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ASEAN Economic Community (AEC) implications and opportunities for UK financial and related professional servicesPresented by Accenture to:TheCityUK’s ASEAN Market Advisory Group (MAG)
Executive Summary
As UK-based financial and related professional services (FRPS) firms consider the business implications of ASEAN’s rising economic dynamism, rapid growth and creation of the ASEAN Economic Community (AEC), it’s increasingly clear that there are many opportunities that they can pursue in the region. However, as this paper highlights, it’s important to assess and prioritise those opportunities in light of the specific context, competitive environment and potential barriers that apply in each case.
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A further factor is that the opportunities in ASEAN vary widely in nature and scale between the different segments of UK-based FRPS. In banking, the ASEAN market’s increasingly free flow of products and services will open up growth opportunities in both retail and wholesale. The development of the small and medium enterprise (SME) segment will boost the potential for commercial banking, and advances in financial infrastructure will open up possibilities in retail e-payments and mobile connectivity systems. The growing trade flows will drive demand for transaction banking and related services, while rapid infrastructure development will play to the UK’s strengths in project finance and syndicated lending. A key part of this will be senior level commitment in governments to developing Public Private Partnership (PPP) approaches.
In capital markets, opportunities will be generated by increased foreign exchange trading and rising bond and equity issuance, including by the region’s increasingly dynamic SME segment. More generally, upgrades in the region’s financial services infrastructure will open the way to improved trading volumes, while ongoing digitisation and improvements in connectivity will enhance opportunities for mass-market wealth and asset management services.
For insurance businesses, rising volumes of cross-border trade will boost lines such as marine and trade credit insurance, while ASEAN’s closer integration into global supply chains will benefit business interruption insurance. The region’s high exposure to natural disasters and climate change risks will demand advanced solutions for catastrophe and agriculture insurance. And rising financial inclusion will combine with digitisation to enable digital mass-delivery of insurance products at low cost.
The creation of an integrated ASEAN market for financial services will also open up opportunities in other sectors of UK-based FRPS, such as legal. This paper does not cover other related professional services. The maturation of ASEAN as a regional trading and financial centre will drive demand for localised legal representation—a strength of UK law firms—and as SMEs in the region develop and grow, they will need more investment and regulatory advice. And the planned strengthening of IPR protection across the region will generate further substantial work for law firms. Further, corporate reporting standards in emerging ASEAN are inadequate and there is potentially important work to build capacity liaising with development banks, as well as both the private and public sectors. There is also a need to continue dialogue through trade agreements where the EU has a key role to play.
Looking across all these segments, this paper pinpoints a number of specific ASEAN opportunities that UK-based FRPS firms should consider prioritising, and looks both at the barriers to realising them and also how the UK can maximise their potential. Recognising this potential, TheCityUK launched its ASEAN Market Advisory Group of senior experts and practitioners from the industry at the inaugural UK-Singapore Financial Dialogue at the end of January 2015.
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Introduction
ASEAN is a diverse and economically dynamic grouping of ten Asian countries, collectively accounting for the world’s third largest consumer base and a 3.2% share of global GDP. That proportion is set to rise in the coming years, as ‘catch-up’ growth sees emerging ASEAN countries close the gap on the major European economies by 2030.
The factors underpinning ASEAN’s growth include rising cross-border trade, strong build-out of new infrastructure and rapid digitisation. All three of these drivers will be given added impetus by the creation of the ASEAN Economic Community (AEC) from the end of 2015, with a goal of achieving a semi-integrated financial market across ASEAN by 2020. While the AEC will allow for the free flow of goods, services, capital and labour across ASEAN, it is not envisaged to become an EU-style currency union.
ASEAN already presents exciting commercial opportunities for UK firms in the financial and related professional services (FRPS) sector—and the creation of the AEC confirms ASEAN’s position as the region most likely to witness strong and sustained growth in financial products and services in the coming years. Many of the resulting opportunities in the ASEAN marketplace play to the world-renowned strengths and capabilities of UK FRPS firms—and these areas of opportunity are examined in this paper.
Inevitably, as UK-based FRPS firms seek to realise the full potential of the ASEAN market, there are barriers to overcome. At the macro level, the timeline for the AEC’s semi-integrated financial market remains aspirational rather than definitive, with different countries progressing at different rates, reflecting their own political, social and operational factors. There are also hurdles to overcome within specific sectors, particularly around integration of markets and cross-border alignment of regulation.
But whatever the challenges along the way, there can be no question that the ASEAN marketplace—especially with the added momentum from the creation of the AEC—presents significant opportunities for FPRS firms based within and beyond ASEAN. This opportunity applies particularly to firms from the UK, given the UK’s strong track record on services exports, and close commercial and economic ties to several key ASEAN hubs.
As the AEC becomes reality, now is the time for the UK-based FRPS industry to take steps to seize the resulting opportunities. This paper explains why.
