International Monetary Fund and World Bank reforms.

A Thought for the incoming Year of the Tiger

It is clear from the above that we have reached a turning point in the development of the international markets. There is a struggle in Asia between the creation of internationally coherent markets and, in some places more than others, the protection of the home patch. Developments in Asia needs to be viewed in that light.

The fragmented nature of the Asian regulatory landscape is likely to remain the rule rather than the exception. Domestic regulatory issues, albeit in the context of the international reforms, are likely to continue to be key, with the promise of significant waves of regulatory change in that landscape.

It remains to be seen whether the problems in the international markets can be tamed by regulatory reform in the Year of the Tiger, or whether they will bite back.