Baker McKenzie’s Karen Man on the Smart Regulation Supporting Hong Kong’s Wealth Management Future

Karen Man has been enjoying a stellar career with global law firm Baker McKenzie, where she has been nearly all her working life since finishing her Economics and Law Degrees at Sydney University. She resides and works in her native Hong Kong, where she sits as Global Chair of Baker McKenzie’s Financial Services Regulatory practice and as a partner of the firm. She focuses her practice on financial services regulations in Greater China. Hubbis met her recently to tap into her expertise on the Greater China market allied with her deep global perspective and to understand why she believes that Hong Kong is well positioned to stay competitive in the modern world of wealth management.

Man opens the discussion by remarking that at this time of global crisis, now might be a good time to step back and reflect on the direction of businesses in the private banking and broader wealth management sector. “Hong Kong,” she reports, “has for example become a regional FinTech hub, home today to some interesting FinTech unicorns, and I believe Hong Kong is well placed from a regulatory and legal perspective, especially as many competitors and entrants are really thinking about moving service offerings online, for wealth managers and private banks alike.”

The FSR practice over which Man presides has an eminent reputation with regard to its advisory work on regulation, and with that background, Man takes the opportunity to focus on exactly why Hong Kong has such a robust regime and positive outlook. “The regulators here have been keen to facilitate the adaptation and evolution of the market with a greater FinTech environment, and have issued various guidelines, commenced initiatives and measures.  One such example is the sandbox initiative for intermediaries to try out new product and service offerings.”

Fast-forward to the future

She refers also to what she considers to be a prescient Hong Kong Monetary Authority (HKMA) initiative that ended last year with the granting of eight virtual banking licenses. She notes that the regulator is also supporting the exploration and implementation of open API programmes for banks, an effort which aligns neatly with the very established legal framework in Hong Kong that allows people to execute most contracts and account opening documents online.

“All these efforts, and the regulatory climate, make it much more attainable for wealth managers or private banks to start to think about offering their services online,” she comments. “We work with such clients to help them achieve a compliant customer journey through a "compliance by design" approach. This is particularly important for HNW clients, who very often demand a seamless omnichannel service offering, so regulatory adherence is vital for these digital solutions. This will be an area of considerable focus in the future.”

Foresight and optimism

Man is therefore optimistic about Hong Kong from the perspective of the foresight of the regulators. “We already have the virtual banks,” she notes, “and are really leading the way in Asia in that regard. We are behind Europe in the open API protocol, but with the open API programme coming along, there will be ample opportunities for new players to roll out their digital financial service offerings.”

She clarifies that the open API programme means that banks will face the challenge of giving control of the banking information about their clients to more industry players, but explains that the upside is consumers will be able to benefit from more competition in the market. Meanwhile, new entrants and the existing players who are not the incumbents, would be able to provide value-added services on top of the infrastructure built up by the incumbents. They can also benefit from the banking information data that consumers will then be able to take control of, and pass on to them, resulting very probably in improved services all round.

Overcoming legacy issues

Man takes a step back to comment on the issues surrounding the incumbent financial institutions, many of which have legacy systems and processing issues that must be overcome on the road to a greater digital proposition.

“We see different financial institutions taking different routes to create their FinTech offerings,” she observes, “some of them being very willing to partner with the FinTech players. Of course, they must assess cyber security risk, privacy and data protection issues etc., but assuming these risks can be managed, this avenue can result in greatly improved offerings. Others go the route of creating their digital or virtual banks outside the core, so they can compete with a clean slate to start their digital service offering. We gain good insights into this as we work with all types of financial institutions, the incumbents and the new arrivals, but at the end of the day, much is about refocusing the service offerings on what the customer wants, via connectivity with the customer and  a seamless customer experience with the use of technological advances.”

Oversight and responsibility

Man keeps the focus on the regulatory side by elaborating on the responsibilities of the top management in relation to technology and digital matters. “They must have oversight,” she explains, “and be able to explain to the regulators, if required, what solutions they offer and the implementation, monitoring, accuracy compared to planned outcome and so forth. There is a liability issue, but the regulators are not overly prescriptive as they know they must not impede innovation.”

She goes further than this, maintaining that she and colleagues remain optimistic about Hong Kong’s ability to compete in the future.

“The regulators might be conservative,” she comments, “but we consider them very clear in terms of the application and allowing for innovation where appropriate, and for people to tailor their business around a core principle framework. For family offices, for example, there is no specialised regime or license. They are subject to the same set of rules, the same very clear standards that apply to everybody, so they know precisely the compliance they will require if they set up here, and what specific licenses they will need. This type of consistency and baseline clarity are what the regulatory framework is built on here.”

