On 19 September 2018, Mr Ashley Alder, Chief Executive Officer of the Securities and Futures Commission (SFC), addressed members of the Hong Kong Investment Funds Association at a luncheon. Some key points are set out below.

Mutual recognition of funds (MRF) – There are initiatives aimed at further developing the MRF scheme with mainland China that was initially launched in 2015. Noting that the current rules do not allow delegation of investment management functions outside Hong Kong, the SFC is looking into the possibility of a more efficient delegation model, in particular for fund houses with a global presence. The SFC will also seek to include the new open-ended fund company structure under the MRF scheme.

The SFC’s message is encouraging. Undoubtedly, mainland China has been perceived as the most important market for fund distribution through MRF; and enhancements to the current regime will hopefully bring more funds into the mainland China market.

Retail fund distribution – The SFC has been exploring the feasibility of an exchange-based, business-to-business online fund distribution platform, with a view to broadening the channels for retail fund distribution. This project is with a view to providing more shelf-space for product distribution and better information to investors, as well as the potential for new financial technologies.

With the existing distribution of retail funds being dominated by commercial banks, the SFC’s on-going effort to facilitate alternative distribution channels is appreciated. However, as Mr Alder remarked, the development of new distribution channels requires “demonstrable commitment and buy-in” from the industry, so that the long-term benefits can be seen.

Code review – Mr Alder referred to the ongoing discussions with the industry on the disclosure of leverage arising from the use of derivatives, as proposed in the consultation to revise the SFC Code on Unit Trusts and Mutual Funds (UT Code). He noted that good progress has been made in reaching a consensus, including the circumstances where derivative usage could be reasonably excluded from the overall leverage limit.

We understand this issue was a major concern during the revised UT Code consultation, due to the additional obligations on the part of distributors for selling a derivative or complex product. The results are expected to be reflected in the new UT Code: the SFC plans to issue consultation conclusions by the end of the year.

The text of Mr Alder’s speech is available here:

https://www.sfc.hk/web/EN/files/ER/PDF/Speeches/Ashley_20180919.pdf