UK and Hong Kong financial regulators agree on the mutual recognition of retail funds

On 08 October 2018, the UK’s Financial Conduct Authority (FCA) and the Hong Kong Securities and Futures Commission (SFC) entered into a Memorandum of Understanding (MoU) to enhance cooperation in respect of both (a) Hong Kong or UK domiciled collective investment schemes (CIS) which are offered to the public in the UK and/or Hong Kong on a cross-border basis, and (b) the management companies of such CIS, based in either Hong Kong or the UK.

What funds does the MoU cover?

The MoU concerns the mutual recognition of Covered Funds (see below) and Covered Management Companies (see below) and related cooperation between the regulators.

A "Covered Fund" is defined as being a UK UCITS or Hong Kong collective investment scheme which is either seeking authorisation (in Hong Kong) or recognition (in the UK) or is already authorised or recognised on a cross border basis in Hong Kong or the UK as the case may be.

A Covered Management Company is the UK authorised or Hong Kong licenced/registered management company of a Covered Fund.

The MoU further sets out that UK Covered Funds applying for authorisation from the SFC must be a UCITS scheme authorised as such by the FCA and falling within one or more of the following types of fund under the SFC’s Code on Unit Trusts and Mutual Funds:

  • general equity funds, bond funds and mixed funds
  • fund of funds
  • index funds
  • passively managed index tracking exchange traded funds (ETFs), or
  • feeder funds, where underlying fund falls within one of the fund types above and complies with the requirements in the MoU.

(Similar requirements apply to Hong Kong Covered Funds, which must meet the requirements of Section 272 of FSMA.)

In addition, a UK Covered Fund must not:

  • use leverage exceeding 100% of the fund’s NAV (as calculated under the commitment approach - see COLL 5.3.8R)
  • invest in real estate, or
  • have share classes with hedging arrangements other than currency hedging.

What does the MoU cover?

The MoU confirms the agreement of the two regulators that each will consider applications from Covered Funds for authorisation in Hong Kong under Section 104 of the Securities and Futures Ordinance or recognition in the UK under Section 272 of FSMA 2000 through a streamlined process, provided the fund concerned meets the applicable conditions and requirements set out in Appendix Bb of the MoU.

Each regulator would remain responsible for the regulation and supervision of the offering, marketing and distribution of a Covered Fund within its jurisdiction in compliance with local law. The offering, marketing and distribution of Covered Funds in the host jurisdiction must comply with the applicable domestic law in the host jurisdiction.

The MoU also establishes a framework for the exchange of information and regulatory cooperation on the cross-border offering of eligible Hong Kong public funds and United Kingdom retail funds, as well as setting out procedures for possible cross-border on site visits.

Conclusion

The MoU is good news for the UK and Hong Kong retail funds industry, allowing potentially greater access to each other’s market and to each other’s investors, and should be welcomed as such, not least given the decline, over the past decade or so, of UK domiciled funds being offered to retail investors in Hong Kong. Recent figures from the SFC indicate that these now constitute a mere 2% of the total - this compares with 47% for Luxembourg funds and 11% for Irish funds. It remains to be seen how “streamlined” the process of authorisation/ recognition will be in practice. It will also be interesting to see how the MoU will be affected by the outcome of the UK’s negotiations with the EU on Brexit and (in the case of the UK) whether a more streamlined access for EEA UCITS using an improved s272 process can be provided perhaps using the MOU with the SFC as a starting (but not finishing) point. Nevertheless, the MoU suggests that UK funds will enjoy favourable treatment in Hong Kong whatever the outcome of the UK’s Brexit negotiations with the EU.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.