Mission: protect investors

When challenged on whether the regulators are not sufficiently doctrinaire with regard, for example, to the licensing of multi- or single-family offices in Hong Kong, Man says the objective of the regulator is directed at investor protection. “Licensing goes to the root of investor protection - this is about ensuring that fit, proper and competent professionals are here to service investors. The laws are not therefore drafted to cater for, for example, family offices, as I mentioned, as those offices could fall within the overall regulatory guidelines and principles covering the entire financial sector in Hong Kong.”

She adds that for a single family office, it is often the decision of an investor to directly hire its own employees to look after its own wealth. “As a matter of regulatory rationale, such investors know precisely what they are doing, so clearly they do not need to have a license to manage their own money, any more than any other investor does to make their own decisions.

In the multiple family office scenario, where there are investment and other professionals who are expert in managing people’s wealth, they are subject to exactly the same regulatory situation as any other wealth manager. “You can call yourself an MFO, or an independent wealth manager, an external investment advisor, but they are all within the same regulatory net,” she reports.

Scrutiny of the individuals

Man notes that the regulators also carefully review individuals before granting licenses of any kind. “The greatest scrutiny, of course, is for the senior management, the accountable decision makers. The regulators are also mindful of helping the industry expand and not to bar people from entry to this sector, so at the entry level, the industry is filled with people with sufficient academic qualifications. The senior management team will naturally be subject to closer vetting.  The qualifications criteria for senior management are transparent, thereby creating a clear picture in terms of ensuring that the entire infrastructure works, and the entire corporate governance protocol is fit for purpose.”

Discretion at the core

She adds that she also values the discretionary element of the approach of the regulators. “They consider this far more than a box-ticking exercise,” she states, “they apply a lot of discretion and qualitative assessments, particularly with regard to previous experience.”

Man offers more insight into the manager-in-charge (MIC) regime that the regulators introduced in 2017 [see also box below on Individual Accountability Regimes].

“Hong Kong has numerous local, regional and global financial firms,” she comments, “and the MIC regime has been remarkably useful in helping them all regarding whether or not the local team or the managers are empowered sufficiently to oversee their business, and also whether or not they have the correct management team from a group wide perspective to be responsible.”

Hong Kong outlook: fine

Man’s closing comment is that Hong Kong is actually in rather a good place. “On top of all the rules and the guidance,” she comments, “the regulators here have also been very proactive in thematic inspections, their oversight, and that includes all sizes of financial institutions and related operators. These also help the firms, as they then offer feedback on exactly what the firms and the industry can do to improve. Perhaps there is a danger this might become too prescriptive, but our view is that they are moving in the right direction at the right pace.”

Karen Man’s Key Priorities

Looking past the current global Covid-19 crisis to times beyond, Man has three core priorities. The first is to keep pace with and therefore service clients in relation to the numerous FinTech developments in the financial services space. “There is a saying in our business that innovation precedes regulation, so as regulatory lawyers we are really trying to keep up with our clients. For example, we need to learn about blockchain, smart contracts and everything relating to all that.”

Her second priority is to boost the cross-border proposition of the firm. “As and when FinTech develops, there is a far greater need for regulatory solutions across borders. We have the footprint to provide clients with an efficient service, leveraging our international office network.”

And the third priority is connectivity between different practice areas of the firm. “We need to think about connectivity, connecting data, connecting experience, connecting everything in the ecosystem and the financial industry, as this all gives rise to numerous challenging and interesting issues for us.”

Baker McKenzie: Global, Regional and Local Financial Services Regulatory Expertise

Baker McKenzie is one of the world’s leading law firms, with revenues of more than USD2.92 billion in the year to 30 June 2019. In its literature, Baker McKenzie (BM) states that it is the most geographically diverse global law firm and all of its regions recorded growth in that fiscal year.

BM’s global Financial Services Regulatory (FSR) practice offers a true multi-disciplinary financial services practice with deep regulatory and industry expertise, according to the company’s literature.

The stated mission is to help financial institutions navigate through regulatory complexities in all areas including banking, stored value facilities, securities, asset management, insurance, FX, money service operators, money lenders, trustee services and so forth. Particularly, given the convergence of multi-financial service offerings by financial institutions in this new era, BM states that its global team is uniquely placed to advise clients on regulatory issues arising from all types of novel and complex product and service offerings, the firm reports.

As a truly international law practice, BM has over 40 years' experience in advising on doing business across the Greater China region. With nearly 300 lawyers based in Hong Kong, Shanghai and Beijing, the firm says it brings an in-depth understanding of the region's cultural, political and legal conditions.

Karen Man sits in Hong Kong as Global Chair of Baker McKenzie’s FSR practice and is a partner of the firm. She focuses her practice in Greater China on financial services regulations, mergers and acquisitions, and general corporate matters, and with a truly global perspective and connectivity. 