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The 10 member states of ASEAN and the ASEAN Economic Community (AEC) are Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar (Burma) and Vietnam. Under the current timetable, a common market encompassing all members of the AEC will be established by the end of 2015.
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The Context of the ASEAN Economic Community (AEC)
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A dynamic and fast-growing marketplace…Bringing together ten diverse national markets with a collective population of 620 million people and GDP of US$2.5 trillion in 2014—3.2% of the global total—ASEAN is seeing rising cross-border trade and rapid digitisation, outpacing most other geographies. By 2020, these and other factors are projected to increase ASEAN’s aggregate GDP by over one-third to US$3.4 trillion, making it bigger than India’s (see Figure 1).
The potential and dynamism of ASEAN are further enhanced by the fact that it includes some of the richest economies in Asia—like Singapore and Brunei—alongside some of the poorest, such as Myanmar, Lao PDR and Cambodia. ASEAN also has the world’s third largest consumer base: collectively, four of the ASEAN countries—Indonesia, Philippines, Vietnam and Thailand—will alone exceed EU’s population in 2020.
Over the next 15 years, so-called ‘catch-up’ growth will drive convergence between the GDP of emerging ASEAN countries with that of the leading economies in Europe. As Figure 2 shows, smaller ‘rising powers’ in ASEAN—such as Indonesia—will catch up with the major European economies by 2030 in terms of share of global nominal GDP, even on partial adjustment forecasts.
Figure 1: ASEAN represents one of the world’s most vibrant economies
World’s Largest EconomiesReal GDP US$ trillion (2014, 2020)
17.4
20.6
10.4
15.2
4.8 5.03.8 4.2
2.8 3.32.0
3.02.5
3.4
US China Japan Germany UK India ASEAN
+3%
+7%
+1%+1%
+2% +7% +5%
2014 2020f
Southern ASEAN Greater Mekong Delta basin
GDP per capita US$, 2014current prices
GDP US$ billion, 2020fconstant prices
Thailand 491Indonesia 1,206
Philippines 412Malaysia 452
Vietnam 264Singapore 367
Lao P.D.R. 18Brunei 22Cambodia 26Myanmar 103
5,5503,404
2,91311,062
2,07356,113
1,50542,239
1,1041,270
Source: IMF’s World Economic Outlook, Oct 2014; Accenture Research
Copyright © 2015 Accenture All rights reserved.
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…driven by rising regional trade, infrastructure build-out and digitisation Various factors will serve to sustain the growth in the ASEAN market over the coming years. A key part of the ASEAN growth story lies in export strength and rising intra-regional trade, reflecting the fact that the ASEAN economies are among the world’s most open, with 40 free trade agreements signed by end of 2013. ASEAN’s total trade was valued at US$2.5 trillion in 2013, with intra-ASEAN trade at US $609bn—24% of total ASEAN trade—and inter-ASEAN trade with external partners running at US$1.9tn, equivalent to nearly 10% of world trade (see Figure 3).
Trade with China—at US$351bn—represents 14% of the ASEAN total, and the China-ASEAN free-trade area (FTA) is expected to achieve the two-way trade goal of
US$500bn by 2015 and $1 trillion by 2020. Going forward, ASEAN’s external trade will be boosted by the completion of the Trans-Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP) and Pacific Alliance (PA)—all building blocks toward a Free Trade Area of the Asia-Pacific (FTAAP)
This growth in trade will be supported by ongoing infrastructure build-out, which will increase ASEAN connectivity and trade, particularly with neighbouring countries. The ASEAN Secretariat has estimated that the region needs investment of US$60 to US$100bn per year through 2022 to fulfil all its infrastructure needs (ports, airports, railways, roads, power, water and sanitation), and this infrastructure build-out could have major macro implications in terms of driving overall investment growth. For example, infrastructure could account for nearly 20% of total investments in the Philippines, while improved connectivity with neighbouring
countries could boost inter-regional trade and investment, with initiatives such as China’s proposed establishment of an Asian Infrastructure Investment Bank (AIIB) to fund infrastructure projects in underdeveloped countries¹.
A further growth driver is rapid digitalisation, as ASEAN consumers—in competition with their peers elsewhere in Asia—adopt new technologies at a very fast pace. As Figure 4 shows, four of the world’s top 15 smartphone markets globally in 2020 will be ASEAN countries, led by Indonesia with 293 million smartphone connections in third place globally behind China and India. Across ASEAN, ICT development is being driven by a regional agenda, supported by specific country-level initiatives such as a new ICT building code in Singapore and mandatory WiFi provision in larger restaurants in Malaysia.
