As of July 30, asset managers in Hong Kong can now establish investment funds in corporate form as an Open-ended Fund Company (OFC), in addition to the already available unit trust regime. The OFC is a corporate vehicle, which is more generally accepted and recognized for collective investment across the globe, and is crucial for cross border fund passporting, such as Mutual Recognition of Funds (MRF). The industry expects the OFC to be more marketable internationally and therefore deliver growth opportunities to the domicile.
Mutual Recognition of Funds
The MRF scheme between Hong Kong and other countries represents a large future growth opportunity for asset managers. With the addition of the UK-Hong Kong MRF in October, the industry expects that Hong Kong domiciled funds (and especially OFC when added to the MRF arrangement) will extend Hong Kong’s reach and relevance, particularly in light of Brexit.
The UK and Hong Kong have a long and storied relationship that includes equivalent legal systems, political relationships, and a similarly modeled and regulated asset management industry. More than 300 UK-based companies have regional headquarters or offices in Hong Kong. Together with the OFC, the industry expects that Hong Kong funds will tend to passport better on a cross-border basis. The corporate structure serves to further grease the wheels of a streamlined authorization process for recognition in the UK – a market familiar with such vehicles through the use of UCITS and OEICs.
Now the fourth such arrangement of its kind for Hong Kong, the Securities and Futures Commission (SFC) previously implement similar MRF arrangements with China, Switzerland, and France. Many believe the UK arrangement has a better chance for success because the UK and Hong Kong are already so interconnected. (So far, demand has been minimal for the France and Switzerland MRF.) This arrangement is also indicative of the UK’s desire to foster financial services partnerships beyond the EU as Brexit negotiations continue to play out. The loss of certain EU fund passports, such as UCITS, is inevitable post-Brexit, but no impediment exists preventing the UK – as a non-EU third country – from striking a similar deal with Ireland and Luxembourg.
Further Updates to the Mutual Fund Code
Early next year, the SFC is expected to issue its conclusion on proposed amendments to the Code on Unit Trusts and Mutual Funds. The proposed amendments include:
- Strengthening requirements of key operators of funds, including management companies, trustees, custodians, and their delegates
- Streamlining existing fund types and introducing new fund types, such as active ETFs
- Enhancing safeguards for funds’ investment activities as well as the oversight and monitoring performed by the trustees/custodians
The above proposals place Hong Kong in a position to better align with international best practices, thereby offering further comfort to overseas investors that they would be protected appropriately through strong governance.
For global asset managers in the process of building out a Greater China and/or European strategy, a Hong Kong domiciled fund range now offers access to Hong Kong, Mainland China, France, Switzerland, the UK and additional jurisdictions in the future. Now with over 800 Hong Kong-domiciled funds, the work of the SFC has had the desired effect in attracting more managers to Hong Kong and making it increasingly attractive for raising assets across borders.
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