She leads the non-contentious Financial Services Regulatory (FSR) practice, and her clientele includes global, Chinese and local banks, fund managers, brokers/dealers, money service operators and FinTech firms. She and her team regularly advise these financial institutions on a variety of regulatory, compliance and anti-money laundering matters, including establishment, structuring and operation of various financial services businesses (including private banking, wealth management, brokerage, fund management, foreign exchange), structuring of cross-border operations, development of new product /service offerings, licensing and regulatory inspections by the Securities and Futures Commission and the Hong Kong Monetary Authority, as well as providing advice on financial services M&As and business integration.

“Our lawyers also have long-standing relationships with financial services regulators in Hong Kong,” she reports, “as well of course as other relevant regulators across the world’s leading financial centres. We understand their policies and practices and are therefore able to provide practical and solution-oriented legal advice to our clients efficiently and cost-effectively in a compliant manner.”

“From set-up and structuring, new business and product offerings, operational support as well as representation in non-contentious and contentious matters,” she elucidates, “we apply our industry knowledge and regulatory expertise to deliver result-oriented and compliant solutions for all types of financial institutions including banks, insurance companies, payments companies, securities firms and asset managers. And our team of full time bilingual financial services regulatory lawyers, which includes ex-regulators, distinguishes ourselves from our competitors.

BM advises on a wide range of transactional, advisory, contentious and non-contentious matters involving financial intermediaries, financial products and financial services business generally. These mandates include the structuring and setting up, or expansion of, securities, futures, investment funds, asset management, banking, private banking, and insurance business and operations in Hong Kong and China, as well as advising on regulatory and compliance issues arising from the operation of the financial services business.

BM also advises on the structuring and offering of investment products and services, including wealth management products and services, funds, and other regulated and non-regulated investment products. The firm offers advice on regulatory visits, inspections and even investigations by the securities, banking, insurance and other regulatory authorities. And BM provides guidance on mergers, acquisitions, restructurings, and the related regulatory issues involving funds, securities, banking and insurance businesses. And of course, the firm represents financial intermediaries in litigation and other dispute resolution proceedings.

The firm works on numerous assignments, but to highlight only a few from Greater China in the recent past, FSR has advised Tencent Holdings Limited on the successful application for the virtual banking licence.

Man’s team has advised many financial institutions and FinTech start-ups on regulatory issues relating to their FinTech initiatives, including non-face-to-face loan applications, non-face-to-face account opening procedures, P2P platforms, cloud storage, robo advice etc.

And of course, there are plentiful other notches on the FSR holster to proclaim the firm’s pedigree to actual and would-be clients, many of which are directly in wealth management. For example, Man’s team has advised a large-US based fund house on the establishment of fund marketing and management presence in Hong Kong, as well as advising various banks on structuring their cross-border private banking offerings in Hong Kong.

Individual Accountability Regimes – Driving Improvements in Culture
Baker McKenzie strives to be at the cutting edge of advice on and implementation of actions taken across international financial centres to improve industry standards. The implementation of enhanced individual accountability regimes is core to this effort.

In 2017, the Hong Kong Monetary Authority (HKMA) began a Bank Culture Reform program by promoting a framework to foster a sound culture within banks.

“While acknowledging there is no one-size-fits-all approach,” Man explains, “this gives particular importance to three pillars, which are governance, incentive systems, and an assessment and feedback mechanism. It has seen banks being required to review and report on their governance arrangements, including policies and procedures, on corporate culture and to take steps to foster a sound bank culture.”

More recent supervisory measures required banks to undertake self-assessments – a questionnaire template has also been issued – and to see HKMA supervisors to conduct focus reviews to assess and benchmark a bank’s practices on culture, together with gathering insights during the course of ‘culture dialogues’ with senior management.

Highly relevant to governance arrangements, the Manager-In-Charge (MIC) regime has been in place since October 2017. The regime captures approximately 10,000 senior individuals responsible for managing core functions within financial services businesses supervised by the Securities and Futures Commission. Similarly, the HKMA followed suit in March 2018, launching its Management Accountability Initiative (MAI).

“The regimes seek to better bring home regulatory expectations and make management more conscious of their individual accountability,” Man reports. “In this regard, both look to identify those individuals responsible for defined functions, such as key business lines, risk management and money laundering, and as in the UK, firms must have governance maps showing the management structure, roles, responsibilities and reporting lines. All of these are helpful for regulators looking to apportion liability after a firm’s regulatory contravention.”

Getting Personal with Baker McKenzie’s Karen Man

Born in Hong Kong, her family then migrated to Australia and she later returned home after she had completed her high school and university studies there. She studied Economics and Law at Sydney University, after which she joined Baker McKenzie, where she has forged a remarkably successful career to date since her early work as a corporate lawyer, before moving to the regulatory side when it became more mainstream.

Married with three children aged 16, 14 and eight years old, the whole family is in Hong Kong and thoroughly enjoying life there, at least before the social unrest hit and then the virus later struck.

Leisure time might be spent exercising and practising yoga or enjoying a family trip to the movies. She also enjoys hiking in vicinities close by, and ski trips when time permits.