Figure 2: GDP growth of emerging ASEAN will drive convergence with major European economies
”, 30 May 2014
1980
Germany France UK ASEAN India Indonesia
(% o
f wor
ld n
omin
al G
DP, c
urre
nt p
rices
, MER
)
1
2
3
4
5
6
7
8
9
1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Projections
Sources: Oxford Analytica’s report for Prudential titled “Opportunities for the UK in the future economic order”, 30 May 2014
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Figure 3: ASEAN’s Total Trade and Trade Partners
Sub-SaharanAfrica$63B7.6%$38B
Europe$498B
7.3%
$304B MENA$296B
8.9%
$162B India$146B11.7%$67B
China$777B
12.0%
$350BKorea$267B10.3%$135B
North America$355B
7.0%
$220B
Latin andCentral America
$124B
2020 Total TradeForecasted - US$4.5T
2013-2020 7y CAGR
2013 Total TradeActual -US$2.5T
8.2%$71B
Legend: Country/Region
ASEAN member countryTotal Trade
Oceania$120B6.4%$78B
INTRA-ASEAN$1,151B
9.5%
$608B
Total Trade (Exports + Imports, USD Billion)
6 783
THA478SGP783
IDN369
MYS434 BRN
15
KHM18 PHL
119
VNM265
LAP6
MMR23
Figure 4: Global ranking of Asian smartphone markets in 2020, and ASEAN mobile and wired Internet penetration rates 2005-2020
In 2020, 4 of the top 15 smartphone markets globally will be ASEAN
Global Rank #1
1,198
China
2
694
India
3
193
Indonesia
7
137
Japan
9
106
Pakistan
11
98
Vietnam
12
96
Philippines
13
92
Bangladesh
14
85
Thailand
Connections(million)
ASEAN-6: Mobile Subscription Penetration, 2012, 2015F, 2019F (%)
ASEAN-6: Wired Internet User Penetration, 2012, 2015F, 2019F (%)
2012 2015 2019
SG MY TH ID PH VN
115 119 124
3541 47
27 1 12 2233 34
8 1215 19 26 28
SG MY TH ID PH VN
152163
167
137157
165
126
150155
112
148170
106 119
136
175 173 168
100%
50%
Source: Accenture Research; Trade data from Asean.org; trade forecasted growth rates from HSBC Global Connections
Source: GSMA Intelligence, Ovum Fixed Broadband Subscription Forecast 2014-19; Pyramid Research, 2014; Accenture Research
Note: Wired internet user penetration is equal to fixed broadband subscriptions over total country households.
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The creation of the AEC will boost opportunities for FRPS firms…The penetration of financial services is currently very low in emerging ASEAN markets. Combined with the region’s inherent dynamism, strong growth prospects and large consumer base, this lack of existing penetration points to significant growth potential in ASEAN for financial and related professional services (FRPS) firms, whether based within ASEAN or elsewhere in the world.
Already, these positive conditions are seeing the ASEAN market generate high demand across the key financial services segments of banking, insurance and capital markets, creating exciting opportunities for FRPS participants of all types. The scheduled creation of a common market within the ASEAN Economic Community (AEC) from the end of 2015, advancing to a semi-integrated financial market by 2020, will increase these opportunities still further, making ASEAN the region most likely to witness strong and sustained growth in financial products and services.
In January 2007, the leaders of the ASEAN member countries affirmed their commitment to creating the AEC by December 2015, aiming to “transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital”. In the same manner, the ASEAN finance ministers proposed a comprehensive programme to achieve financial integration, and recommended institutional and policy reforms to be implemented in 2011–2020.
These reforms cover banking market integration, capital account liberalisation, financial infrastructure-building, payment and settlement systems, and insurance and capital market development. The financial integration target to be achieved by 2020 is not a fully integrated regional market but a semi-integrated one. It is important to stress that the ASEAN leaders’ vision for the AEC does not embrace currency union and monetary integration, as is the case in the European Union. As Figure 5 shows, the AEC’s degree of cooperation and integration will exceed that in NAFTA by allowing for the free flow of services, capital and labour as well as goods, but will stop well short of the EU’s shared currency (the euro) and monetary policy.
The opportunities for FRPS springing from the growing openness in the ASEAN region’s markets—and the increasing integration of its financial sector—will emerge from each of the four key pillars of the ASEAN AEC Vision 2020 (see Figure 6): a single market and production base, competitive economic region, integration with the global economy, and equitable economic development. These pillars will create the potential for growth in FRPS both at a national level from the development of individual markets, and at also at a regional level from the rising need for pan-ASEAN services.
