When Ashley Ian Alder steps down as CEO of Hong Kong Securities and Futures Commission this November, he will depart with the regulator’s international reputation in sound condition – but with many people in the city’s fintech community concerned that his conservative approach has hobbled the city’s innovative edge.
Alder has served as SFC’s chief executive since October 1, 2011. He has consistently viewed his role as supervision and enforcement and has not verbalized a role for market development or advocacy.
He has fought and sometimes lost battles to maintain his view of what traditional investor protections require. Like all captains of conservatism, he has had to try to uphold standards amid technology-driven changes that constantly threaten to capsize the ship.
Not “fintech forward”
Alder has overseen several major initiatives in response to those changes. These include the introduction of licensing for virtual-asset businesses, opening a “fintech facilitation office”, promulgating rules for wealth managers to onboard clients digitally, and advancing enforcement of data protection.
These measures are, however, seen by many in Hong Kong’s fintech industry as efforts to mitigate the impact of technology on business models, rather than to encourage them.
“What he’s done for fintech has not been fintech-forward,” says one head of an industry association.
DigFin spoke with lawyers, associations, consultants, compliance heads, and others familiar with the inner workings of the SFC. They share the view that Alder is regarded as a bulwark of high standards, which in many respects is laudable but may have been too strict regarding innovation. The SFC did not respond to DigFin’s request to speak with Alder about his legacy.
The inheritance
To appreciate Alder’s tenure, it’s useful to understand what he inherited.
He is only the second CEO at SFC, the post being created for his predecessor, Martin Wheatley, as a governance move to separate the executive from the board of directors. (The board is today chaired by Tim Lui Tim-leung, a grandee involved with committees at the Hong Kong Monetary Authority, Hong Kong Exchanges and Clearing, and various associations and academies.)
Wheatley’s term was defined by the 2008 global financial crisis, when retail investors faced losses in so-called mini-bonds, structured products issued by Lehman Brothers. The bank’s collapse led to months of street protests that included burning Wheatley in effigy. The SFC arm-twisted 20 banks and brokers to refund the investors on the grounds of mis-selling.
This searing experience led to new rules for intermediaries selling investment products to retail investors that are among the most onerous in the world.
When Alder joined as CEO after a highly regarded term as Herbert Smith’s head of Asia, his mandate seemed clear: set and enforce market regulations; license and supervise the brokers, advisors, and fund managers; authorize the offering documents of investment products for retail investors – and don’t ever let there be another mis-selling blowup.
Fighting for investors
Alder’s conservative instincts (or mandate) may have been entrenched after he lost a battle to rein in the power of the Hong Kong Exchange’s listing committee. Many fund managers and corporate-governance advocates were eager to see the SFC dilute the ability of HKEX to set the rules for IPOs. The HKEX – itself a listed, for-profit entity – was considered all too willing to let lower quality companies go public. But in 2017 the SFC’s attempt was watered down to a consultative role.
The SFC also fought rearguard actions against HKEX’s tradition of one-vote, one-share structures – and lost, as HKEX eventually won the ability to allow dual-class share structures and SPACs, two frameworks that heavily favor founders and insiders, not to mention the investment banks that underwrite and trade these securities.
So here we have Alder fighting to for principles that are meant to defend investors, both institutional and retail, and by the time he may have come up for air, fintech was threatening to write entirely new rules of the game. He was not likely to be inclined to experiment. His priority was to hold the line for investors, and ensure Hong Kong maintained its gold-star reputation for securities regulation.
Indeed, Alder has probably governed the SFC with a deliberate eye on international opinion more than his predecessors. He was also chairman of IOSCO, the International Organization of Securities Commissions. IOSCO put him in the center of conversation among his peers and gave him a global perspective as pressing issues emerged.
A lawyer told DigFin this experience influenced Alder’s view on tech-related matters, especially crypto: “If you’re in the Hong Kong goldfish bowl, the SFC looks to slow, and too restrictive. But if you’re in the European Union, Hong Kong looks pretty good – a well-regulated and supervised market that has taken the lead on virtual assets.”
By and large, Alder has achieved this primary goal. There have been no scandals such as Singapore’s taking its eye off the ball of its commodity trading companies or platform-related scandals such the UK’s Greensill case.
Crowdfunding and fintech
Let’s look then at the major technology-related issues that Alder’s SFC grappled with. Although virtual assets are where he made his most visible mark, his approach to innovation is grounded in earlier brushes with fintech.
