31 October 2018

Mutual Recognition of Funds between the United Kingdom and Hong Kong

On 8 October 2018, the Securities and Futures Commission of Hong Kong (SFC) and the Financial Conduct Authority of the United Kingdom (FCA) signed a Memorandum of Understanding Concerning Mutual Recognition of Covered Funds and Covered Management Companies and related Cooperation (MoU), setting out the regulatory framework and application details for mutual recognition of publicly offered funds (MRF) between the United Kingdom (UK) and Hong Kong.  

This is the fourth MRF arrangement between the SFC and regulators of other jurisdictions since 2015, and is part of Hong Kong’s continuous development as an international asset management centre. The SFC entered into mutual recognition of funds arrangements with the China Securities Regulatory Commission in 2015, the Swiss Financial Market Supervisory Authority in December 2016 and the Autorité des Marchés Financiers of France last year. The SFC also entered into similar arrangements with other jurisdictions in the past, including Australia, Chinese Taipei, Dubai, Guernsey, India, Indonesia, Malaysia, Sri Lanka and Thailand.

The new cooperation framework will not only pave the way to offering investors of both jurisdictions greater choice and diversification in their investment, but also benefit the asset management industries in the UK and Hong Kong.

The MRF allows for UCITS authorised by the FCA (UK Covered Funds) and Hong Kong collective investment schemes authorised by the SFC (HK Covered Funds) to be recognised and authorised (as applicable) under a streamlined vetting process and distributed in each other’s jurisdiction. Retail funds operating from Hong Kong and the UK that meet certain eligibility requirements prescribed by the SFC and FCA respectively for MRF will generally be deemed to have complied in substance with the other market’s registration requirements under a streamlined process for distribution in such market.

On the date of signing of the MoU, the SFC and the FCA each issued a circular on MRF (namely, the SFC Circular and the FCA Circular). This alert sets out a summary of key regulations applicable to UK and HK Covered Funds seeking registration and recognition (as applicable) under the MRF.

General principles of the MRF

Similar to previous mutual recognition of funds programmes, adoption of the rules and principles of the home jurisdiction is a key and fundamental principle under the MRF.

A HK or UK Covered Fund needs to meet the eligibility requirements stipulated by the SFC and the FCA. It must first be approved and authorised by the relevant authority in the home jurisdiction (i.e. the jurisdiction in which the fund is domiciled and managed, namely Hong Kong or UK), and must further comply with applicable laws and regulations of the host jurisdiction (i.e. the foreign jurisdiction where the fund is to be publicly offered pursuant to the MRF, namely Hong Kong or UK) regarding the sale and distribution of the fund in that jurisdiction.

The regulator of the home jurisdiction will oversee the relevant fund in respect of its domestic authorisation or registration, as well as monitor the operation and management of the fund given this occurs in the home jurisdiction. The regulator of the host jurisdiction will oversee the fund in respect of MRF eligibility requirements, the sale and distribution of the fund in the host jurisdiction, as well as additional rules relating to authorisation or registration, and ongoing compliance in the host jurisdiction.

The treatment of investors in both home and host jurisdictions must be fair and the same.

Eligible types of funds

Each UK or HK Covered Fund must fall within one or more than one of the following fund types under the Code on Unit Trusts and Mutual Funds (UT Code):

  1. General equity funds, bond funds and mixed funds;
  2. Fund of funds;
  3. Index funds;
  4. Passively managed index tracking exchange traded funds (ETF); and
  5. Feeder funds, where underlying fund falls within one of the fund types in paragraphs (a) to (d) above;

Requirements for UK Covered Funds applying for SFC authorisation

Eligibility

Each UK Covered Fund applying for SFC authorisation must:

  • be established, domiciled and managed in accordance with UK laws and regulations and its constitutive documents;
  • be a UCITS scheme authorised by the FCA[1];
  • appoint a firm in Hong Kong as its Hong Kong representative[2];
  • not use leverage exceeding 100% of the UK Covered Fund’s net asset value (calculated using the commitment approach);
  • not invest in real estate;
  • not have share classes with hedging arrangements other than currency hedging; and
  • have a trustee or depositary that qualifies to act as a trustee or depositary for UK UCITS.
Requirements on the management company

The management company of a UK Covered Fund (UK Covered Management Company) must:

  • be authorised by the FCA and have permission to carry out the regulated activity (managing a UCITS) under the FSMA[3]; and
  • not have been the subject of any major regulatory or enforcement actions by FCA in the past 3 years or, if it has been established for less than 3 years, since the date of its establishment.