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Figure 5: Degree of economic integration between national markets in the world’s major free trade areas (FTAs)
Free flow of:• Goods
Free flow of:• Goods& Services• Capital • Labor
Unified tari�s on the exterior borders of the union
Shared currency and monetary policy
Preferential/ free trade area
Common market Custom union w/ common market
Monetary union
Shared fiscal and budgetary policy
Fiscal union
Complete economic integration
AEC* EU USNAFTA
*Note: AEC has some unified tari�s and agreements for some goods and services, as a custom union has
Figure 6: The four pillars of the AEC Vision 2020
Initiatives in Bold have direct implications for the Financial Services industry
Competitive economic region
Integration with the global economy
Single market and production base
Equitable economic development
• free flow of products and services• free flow of investments• “freer” flow of capital • free flow of skilled labor • priority integration sectors• food, agriculture and forestry
• competition policy• consumer protection• intellectual property rights• infrastructure development• taxation• e-commerce
• SME development• initiative for ASEAN integration (IAI) to narrow the development gap between members and to accelerate integration of Cambodia, Lao PDR, Myanmar and Vietnam (CLMV)
• coherent approach regarding external economic relations
• enhanced participation in global supply networks
Source: Accenture Research
Source: Asean.org; Accenture Research
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Figure 7: Progress towards the ASEAN leaders’ AEC Vision 2020
As per ADBI’s AEC Scorecard for 2008–2011, the implementation rate was 67.5% for the AEC Blueprint overall
All ASEAN countries―except Myanmar―have fully implemented freer flowof capital Linkage of three ASEAN Exchanges (Malaysia, Singapore and Thailand) via a single trading platform achieved
At the stage of in-principle approvalsFinancial Services Liberalization
Capital Account Liberalization
Capital Market Development
All ASEAN countries except Myanmar have fully implemented freer flow of capital
Some developments in Singapore, Malaysia, Thailand only
Significant discrepancies in ASEAN development needs greater e�orts, with priority to CMLV countries
Note that Financial Services has been granted greater flexibility than other sectors, due to its impact on economic stability. Countries are allowed to progressively liberalise subsectors, according to their own financial sector masterplan
2007-11 2015 2017 2020•
•
…but the timeline remains aspirational rather than definitiveHowever, while the opportunities springing from the AEC’s semi-integrated financial market promise to be clear and substantial, the date for completion is not yet set in stone. So while the 2020 timeline is an important milestone, it should not be seen as a hard-and-fast deadline for financial integration across ASEAN.
In this context, the Roadmap on Monetary & Financial Integration for ASEAN (RIA-FIN) includes the following three goals:
• Capital account liberalisation Achieve a freer flow of capital in the region as per the AEC Blueprint.
• Financial services liberalisation Further liberalisation of the banking and insurance sectors.
• Capital market development Enable access to cross-border equity and bond markets, and develop cross-border payment, settlement and market infrastructure.
In moving towards these overall objectives, each ASEAN Member State has its own initial conditions, and each may define its own milestones and timelines to achieve the common end target of financial integration. As Figure 7 shows, the result is that overall progress towards these three goals is subject to the flexibility of each member country, and consequently the rate of implementation varies in different member states across the AEC.
Additionally, while economic integration is the keystone of the AEC, there are political, social and operational issues in each member country that may have an impact on how successfully the various AEC initiatives are implemented. The issues that present risks to progress include the following:
• Development gaps between countries Differences in skills, infrastructure and standard of living between ASEAN countries at different stages of development present challenges to implementing standardised systems and procedures.
• Potential delays in implementation Countries have different deadlines for implementation according to their level of development. This tiered deadline system has buffers built in, which suggest expectations of delays.
• Prioritization of national interests Countries will still be able to put their own macro-economic stability and nascent industries ahead of the integration goals, and this may affect their commitment: some initiatives are merely ‘recommendations’.
• Language and cultural gaps between countries may hinder cooperation
• Political instability in parts of the region—Myanmar, Thailand—has the potential to delay the process.
• Regional disputes—such as maritime confrontations between China and Vietnam—may have geopolitical implications for other countries in ASEAN and the wider region.
Source: Accenture Research, ADBI, AEC and other releases
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In moving towards these overall objectives, each ASEAN Member State has its own initial conditions, and each may define its own milestones and timelines to achieve the common end target of financial integration.
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Opportunities and Challenges in ASEAN for UK-based FRPS firmsAs we’ve shown, the forces shaping the ASEAN market make it a dynamic opportunity that is both attractive and complex at the same time. The unique set of conditions in ASEAN—namely strong economic growth, rising cross-border movement of goods and services, and rapid digitalisation combined with the ongoing AEC and financial sector integration—give rise to specific opportunities and challenges that are unique to the region.
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The UK-based financial and related professional services (FRPS) industry is competitively better placed to address some of these opportunities more effectively than its competitors from other countries. The UK has long demonstrated a remarkable relative strength in services exports, and by leveraging this it can gain a head start on other entrants: in 2013 the UK FRPS sector generated a record trade surplus of GBP61 billion. UK-based FRPS also provide employment for over 2 million people, with total headcount rising 2.5% year on year in December 2014³.
In combination with its renowned strength in many segments of FRPS, the UK also has strong economic and commercial ties to several key hubs in ASEAN, and has specific expertise that is essential for this region. The UK’s business potential is further supported by the ubiquitous use of English as the language of business, as well as educational and professional ties and long-standing financial linkages to London as a global financial centre. This all means that UK businesses are well positioned to engage with developing ASEAN businesses and the consumer base in fast-growing ASEAN countries.
