The SFC and the UK's Financial Conduct Authority (FCA) issued a memorandum of understanding on 8 October 2018 establishing a bilateral framework for mutual recognition of cross-border fund offerings to retail investors in the UK and Hong Kong (UK-HK MRF).
Key takeaways from the UK-HK MRF:
- Increased regulatory co-operation between the SFC and the FCA
- Streamlined authorisation process in Hong Kong and the UK in respect of eligible funds aimed at facilitating market access
- A more flexible vetting approach in respect of key operators
Accessing Hong Kong
In order to enjoy a streamlined process of SFC's authorisation under the arrangement, a UK domiciled fund (UK Covered Fund) must be a UK UCITS scheme with a leverage level not exceeding 100% of its net asset value under the commitment approach. It must also fall within the following fund types:
a) General equity funds, bond funds and mixed funds
b) Fund of funds
c) Unlisted index funds
d) Passively managed index tracking exchange traded funds (ETFs)
e) Feeder funds where the underlying fund falls within one of the fund types above.
The UK Covered Fund must be managed by a UK management company authorised by the FCA and its investment delegate(s) (if any) must be operated in a jurisdiction with an acceptable inspection regime the list is available here: https://www.sfc.hk/web/EN/files/PCIP/List%20of%20AIR/AIR_List_Eng_20180314.pdf.
Whilst the SFC's authorisation procedures will be streamlined, the UK Covered Fund is still subject to certain requirements prescribed by the SFC, including but not limited to the following:
a) Issuance of Hong Kong offering documents (including the key facts statement) in English and Chinese complying with the SFC's disclosure requirements;
b) Operational requirements in respect of valuation, pricing, dealing, fees paid from the fund and transactions with connected persons;
c) Appointment of a Hong Kong representative;
d) Post-authorisation requirements in respect of scheme changes, notifications, ongoing disclosure, reporting, withdrawal of authorisation, merger or termination; and
e) Additional requirements applicable to specific fund type (i.e. funds of funds, index funds, ETFs and feeder funds).
In support of an application for authorisation of a UK Covered Fund under the arrangement, the applicant must request the FCA to provide directly to the SFC a certificate confirming that the SFC's prescribed eligibility requirements are met.
This new arrangement provides a more streamlined authorisation procedure to process UK UCITS applications compared with the existing recognised jurisdiction scheme approach for UCITS funds, as the key operators (i.e. the management company, investment delegate(s) and the depositary) are deemed compliant with the standard eligibility requirements under the SFC's Code on Unit Trusts and Mutual Funds (UT Code). This may attract more eligible UK funds to be offered in Hong Kong.
Accessing the UK
In order to enjoy a streamlined process of FCA authorisation under the arrangement, a Hong Kong domiciled fund (HK Covered Fund) must be established and managed in accordance with Hong Kong law and regulations and authorised by the SFC. It must not use leverage exceeding 100% of the fund's net asset value under the commitment approach provided under the SFC's UT Code.
The eligible category of fund types is the same as that listed above applicable to UK Covered Funds.
The FCA approval process adopts a similar approach in terms of relying upon the SFC to provide directly to the FCA a certificate confirming that the FCA's prescribed eligibility requirements are met.