Alder is said to have regarded many fintech-related issues as insignificant and did not put resources to create new frameworks or advocate for legislative changes. Crowdfunding and peer-to-peer markets, for example, would remain limited to professional investors (those with about $1 million or more of liquid assets) – which seems antithetical to the purpose of crowdfunding.
He opened a fintech facilitation office, meant to serve as a place for fintech companies to explain what they were trying to achieve, and hopefully win acceptance into the SFC’s regulatory sandbox or at least get some clarity as to what the SFC thought of their business ideas.
Several people told DigFin the office didn’t lead to new approaches by the SFC. “He has no interest in innovation,” one person familiar with Alder said.
Another person, running compliance at a global bank, said, “There were a lot of speeches about the fintech office, but the practical actions and implementation didn’t match.”
Digital wealth management
Crowdfunding may have been small beer, but the emergence of digital client onboarding for wealth managers gets to the heart of Hong Kong as a financial hub.
The industry manages $4.5 trillion of assets, making private wealth a huge driver of growth. The fast rise of private wealth has also meant intermediaries such as private banks are racing to onboard clients as smoothly as possible. This is always difficult for wealthy, complex customers, so banks have invested in digital methods, both for operational efficiency as well as to please their customers, even at the ultra-high-net-worth level.
But they ran smack into the relics of the mini-bond fiasco of 2008. SFC regulations require all clients to go through a laborious process, both to get onboarded, and to approve what products they can buy. In regulator-speak this is called product suitability, and it requires a face-to-face interview to ascertain that a client is suited to the risks of a given product.
The SFC makes no distinction between the customer of a consumer bank versus a private bank. Before banks went digital, it didn’t seem to matter, but the advent of remote onboarding and execution has made the difference stark.
“Even if the client requests a product, an intermediary can’t offer it until the product is deemed suitable,” says an industry executive. The nature of online onboarding makes it difficult or impossible for banks to take their clients through the suitability process virtually. “It’s a nightmare for many intermediaries.”
Wealth AUM in play
COVID has made the situation worse, and private banks are keen to see the SFC allow some differentiation between retail and professional investors.
The compliance head adds: “Complex-product rules represent the traditional way of doing things. The SFC says it is looking at fintech adoption but it’s still using the old mindset.”
This contrasts with Singapore, which allows banks to treat rich clients differently to retail, exempting them from the more burdensome requirements – which Hong Kong industry executives fear is luring away business.
“Hong Kong wants to promote itself as the leading wealth-management center for Asia but are we really competitive?” wonders the compliance head. The problem is not just that rival centers may have more attractive regulations: it’s that onerous compliance in Hong Kong diverts attention and resources. “People at my firm aren’t focused on innovation because they don’t have free hands to do tech stuff.”
Cloud enforcement
It may be too early to tell if the SFC’s approach to online really is driving AUM to Singapore. But sources tell DigFin they worry that two other SFC policies are already reducing Hong Kong’s attractiveness: cloud and crypto.
In October 2019, an SFC circular on electronic data storage sent shockwaves through the financial services industry. Although intended to clarify and therefore reassure the market about the SFC’s approach to cloud computing, the circular achieved the opposite.
The SFC’s concern was how to enforce actions against bad actors if the relevant customer or transaction data was stored abroad. This is a valid concern: the regulator needs to be able to arrest people if there is a crime.
Its idea, however, was to force banks and asset managers to hold their cloud vendors responsible, forcing the likes of AWS, Google and Microsoft to be accountable for a client’s run-ins with the law.
No vendor was going to volunteer to such a thing, which meant Hong Kong could be shut out of cloud services. In the end, the SFC amended its circular to accept “persons in charge” at the local financial institution as people they could investigate and arrest if needed.
One lawyer told DigFin the SFC should be applauded. “They listened,” he said.
But the SFC didn’t seem to listen during the consultation process, blithely ignoring the very same concerns when it first issued the circular.
Moreover, the outcome means firms must still store documents in paper form – a costly exercise that obviates the benefits of storing data in the cloud. It moved Hong Kong closer to those jurisdictions promulgating protectionist data-sovereignty laws and away from being an international financial center.
The episode still rankles. “The cloud regulations on the SFC website are difficult to digest and understand,” says a compliance head. “At the MAS, you type in a keyword and get a welcome message. They welcome your ideas. The SFC isn’t responsive.”