The UK Covered Management Company may delegate the investment management functions to any person, provided that such delegation is accepted under UK laws and regulations for UK UCITS authorised for public offering, the UK Covered Management Company remains responsible for any action of its delegate(s) and such delegate operates in one of the acceptable inspection regimes (AIR) recognised under 5.1 of the UT Code.

Application process to the SFC for public offering in Hong Kong

UK Covered Funds which apply to the SFC for authorisation under the MRF are subject to the same application process as Hong Kong-domiciled funds.

The average processing time is expected to take between 1 to 3 months from the take-up date of the applications.[4]

Fund offering documents for distribution in Hong Kong

The fund offering documents issued to Hong Kong investors must be in bilingual form (English and Chinese) based on its fund offering documents approved by the FCA, supplemented by a Hong Kong covering document to comply with relevant disclosure principles and requirements of the UT Code. This will include a product key facts statement containing prescribed information and available for Hong Kong investors.

Sale and distribution of UK Covered Funds in Hong Kong

UK Covered Funds must only issue advertisement and marketing materials via a representative or distributor who is licensed or registered for Type 1 (dealing in securities), Type 4 (advising on securities) or Type 6 (advising corporate finance) regulated activity or based on other applicable exemptions under section 103 of the SFO. Such materials would not be subject to authorization/pre-vetting by the SFC but would be subject to post-vetting by the SFC.[5]

All advertisements in relation to a UK Covered Fund must comply with the relevant Hong Kong laws and regulations, in particular, the Advertising Guidelines Applicable to Collective Investment Schemes Authorised under the Product Codes.

Requirements for HK Covered Funds seeking FCA recognition

Eligibility

Each HK Covered Fund seeking FCA recognition must:

  • be established, domiciled and managed in accordance with Hong Kong laws and regulations and their constitutive documents;
  • be authorised by the SFC under the SFO for public offering in Hong Kong[6];
  • not use leverage exceeding 100% of the HK Covered Fund’s net asset value (calculated using the commitment approach);
  • not invest in physical commodities (including precious metals or commodity based investments or real estate); or certificates representing physical commodities;
  • not have share classes with hedging arrangements other than currency hedging; and
  • have a trustee/depositary that is qualified to act as a trustee/depositary of Hong Kong publicly offered funds.
Requirements on the management company

The management company of a HK Covered Fund (HK Covered Management Company) must:

  • be licensed by or registered with the SFC for Type 9 (asset management) regulated activity under the SFO[7]; and
  • not have been the subject of any major regulatory or enforcement actions by the SFC in the past 3 years or, if it has been established for less than 3 years, since the date of its establishment.

The HK Covered Management Company may delegate the investment management functions to any person, provided such delegation is accepted under Hong Kong laws and regulations for Hong Kong funds authorised for public offering, and the HK Covered Management Company remains responsible for any action of its delegate(s).

Application process to the FCA for public offering in the UK

HK Covered Funds which apply to the FCA for recognition under the MRF are subject to a similar application process as UK-domiciled funds.

The FCA aims to determine an application for FCA recognition within 2 months of receipt of a complete application provided that the applicant satisfies the relevant conditions and requirements.[8]

Fund offering documents for distribution in the UK

The fund offering documents issued by a HK Covered Fund to UK investors must be based on its fund offering documents approved by the SFC, supplemented by a UK covering document to comply with the relevant disclosure requirements under the UK laws and regulations. This will include a product key information disclosure statement containing prescribed information and made available for UK investors.

Sale and distribution of HK Covered Funds in the UK

Specific requirements apply to the communication of financial promotions and other marketing information in the UK. Unless exempted by relevant UK laws and regulations, any financial promotions in relation to a HK Covered Fund must be communicated or approved by a UK authorised person as defined under the FSMA and must meet the requirements set out in the FCA’s Conduct of Business Sourcebook.



Comparison between different MRFs with Hong Kong


 

Mainland-HK MRF[9]

Swiss-HK MRF[10]

France-HK MRF[11]

UK-HK MRF

Eligible types of funds
  • Equity funds
  • Bond funds
  • Mixed funds
  • Unlisted index funds
  • Physical index-tracking ETFs (for Recognised Mainland Funds only)
  • Equity funds
  • Bond funds
  • Mixed funds
  • Feeder funds
  • Fund of funds
  • Money market funds/Cash management funds
  • Index funds
  • Structured funds
  • Funds that invest in financial derivative instruments (FDI)
  • Index-tracking Exchange-Traded Funds (ETFs)
  • Equity funds
  • Bond funds
  • Mixed funds
  • Equity funds
  • Bond funds
  • Mixed funds
  • Feeder funds
  • Fund of funds
  • Index funds
  • Passively managed index-tracking ETFs
Specific eligibility requirements for authorised funds under the MRF