A further advantage enjoyed by UK-based FRPS firms active in the ASEAN market is the establishment of the ASEAN Market Advisory Group (MAG) by TheCityUK for the FRPS industry. The first group of its kind
to be established in the UK, the ASEAN MAG is a private sector forum comprised of senior experts and practitioners from across the FRPS industry, who have been brought together with the aim of identifying trade and investment opportunities and priorities for an ongoing and mutually beneficial strategic business dialogue between the UK and the ASEAN region.
The Group’s remit is to:
• Provide thought leadership on the policy direction the industry would like to see progressed with regard to ASEAN markets and ASEAN as a group.
• Drive projects that have the potential to create new and lasting opportunities for developing dialogue and business between the UK and ASEAN markets.
• Bring focus on formulating the industry’s trade and investment policy priorities for ASEAN.
• Develop relations with senior ASEAN decision-makers, regulators, and economic and practitioners.
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Opportunities and barriers for each segment of FRPS Given the trends and drivers that we have described, ASEAN offers a wide range of opportunities and challenges for the UK-based FRPS industry. Inevitably, these vary by sector and even from firm to firm, depending on each organisation’s strengths, capabilities and relationships in the region.
In banking, the greater openness in the ASEAN market will offer a diverse set of opportunities. The freer flow of products and services will open up the potential for growth in both retail and wholesale banking, while rapid infrastructure development will play to the strengths of UK wholesale banking and capital markets firms in project finance, syndicated lending and the bond markets. The AEC’s focus on supporting SMEs will boost opportunities in commercial banking for those customers, including selling products and services adopted from corporate banking. Advances in payment and settlement systems, together with the e-ASEAN ICT Masterplan, will open up possibilities in payments systems, mobile connectivity and banking apps—all areas where UK players are global leaders.
However, banks’ efforts to realise these opportunities may come up against a number of barriers, particularly where differing national laws hamper cross-border payment integration and bank regionalisation. Also, the long tenor of infrastructure financing deals means they are highly exposed to risks around political instability and currency fluctuations.
Meanwhile, the opportunities for UK capital markets firms will include freer product and service flows opening up new opportunities through rising bond and equity issuance and increased foreign exchange trading, while freer investment flows will also boost demand for investment instruments. The development of the SME segment will extend this segment’s needs beyond traditional bank lending to debt and equity issuance and peer-to-peer (P2P) financing. Upgrades in financial services infrastructure will open the way to improved trading volumes, and the ASEAN ICT Masterplan will enhance opportunities for mass-market wealth and asset management services.
Once again, there will barriers for capital markets firms to overcome to capitalise on these opportunities. For example, in terms of cross-border capital flows, many economies restrict settlement of their local currencies outside their economies for the purpose of capital control, and regional integration of cross-border trade settlement has been slower and more challenging than first outlined in the Integration Blueprint 2015 . Also, existing infrastructure capabilities in some AEC member countries need to be enhanced to accommodate higher-speed connections among all national information infrastructures.
Turning to the opportunities for insurance businesses, freer trade flows will boost demand for lines such as marine and trade credit insurance, while ASEAN manufacturers’ closer integration into global supply chains will benefit business interruption insurance, and freer investment flows will drive availability of a wider range of investment instruments. The region is highly exposed to natural disasters and climate change risks—ranging from tsunami in Indonesia to typhoon and floods in the Philippines—meaning advanced solutions are needed for catastrophe and agriculture insurance, both at individual and sovereign levels. The target to double financial inclusion across ASEAN will bolster the potential for microinsurance in less-developed countries, and the ICT Masterplan will enable digital mass-delivery of insurance products at low cost.
The barriers faced by insurers in pursuing these opportunities include the fact that some insurance sub-sectors committed for liberalisation by 2015 remain closed, especially in terms cross-border movement of talent and cross-border supply of products. Regulators will need to harmonise regulations for cross-border consumer protection, resolution in cases of crisis, and a framework to address violations. Liberalisation in insurance—more than in other sectors—will be subject to national policy objectives and development.
More generally, before any agreement on lowering the barriers can be reached, each of the regulators for banking, capital markets and insurance will have to tackle issues around synchronisation of regulations. Due to its impact on economic stability, financial services has been granted greater flexibility than other sectors, and member countries are allowed to harmonise regulations and progressively liberalise subsectors, according to their own financial sector masterplan.
The creation of an integrated ASEAN market for financial services will also open up opportunities for professional services, such as legal. The maturation of the ASEAN market as a regional trading and financial centre will drive demand for legal representation, as more players look to take advantage of growth opportunities. Freer flows of goods and services will boost the need for in-depth local knowledge, giving UK firms an advantage with their localised offices, knowledge, and relationships. As SMEs develop and move beyond bank lending into other forms of funding such as peer-to-peer lending supported by individual and institutional investors, they will require advice on investment registration and regulatory documentation. And for ASEAN to fully realise its vision, IPR protection will need to be strengthened across the region—generating further substantial work for law firms.