Regulating virtual assets
Alder’s term will be remembered most of all for his approach to virtual assets. He has made Hong Kong a home for licensed institutions to engage in virtual assets but has drawn a line that excludes retail participation. To some this is astute and has put Hong Kong on the path to sustainable leadership. To others it is leaving a gaping hole and chasing away many players.
In 2018, Alder announced a plan to institutionalize crypto, suggesting a path to license funds investing in digital assets, as well as their distribution. He also said trading venues would be eligible for the regulator’s sandbox. But these would only apply to professional (wealthy) investors, leaving retail investors at the mercy of unregulated exchanges and brokers.
Alder couched his strategy as a response to international rules on anti-money laundering, which would mean the SFC must supervise any provider of virtual-asset services operating in the city, or marketing to Hong Kong residents.
Over the next few years, the SFC augmented this stance but did not deviate. The SFC licensed OSL as the first digital-asset exchange, and Arrano Capital as the first licensed asset manager for crypto. In November 2020, Alder announced regulatory changes to bring all virtual-asset activities under his purview – at a time when mainland China was piloting its eRMB. Earlier this year, the SFC extended an exchange license to Hashkey. It has yet to license a securities firm to broker virtual assets.
Alder’s path has provided clarity to the crypto industry that it has craved and carved out a space for institutions. To date, its message to retail investors is merely “buyer beware”. (By making this about AML Alder could bypass the question of why the SFC regards professional and retail investors the same for suitability, but different with regard to access to regulated crypto services.)
Many of Hong Kong’s retail-focused crypto businesses have left, including FTX, Crypto.com, and Huobi. Some have gone to Singapore, but that market is now also becoming more careful about its licensees, so anything-goes Dubai is attracting a lot of players.
Implications for tokenization
It is doubtful that seeing these firms exit Hong Kong is troubling Alder’s sleep.
“From the outset, the thinking was about the international perception of Hong Kong,” said the lawyer. “The SFC regulator is at the high end of the market. He probably thinks it’s okay if those other players leave town.” The same approach continues in an updated circular issued earlier this year with the Hong Kong Monetary Authority. “The policy hasn’t changed.”
One person familiar with the SFC – and critical of Alder’s stance because it marginalizes retail investors – admits, “Given the current market crash, his policy is looking like the smart choice.”
The question will be whether the strict, purely institutional approach will put Hong Kong at the forefront of tokenization – the creation, trading, settlement and investing in securities in pure digital form. For institutions this is the prize, not trading in bitcoin. This is the future that Alder’s SFC is hoping to build.
But Singapore, led by MAS, is far more proactive in building blockchain-based infrastructure – for payments, for green bonds, for tokenized securities. Hong Kong is pursuing a laissez-faire approach that only applies to a few licensed private operators, but without handing out enough licenses to support an ecosystem. It’s free markets for the handful of lucky operators and regulatory limbo for the rest. This contrasts with Singapore’s more interventionist but flexible – and inclusive – style.
After Ashley Alder
Industry figures say they would like to see Alder’s successor be more open-minded toward innovation. Having maintained Hong Kong’s five-star reputation, the city is now at risk of seeing the next generation of best ideas emerge elsewhere. The city’s zero-COVID strategy has already put Hong Kong out of sync with other global markets. An overly cautious stance on innovation adds another risk that the best people, ideas and businesses will go somewhere else.
The SFC’s next CEO, whoever he or she may be, already has a crisis to manage: a brain drain. Zero COVID has hit the SFC ranks hard: in 2021 it lost 12 percent of its staff, including 25 percent of its junior staff. That is crippling, even for one of the world’s best-resourced regulators.
More strategically, the SFC will have to navigate a world in which integration with mainland China, via the Greater Bay Area project, is the political priority. It is debatable whether Hong Kong still counts as an international financial center, but it is certainly a very large financial center with a foot in international markets and another in the mainland. Until now, the SFC has been a reliable champion for the “two systems” part of Hong Kong’s “one country, two systems” relationship with the mainland. Integration while maintaining the SFC’s independence will be a high-wire act.
Given these imperatives, will the new CEO make time to think harder about the role of innovation, and how the SFC can help foster its more constructive elements?
The HKEX has taken the lead on cross-border connectivity, and the Hong Kong Monetary Authority has been proactive on fintech. The SFC is at risk of being relegated to a mere enforcer. If the SFC can work out those fintech models that can support investor protection and market fairness, Ashley Alder’s successor may find a way to keep Hong Kong at the global forefront of regulated markets.
