On 10 September 2021, the Hong Kong Monetary Authority (HKMA) and People’s Bank of China (PBoC) released their respective implementation rules in connection with the cross-boundary Wealth Management Connect (WMC) pilot scheme in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). See here for the HKMA’s circular on the implementation arrangements, including guidance in respect of the southbound scheme and northbound scheme, and a set of frequently asked questions (FAQs).
In this article, we will highlight some key points in the final rules while providing comments from the perspective of fund managers.
WMC permits eligible residents in the 11 cities in the Greater Bay Area, which covers nine Mainland cities plus Hong Kong and Macao, to invest cross-boundary in eligible wealth management products distributed by banks in each other’s market.
Eligible residents in Hong Kong are able to invest in wealth management products distributed by Mainland banks (the northbound scheme) and eligible residents in the Mainland are able to invest in wealth management products distributed by banks in Hong Kong (the southbound scheme).
This article focuses on the southbound scheme and the significant opportunities it affords to Hong Kong based retail fund managers as well as international managers who are able to structure retail products in Hong Kong.
Duties and responsibilities of participating banks
WMC is a bank-led scheme under which banks in the Mainland and Hong Kong are predominantly responsible for the scheme’s operation. Such responsibilities include the following:
(i) assessing investor eligibility;
(ii) investment account opening;
(iii) cross-boundary monetary remittance;
(iv) managing the scheme’s quota as well as the individual’s quota;
(v) undertaking product due diligence and accessing eligibility;
(vi) overseeing the sales process; and
(vii) monitoring overall compliance with the scheme.
In order to participate in the southbound scheme, Hong Kong banks are required to partner with one or more eligible Mainland bank and enter into a cooperation agreement governing their respective duties and obligations in connection with the items outlined in (i) to (vii) above.
WMC is subject to aggregate and individual quotas.
Aggregate remittances from the Mainland are subject to a quota of RMB150 billion calculated by reference to cumulative remittances from the Mainland to Hong Kong and Macao minus cumulative remittances from Hong Kong and Macao back to the Mainland.
The PBoC Guangzhou Branch and Shenzhen Central sub-branch will update the quota usage each day on their websites.
The individual investment quota is capped at RMB1 million and is calculated on a net remittance basis and so any investment gains and losses will be accounted for.
Cross-boundary remittances – closed loop funds flow
Cross-boundary remittances between an individual’s account (comprising an investment account and remittance account) must be maintained in RMB.
Save for exotic foreign currency deposits, there is no restriction on the currency of the underlying wealth management products and Hong Kong banks can provide foreign exchange services to enable southbound investors to purchase eligible products denominated in a foreign currency. Upon redemption from such products, the redemption proceeds are required to be converted back into RMB prior to remittance to the investor.
Eligible products for southbound investors
Eligible wealth management products include:
(i) Hong Kong domiciled funds authorised by the Securities and Futures Commission (SFC);
(iii) deposits (in its FAQs, the HKMA has clarified that besides RMB and Hong Kong dollar, eligible deposits must be denominated in one of the following currencies: Australian dollar, Canadian dollar, Euro, Japanese Yen, New Zealand dollar, Singapore dollar, Swiss Franc, UK Pound Sterling and US dollar).
It is the first category, namely Hong Kong domiciled SFC authorised funds, which present significant opportunities for fund managers, opening up a potential retail investor base of some 72 million in the GBA.
However, in order for a Hong Kong domiciled SFC authorised fund to be eligible for participation in the southbound scheme it must be assessed as “non-complex” in accordance with Hong Kong regulations and “low risk to medium risk” by the Hong Kong bank distributing such fund.
Whilst WMC is clearly a significant opportunity for Hong Kong based retail fund managers with locally domiciled products, the implementation rules do not restrict feeder and/or fund of funds structures. This means that Hong Kong domiciled SFC authorised funds, structured as a feeder fund or fund of funds into underlying UCITS funds would be technically possible, subject to the Hong Kong domiciled fund maintaining a risk rating of low to medium. Also in the case of a feeder fund structure, the underlying UCITS would also need to be authorised by the SFC. However, in the case of a fund of funds structure the underlying UCITS need not be authorised by the SFC provided it qualifies as a recognised jurisdiction scheme under the SFC’s Code on Unit Trusts and Mutual Funds (i.e. a UCITS fund domiciled in Ireland, Luxembourg or the United Kingdom).
WMC distribution model
As mentioned above, the WMC is a bank driven scheme and this extends to the distribution arrangements.
Hong Kong banks are however subject to restrictions in the manner in which they are able to promote eligible funds. In short, they are not permitted to solicit or recommend a fund to potential southbound investors and hence their promotional activities are restricted to making products available on their websites or dedicated WMC platforms or otherwise simply making product documentation and information available in a manner which does not solicit or recommend a product. This “execution style” only of promoting products is a departure from the normal distribution activities undertaken by banks in Hong Kong and will require strict compliance monitoring.
WMC has contributed to further “connectivity” between Mainland China and Hong Kong, and is a game changing channel for fund distribution across the GBA region. It potentially lays the foundation of a UCITS equivalent cross-border funds platform between Hong Kong and the Mainland. Although like many pilot programmes, the scheme is being rolled out subject to restrictions involving investment quotas and product eligibility. However, as we have seen with other connect schemes, they evolve over time and for now WMC clearly positions Hong Kong’s fund management industry and those overseas institutions who establish a retail asset management hub in the territory as the retail funds gateway into the Mainland.