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Given the trends and drivers that we have described, ASEAN offers a wide range of opportunities and challenges for the UK-based FRPS industry. Inevitably, these vary by sector and even from firm to firm, depending on each organisation’s strengths, capabilities and relationships in the region.
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A table summarising opportunities, barriers, and potential roles for UK-based FRPSThe following table sets out some of the most important opportunities and the related barriers for UK-based FRPS segments, together with ways in which the UK can support firms’ efforts to realise these opportunities.
FS Segment Opportunity driver Barriers/challenges How the UK can support
Cross-border Corporate Banking
Increasing trade flows, internationalization of businesses, China emerging as ASEAN’s leading trade partner
Entrenched relationships with local banks
• Transaction banking: payables & receivables finance, cash management - focus on multinational corporate clients
• RMB capability and possibly its internationalisation supporting the Asian Development Bank and the AIIB
Pan-ASEAN Retail Banking
Rising consumer demand with economic growth; free flow of services and individuals under the AEC
Entrenched relationships with local banks and consumer lending risk; AEC banking integration likely to delay beyond 2020
• E- and m- payments services connecting the payments ecosystem, in e-commerce for instance
• Digital banking services/ internet finance (see below)
Local SMEs and trade financing
Development of micro and small medium enterprises is an AEC priority, including their participation in global value chains
Credit risk due to paucity of supporting documentation and credit history; cost of administration
• Private and Public credit bureaus covering MSME credit information
• Develop high quality data with analytics for use by microfinance/ commercial banks
Financial inclusion In-country regulatory changes underway e.g. microinsurance; ‘equitable development of Cambodia, Lao, Myanmar and Vietnam’ is an AEC priority
Credit risk due to lack of credit history; high cost of administration for small accounts
• Private and public credit bureaus
• Unique Identity rollout for citizens to enable inclusive finance
• Mobile wallet/mobile financial services for telco-dominated markets like Indonesia
Internet finance/ digital services
Mobile/digital cheaper and more accessible than traditional FS infrastructure; e-ASEAN and ICT Masterplan of AEC
Digital readiness differs across ASEAN; differing regulations by jurisdiction for internet finance
• UK, as Fintech leader, providing digital/technology innovations
• Alternative funding platforms such as peer-to-peer lending and crowdfunding
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FS Segment Opportunity driver Barriers/challenges How the UK can support
Infrastructure finance and management
An estimated US$550 billion investment until 2020 to fulfil infrastructure needs
Long tenor finance exposed to political and currency risks
• Formation of PPPs, and infrastructure project governance and management
• Green financing in Singapore
• Syndicated lending, project finance
Islamic finance Malaysia’s ambition to develop KL as international centre, Muslim population in Indonesia and other pockets
Relatively narrow opportunity as a niche segment in select markets
• Product development and capability exchange between London and Kuala Lumpur, also leveraging Singapore/Indonesia
Capital markets’ development
Market growth following AEC initiatives on trading links, exchanges links, capital flows
Cross-border fragmentation, disjointed capital markets’ infrastructure
• Build/facilitate ‘Shared Market Utility’
• Differentiated trading platforms to foster new markets and asset classes
Wealth and asset management
Rising affluence esp. ASEAN-4 (Indonesia, Malaysia, the Philippines, and Thailand); AEC targeted liberalization of Trading For Own Account; Asia Funds Passport underway
Competitive threat, esp. in cross-border asset management from the Asia Funds Passport underway⁵
• Holistic wealth management platforms: real time, interactive services, advice on-demand
• Experiences of Europe’s UCITS framework for Funds Passport
Insurance (excluding Natural Catastrophe insurance)
Free flow under AEC is an opportunity for lines such as marine, trade credit insurance
Cross-border fragmentation; liberalisation in insurance more than others subject to national policy objectives
• Developing regulatory frameworks for insurance
• Training e.g. actuaries and upskilling
• Product development capability
Climate change/ NatCat insurance
Region has high climate-demography vulnerability index; ltd. insurance coverage
Challenges in structuring and pricing products
• Risk policies and insurance mechanisms for customers but also governments
Professional services, i.e. legal
Market growth and demand for related legal services
Liberalisation in legal will be last to come through after AEC
• Follow demand in specific industries and markets, e.g. PPPs in the Philippines
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Prioritising the opportunities in ASEAN/AEC for UK FRPS
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As the table above confirms, the core characteristics of the ASEAN market and ASEAN Economic Community—diverse, dynamic, rapidly digitizing and increasingly moving towards cross-border integration—offer specific opportunities across many segments and product/service areas of FRPS, including:
• Cross-border corporate banking
• Pan-ASEAN retail banking
• Local SMEs and trade financing
• Financial inclusion
• Internet finance/digital services
• Infrastructure finance and management
• Islamic finance
• Development of capital markets
• Wealth and asset management
• Insurance life and non-life
• Climate change/natural catastrophe insurance
• Professional services, such as Legal
However, across all these segments, the opportunities outlined in table will not be accessible to a uniform degree in all ASEAN member countries. The prioritisation matrix shown in Figure 8 sets out an analysis of the likely size of each opportunity by country, and its accessibility to UK FRPS players over the short versus long term.
