The aim is to make it easier for:
- Hong Kong domiciled and authorised funds to be recognised by the FCA under section 272 of the Financial Services and Markets Act 2000 (“Section 272”) so that they can be marketed to the UK public; and
- UK UCITS funds to be authorised under section 104 of the Hong Kong Securities and Futures Ordinance (“Section 104”) for offering to the public in Hong Kong.
Importantly, therefore, eligible funds will still need to apply for recognition under Section 272 (in the UK) or authorisation under Section 104 (in Hong Kong), and they and their managers will need to comply with the local rules and regulations in the host jurisdiction (e.g. any local financial promotion rules). For more information on which funds will qualify for this new regime, see the Q&A below.
However, by concluding the MoU, the FCA and the SFC have committed to processing and determining applications from eligible funds in a more efficient and streamlined fashion. The FCA, for example, has indicated that it expects to determine an application for recognition under Section 272 with respect to an eligible Hong Kong fund within two months of receipt of the completed application. This compares favourably to the statutory maximum six month period that the FCA has to consider Section 272 applications.
The streamlined process should be facilitated by increased regulator-to-regulator cooperation. For instance, as part of its application for recognition under Section 272, a Hong Kong applicant must request the SFC to provide the FCA directly with a certificate confirming that the eligibility criteria are satisfied with respect to the applicant (see “Are there any eligibility criteria?” and “Are there any eligibility criteria for managers and depositaries / trustees?” in the Q&A below). While the MoU stresses that Section 272 recognition will not be automatic and that each application will be considered on its merits, direct confirmation of this kind from the SFC should greatly assist the FCA when considering the statutory factors listed in Section 272.
The Section 272 recognition regime has not been well used. This is largely because the FCA has, to date, interpreted the requirements for the third country fund to offer “adequate protection” to investors, very narrowly. It will be interesting to see, particularly with Brexit fast approaching, whether this mutual recognition process will spur greater take up of the Section 272 route.
Q&A
To which types of fund does the regime apply?
UK UCITS funds (for offerings to the public in Hong Kong) and Hong Kong domiciled funds that are authorised by the SFC (for offerings to the public in the UK) which, in either case, fall into one of the following categories under the SFC’s Code on Unit Trusts and Mutual Funds (the “UT Code”):
- general equity funds, bond fund and mixed funds;
- fund of funds;
- unlisted index funds;
- passively managed index tracking exchange traded funds; and
- feeder funds for funds falling within any of the preceding categories
Are there any eligibility criteria?
Yes. To be eligible, a fund must not:
- use leverage exceeding 100% of its NAV, calculated using the commitment approach;
- invest in real estate (if it is a UK fund);
- invest in: (i) physical commodities (including precious metals or commodity based investments or real estate); or (ii) certificates representing physical commodities (if it is a Hong Kong fund); and
- have share classes with different hedging arrangements other than currency hedging
Are there any eligibility criteria for managers and depositaries / trustees?
Yes.
- UK fund wanting to market in Hong Kong
The manager of a UK fund wanting to market in Hong Kong must be FCA-authorised with permission to manage UCITS funds and must not have been subject to any major regulatory or enforcement actions by the FCA in the preceding three years (or since its establishment, if that is less than three years).
Delegation of investment management to a third party is permitted, so long as it is in compliance with UK law and the manager retains responsibility for the delegate’s actions. Further, the delegate must operate in a jurisdiction listed as having an “acceptable inspection regime” under the SFC’s Code on Unit Trusts and Mutual Funds. The requirement for the manager to be responsible for the delegate’s actions will likely be problematic, as typically a UK manager would only accept responsibility for the actions of a delegate that is affiliated with the manager; where the delegate is unaffiliated, the manager’s responsibility is usually limited to selecting and monitoring the delegate with reasonable care and skill.
Finally, the fund’s depositary or trustee must be authorised to act as a depositary or trustee of a UK UCITS.
- Hong Kong fund wanting to market in the UK
The manager of a Hong Kong fund wanting to market in the UK must be licensed by or registered with the SFC for Type 9 regulated activity (asset management) and must not have been subject to any major regulatory or enforcement actions by the SFC in the preceding three years (or since its establishment, if that is less than three years).
Delegation of investment management to a third party is permitted, so long as it is in compliance with Hong Kong law and the manager retains responsibility for the delegate’s actions. Further, as for UK funds wanting to market in Hong Kong, the delegate must operate in a jurisdiction listed as having an “acceptable inspection regime” under the UT Code.
Finally, the fund’s depositary or trustee must be qualified to act as a depositary or trustee of a Hong Kong publicly offered fund.
To view the signed Memorandum of Understanding ("MoU") please click here.