For both Recognised HK and Mainland Funds

  • at least 1 year track record, with not less than RMB200 million assets under management (or its equivalent in other currency);
  • not primarily invest in the market of the Recognised Fund’s home jurisdiction (≤ 20% of the investments in the market of the home jurisdiction); and
  • the value of the shares/units sold to investors of the Recognised Fund’s host jurisdiction must not be more than 50% of the Recognised Fund’s total assets under management

For HK Covered Funds only

  • must not invest in real estate;
  • must not invest in precious metals or precious metals certificates, commodities or commodity-certificate;
  • must not short-sell investments; and
  • must not exceed the maximum borrowing limit of 10% of the fund’s total net asset value

For both HK Covered and Swiss Covered Funds

  • Eligibility requirements specific to each type of fund

For both French and HK Covered Funds

  • at least 20% of the Covered Fund’s net asset value must be attributable to investors of the Covered Fund’s home jurisdiction;
  • must not use leverage exceeding 100% of the Covered Fund’s net asset value;
  • must not invest in physical commodities including precious metals or commodity based investments or real estate, or certificates representing them;
  • must not have share classes with hedging arrangements other than currency hedging; and
  • specific restrictions on charging of performance fees

For HK Covered Funds only

  • must have at least one dealing day for redemption every two weeks

For French Covered Funds only

  • must not pay any unreasonable turnover fees or percentage-based transaction fees to the French Covered Management Company or any of its connected persons

For both UK and HK Covered Funds

  • must not use leverage exceeding 100% of the fund’s net asset value; and
  • must not have share classes with hedging arrangements other than currency hedging

For HK Covered Funds only

  • must not invest in physical commodities including precious metals or commodity based investments or real estate, or certificates representing them

For UK Covered Funds only

  • must not invest in real estate
Quota

RMB300 billion (USD48 billion) each way

No quota No quota No quota

Next steps – Get prepared!

2017 saw an unprecedented growth in the UK retail funds market as net sales of UK authorised funds hit a record breaking £63 billion and funds under management at £1.2 trillion in December 2017[12]. With the strength of the UK market for fund distribution and asset management activities, the MRF between the UK and Hong Kong presents exciting opportunities for fund managers and authorised dealers marketing and selling qualifying funds in Hong Kong and the UK.

The MRF with the UK further expands the mutual fund market access between Hong Kong and the international market. This is an encouraging development after various mutual access schemes between Hong Kong and the Mainland China as well as the European countries. We expect to see further developments and innovations introduced by the regulators to create greater connectivity. Please speak to us if you wish to know more.



[1] under Part 17 of FSMA or under the Financial Services and Markets Act 2000 (Open Ended Investment Company) Regulations 2001 (SI 2001/1228) (as amended)

[2] in compliance with Chapters 9 and 11.1(b) of the UT Code

[3] under Part 4A of FSMA to carry on the regulated activity specified in article 51ZA (Managing a UCITS) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended)

[4] FAQ H1, https://www.sfc.hk/web/TC/files/PCIP/FAQ-PDFS/FAQs%20on%20Mainland-Hong%20Kong%20Mutual%20Recognition%20of%20Funds_20170630.pdf

[5] FAQ 2, https://www.sfc.hk/web/files/PCIP/FAQ-PDFS/FAQs%20on%20United%20Kingdom-Hong%20Kong%20Mutual%20Recognition%20of%20Funds_20181008.pdf

[6] under section 104 of the Securities and Futures Ordinance (SFO) for public offering in Hong Kong

[7] in accordance with Part V of the SFO that satisfies the requirements in Chapter 5 of the UT Code

[8] Applications for recognition of Hong Kong Covered Funds under section 272 of FSMA, https://www.fca.org.uk/firms/authorised-recognised-funds/apply-fund-recognition

[9] https://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=15EC29

[10] https://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=16EC63

[11] https://www.sfc.hk/web/EN/files/ER/PDF/MOU/AMF-SFC%20MoU.pdf

[12] https://www.theinvestmentassociation.org/media-centre/press-releases/2018/net-sales-hit-a-record-breaking-%C2%A363-billion-in-2017.html

Key contacts

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter Share on Google+
    You might also be interested in

    This article sums up the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area and its vision for the core GBA cities.

    25 February 2019

    The Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 has introduced notable benefits to Hong Kong’s tax regime for funds.

    28 December 2018

    Read on for issues that biotech companies should watch out when planning a listing by Ch.18A of the HK Main Board.

    28 September 2018

    Negotiating a deal that you and your investment committee are happy with is no longer enough for many private fund investors. Instead, Fear of Missing Out is a common investor mindset.

    24 September 2018

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.

    Supported by Cheap Skip Bin Hire Melbourne - Hire Skip Bins Ltd