Figure 8: A prioritisation matrix for the ASEAN opportunity for UK FRPS
SG MY TH IN PH VN BCLM
Large or near term opp. Limited or long term opp. Not applicable
Sub-sector Rationale
Cross-border Corporate Banking
Pan-ASEAN Retail Banking
Local SMEs and trade financing
Financial inclusion
Internet finance/digital services
Infrastructure finance & mngt.
Islamic finance
Capital markets’ development
Wealth & asset management
Insurance (ex NatCat)
Climate change/NatCat insurance
Professional services
Di�erentiation mainly with MNCs
Di�erentiation mainly in Digital
SME is AEC priority esp. in CLMV
FI is AEC priority esp. in CLMV
Digital Readiness di�ers by market
Infra dev. is an AEC priority
Intl. centres link: KL-London
Maturing markets i.e. ASEAN-4
Di�erentiation in Digital/platforms
Potential to guide mkt. growth
UK expertise on NatCat insurance
Maturing markets i.e. ASEAN-4
Source: Accenture Research; members of TheCityUK’s ASEAN Market Advisory Group
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In Accenture’s view, eight key areas of opportunity stand out clearly where there is close alignment between the nature of the ASEAN opportunity and the established strengths of UK FRPS firms. Our analysis suggest that the UK FRPS industry could leverage its existing advantages most effectively in eight key areas:
1. Infrastructure public/private partnerships (PPPs) ASEAN’s massive need for infrastructure investment over the coming years and decades will require deep understanding and skills in PPP structures, which UK-based FRPS firms are world leaders in designing and delivering. For example, UK banks can oversee the structured finance components while UK law firms are supremely positioned to put the deals together, especially since these are often founded on UK law. UK engineering contractors can also provide world-class management of the resulting projects.
2. Capital markets growth, integration and development Opportunities for which UK firms are especially well-suited include building trading platforms for localised non-traditional financial instruments fostering transparency, efficiency and lower cost; and potentially building a Utility⁶ for post-trade processing, reference data management, and cross border regulatory compliance as a service to ASEAN financial services firms. There is also the potential to be involved in setting up holistic, real-time wealth management platforms to take advantage of AEC’s targeted liberalisation of individuals’ trading for own account, and to provide new internet finance platforms such as B2B, C2B, crowdfunding and P2P to leverage the ASEAN SME Strategic Action Plan.
3. Internet finance/digital services ASEAN’s rapid growth in digital services, as driven by market forces and supported by the state, will need to be guided by regulatory frameworks around consumer protection, data privacy, fraud and cyber security. Internet finance also poses risks from shadow banking that central banks seek to manage. UK firms’ experiences in these areas will be valuable for ASEAN—possibly more than the technology applications that London’s FinTech sector can export.
4. Risk analytics/credit bureaus for financial inclusion A key success factor for all financial service providers is the ability to accurately assess and manage credit risks. This capability becomes more critical for inclusive finance, considering the fact that limited transactional history and supporting information is available for low-income individuals and micro, small and medium enterprises (MSMEs). ASEAN would benefit from the creation of credit bureaus and advanced risk analytics—which are strengths of UK-based FRPS firms.
5. Disaster recovery/catastrophe/agriculture insurance and reinsurance The freer flow of manufactured products and services across and beyond ASEAN will result in the emergence of centres of specialisation. Examples might include Cambodia and Vietnam producing low-value goods using cost-effective labour, and Thailand and Myanmar specialising in automotive, electronic and computer goods. As ASEAN becomes an increasingly important link in global supply chains, demand for disaster recovery and business interruption insurance will increase, alongside lines such as marine, aviation, transport, and trade credit insurance. UK reinsurance firms’ strength will also be an advantage across all these areas and more, particularly natural catastrophe and agriculture insurance.
6. Islamic finance Malaysia’s ambition to develop Kuala Lumpur as international centre for Islamic finance, together with the large Muslim population in Indonesia and other pockets across ASEAN, creates opportunities for UK-based FRPS firms in areas including Islamic banking, Islamic/Sukuk bonds, and Islamic/Shariah insurance. In takaful, or Islam-compliant insurance, ASEAN countries represented one-quarter of global gross takaful contributions in 2013, with US$3.5 billion. Malaysia is the second-largest takaful market in the world, with industry growth of 24.2% in 2013, and the country’s low insurance penetration and young population present significant potential for growth. London is already established as a centre for Islamic insurance
product development, with ongoing capability exchange between London and Kuala Lumpur. Other niche areas like microinsurance also offer great potential, particularly through the use of mobile models in telco-dominated markets such as Indonesia to reach the underpenetrated populations with low-but-rising incomes.
