It has been a busy summer for securities regulators in Hong Kong and on the Mainland. Recent press coverage indicates that the regulators are closer now to making the Mutual Fund Recognition Scheme (the “Scheme”) a reality, possibly as soon as before the end of this year. While the industry is still no closer to receiving detailed regulations and procedures from either set of regulators as to how the Scheme will work in practice, there have been enough indicators to heighten excitement in the market that the Scheme will soon come to pass.1
For fund houses and investment managers on the outside looking in, at a potential market of 1.3 billion investors (with a middle class of 10% (i.e. 130 million) and approximately USD3.62 trillion in savings),2 the pre-requisites to participate in this new initiative are:
- to have a fund that is domiciled in Hong Kong, and authorised by the Hong Kong Securities and Futures Commission (“SFC”) for distribution to retail investors; and
- which is managed by an investment manager that is both based in Hong Kong and regulated by the SFC, i.e. licensed to carry on Type 9 (asset management) activity.
Under existing Hong Kong legislation, the fund can only practically be constituted as a unit trust – Hong Kong does not currently have specific mutual funds legislation. In all likelihood, the fund should also be denominated in RMB so as to be in a currency familiar to PRC domestic investors. The number of SFC-authorised funds that currently fall into this category (and which are managed by a HK-based and licensed investment manager) are not many. Only about one quarter of the total number of SFC-authorised funds are domiciled in Hong Kong and, out of these, most cater almost exclusively for the local mandatory provident funds. Larger fund houses who already have a presence in Hong Kong are now busy applying for SFC authorization of newly-minted Hong Kong-domiciled unit trusts.
Fund houses and investment managers who are not already operating in Hong Kong but who are keen to be a part of this new Scheme should note that the fund authorization process with the SFC takes, on average, 9-10 months (from the date on which the application is submitted to the SFC). The process of establishing and licensing an investment manager in Hong Kong will take (on average) approximately 6 months, assuming that the applications progress smoothly. Both applications can proceed simultaneously. The SFC will require the investment manager of the fund applying to be authorized, to have the appropriate prior experience of managing similar publicly registered funds.
Other practical hurdles which outside investment managers hoping to obtain a slice of the PRC pie will likely face on the Mainland are access to distribution networks, a potential lack of foreign brand awareness and a need for investor education. In this regard, the Hong Kong asset management arms of PRC banks, many of which have, in recent years, established a presence in Hong Kong to take advantage of the Renminbi Qualified Foreign Institutional Investor (“RQFII”) Scheme are likely to (once again) benefit from this new Scheme, given the banking distribution networks of their parent companies and other affiliated companies within the Mainland banking groups. An initiative last year to bring independent financial advisers on the Mainland into the mainstream of fund distribution does not appear to have gained much traction.3