Mutual Recognition of Funds between the United Kingdom and Hong Kong

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 A uthority 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 general ly 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 co mply 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 on e 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 c ommitment 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 publi c 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. T his 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 Cov ered 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 ma nagement 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 fina ncial 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

Next steps â€" 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 distr ibution 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.

Source: Google News United Kingdom | Netizen 24 United Kingdom