7. Professional services As highlighted above, UK law firms’ established strength and scale across ASEAN, and their substantial networks of offices and relationships at a regional and national level, position them to gain major opportunities from realisation of the AEC vision. General growth in trade and economic activity will spur demand for legal representation, including tax and compliance expertise at a local level in each jurisdiction—a particular strength of UK law firms. Other elements of the AEC agenda, including rising infrastructure investment and PPP contracts, and the focus on developing the SMEs segment and IPR frameworks, will also generate substantial work for law firms. Corporate reporting standards in emerging ASEAN are inadequate, and there is potentially important work to build capacity liaising with development banks, as well as both the private and public sectors.
8. Framing trade policy and forging relationships To enable UK-basedFRPS firms of all types to realise the full potential of the AEC, they will need policymakers to lobby on their behalf and help them to forge strong relationships across the region. Useful initiatives might include bringing regulators and other industry stakeholders to the UK to see at first hand how the UK FRPS sector operates and is regulated, opening up trade opportunities the other way. Policy agendas will play a major role in the pace and direction of development of the AEC, and political and diplomatic relationships will also make a contribution.
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Conclusion: finding a mutually beneficial way forwardOur goal in producing this paper was to set out the opportunities and barriers for UK FRPS firms springing from current trends and developments in ASEAN, including the creation of the AEC. We hope our analysis will help to set the scene for a positive and productive debate on how UK firms can realise these opportunities.
At the inaugural meeting of TheCityUK’s ASEAN MAG, key priorities were identified and discussed. These will form the basis of initial activity the Group expects to deliver, including capital markets development, infrastructure financing and PPP, Islamic finance and insurance/reinsurance.
Crucial to underpinning work in these areas will be the broader activity that needs to be engaged in to improve market access to goods and services, createe more predictable and transparent regulatory regimes, and protect investors effectively. The ASEAN MAG will work with key partners such as
the UK-ASEAN Business Council, the City of London Corporation, Asia House and the UK government, and interlocutors in the region to influence the development of the business environment to these ends.
As the region of the world most likely to witness strong and sustained growth in financial products and services, ASEAN is vital to the future success of the UK-based FRPS industry. Now is the time to identify the opportunities it will generate, and create strategies to seize them.
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Reference1. ASEAN’s half a trillion dollar infrastructure opportunity, Goldman Sachs, May 2013
2. The Road to ASEAN Financial Integration, Asian Development Bank, 2013
3. TheCityUK’s London Employment Survey, Feb 2015
4. ADBI and other reports, Accenture Research analysis
5. Asia Funds Passport is an initiative to provide a multilaterally agreed framework to facilitate the cross border marketing of managed funds across participating economies in the Asia region
6. A Utility is an entity created by a variety of industry participants in the basic belief to create efficiencies across organizations by collectively performing a set of non-differentiating functions that are similar across the member companies
TheCityUKTheCityUK represents the UK-based financial and related professional services industry. We lobby on its behalf, producing evidence of its importance to the wider national economy. At home in the UK, in the EU and internationally, we seek to influence policy to drive competitiveness, creating jobs and lasting economic growth.
UK-based financial and related professional services contributed 12% of UK GDP in 2013. Over 2 million people work in the industry across the country, two thirds of whom are outside London. Our industry employs 7% of the population and the productivity of these jobs is 70% above the UK average. Foreign companies invested around £100bn into UK financial companies since the start of 2007, more than in any other sector. The UK is Europe’s financial centre and leads the way in international banking, fund management, international insurance, private equity and derivatives trading. The UK also holds a leading position in the delivery of accounting services, legal services and management consulting.
Financial and related professional services are the UK’s biggest exporting industries. We make a £55bn contribution to the balance of trade, helping to offset the trade in goods deficit. TheCityUK creates market access for its members through an extensive programme of work on trade and investment policy. To achieve this, we work closely with governments and the European Commission to represent member views and help deliver the best outcomes in international trade and investment negotiations. Allied to this, we have a country-focused programme to build relationships and to help open markets where our members see significant opportunities. We also have a strong focus on ways of influencing and delivering regulatory coherence through dialogue with regulators, governments and industry bodies internationally.
About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.
ContactsSushil Saluja Senior Managing Director for Financial Services in Europe, Africa, Middle East & Latin America, Accenture and Chairman, TheCityUK’s ASEAN Market Advisory Group [email protected]
Bryan Cress Head, Asia Pacific, TheCityUK [email protected]
Madhu Vazirani Thought Leadership Senior Principal, Accenture [email protected]
Lynda Stewart UKI Financial Services, Management Consultancy, Accenture [email protected]
With special thanks for contributions from: Members of the TheCityUK’s ASEAN Market Advisory Group: Christie Pang (HSBC Bank Plc), Catherine Clark (Prudential Plc) and Gerwin de Boer (The Law Society of England and Wales)