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Hong Kong’s European network of Memoranda of Understanding

  • United Kingdom
  • Hong Kong
  • Luxembourg
  • Netherlands
  • Financial services and markets regulation
  • Financial institutions

07-06-2019

Introduction

The Hong Kong Securities and Futures Commission (“SFC”) has been busy building a network of memoranda of understanding (“MoUs”) in Europe for the mutual recognition of funds, concluding MoUs with the Netherlands (15 May 2019), Luxembourg (15 January 2019) and the UK (8 October 2018) in the last year.

The SFC has pursued mutual recognition arrangements in order to tap into otherwise unreachable overseas markets and ensure the longer-term health and development of Hong Kong’s asset management industry. By using this streamlined approach for the authorisation of certain eligible funds, it is intended that the cross-border offering of retail funds between Hong Kong and Europe will become more efficient, paving the way for the SFC and respective European regulators to extend the regime to include other fund types in future agreements1.

Common features of the MoUs

1. Home jurisdiction supervision

1.1 An eligible foreign fund (“Covered Fund”) and its key operators which comply with

1.1.1 the laws and regulations of the Covered Fund’s home jurisdiction

1.1.2 the conditions prescribed by the SFC

are generally deemed to have complied in substance with the relevant SFC requirements.

1.2 An applicant must direct its home regulator to provide a certificate to the SFC directly confirming that the Covered Fund meets the eligibility requirements as prescribed by the SFC

1.3 Both the Covered Fund and its Management Company (as defined below) must not have been the subject of any disciplinary action undertaken by the Covered Fund’s home regulator in the past three years

2. Eligibility requirements

2.1 A Covered Fund must be a UCITS fund registered with its home regulator and must not

2.1.1 use leverage (arising from derivatives) exceeding 100% of its net asset value

2.1.2 have share classes with hedging arrangements other than currency hedging

3. Appointment of key operators

3.1 A Covered Fund must be managed by a management company that is approved or licenced by its home regulator to manage the Covered Fund (“Management Company”)

3.2 A trustee or depositary, qualified to act as a trustee or depositary for the UCITS in the home jurisdiction of the Covered Fund, must be appointed

3.3 A Hong Kong representative licensed by the SFC must be appointed to represent the Covered Fund

4. Sale and distribution of the Covered Fund

The sale and distribution of a Covered Fund in Hong Kong must also be conducted by intermediaries who are properly licensed by or registered with the SFC (which may include the Management Company if so properly licensed) and all advertisements in relation to the offering of the Covered Fund must comply with the relevant Hong Kong laws and regulations relating to the sale and distribution of funds.

5. Language of documents

The offering documents and notices to Hong Kong investors must be provided in English and Chinese, while the constitutive documents and financial reports can be made available to Hong Kong investors in either English or Chinese.

6. Ongoing reporting requirements and disclosure

Any proposed material changes to a Covered Fund must be notified and/or approved by the SFC in advance. Any breaches committed by a Management Company must be notified to both its regulator and the SFC and rectified promptly.

7. Equal and fair treatment to investors

Equal treatment must be provided to investors in both jurisdictions including investor protection, exercise of rights, compensation and timely disclosure of information.

Specific features of the MoUs

Hong Kong – Netherlands MoU

Hong Kong

A Dutch Covered Fund authorised by the Autoriteit Financiële Markten (“AFM”) can only be

• a general equity fund, bond fund or mixed fund

• an index fund (other than an exchange-traded fund)

and must not invest in physical commodities including precious metals or commodity based investment or real estate, crypto-assets or crypto-currencies or certificates representing these assets.

It is worth noting that a Dutch management company which has been manager of other EU UCITS, which would qualify under similar mutual recognition schemes of the SFC, will be accepted by the SFC as an acceptable management company for a Dutch Covered Fund.

In addition, the SFC requires the Dutch Covered Fund to ensure, and procure its distributors to ensure, that Hong Kong investors are able to bring actions concerning the Dutch Covered Fund and the Dutch Management Company in the courts of Hong Kong.

Further, the offering document registered by the AFM must be supplemented by a Hong Kong covering document to comply with the disclosure requirements prescribed by the SFC and disclose any other information which may have a material impact on the investors in Hong Kong.

The Hong Kong – Netherlands MoU may mark the first time that Dutch funds seek authorisation from the SFC. Given that the MoU also recognises a Dutch fund manager which manages other EU UCITS which would qualify under the SFC mutual recognition schemes, the MoU provides a great incentive for the retail offering of Dutch Covered Funds in Hong Kong.

Netherlands

The MoU will allow eligible UCITS and Hong Kong Collective Investment Schemes (CIS) to be distributed in each other’s market through a streamlined process. This new SFC-AFM framework will open up opportunities for the asset management industries in both markets and provide investors in Hong Kong and the Netherlands with more investment choices.

The Dutch fund must be a UCITS fund approved by the AFM for public offering in the Netherlands. It must be managed by a Dutch management company approved by the AFM to manage UCITS under Dutch law. At the moment, only the following types of funds are eligible:

• general equity funds, bond funds and mixed funds

• index funds (other than exchange traded funds)

The MoU establishes a framework for exchange of information, regular dialogue as well as regulatory cooperation in relation to the cross-border offering of eligible Dutch UCITS and Hong Kong CIS. In addition, a streamlined approach to the authorisation of funds also applies where Dutch fund managers have been appointed as managers of other European Union UCITS that qualify under the SFC recognised jurisdiction schemes regime.

Under to the MoU, managers from the Netherlands and Hong Kong no longer need an extra licence to offer participation rights in their investment funds on each other's markets. However, they will have to go through a simplified procedure (vereenvoudigde procedure). The AFM have published FAQs setting out how Recognised Hong Kong Funds that seek AFM approval can submit their applications.

This newly established bridge between the Netherlands and Hong Kong constitutes an important stepping stone for the Dutch asset management industry seeking to develop activities in Asia. It leads to offering investors greater choice and diversification in their investments. The AFM has set out in further detail the requirements and process for mutual recognition of funds scheme.

To read the Hong Kong – Netherlands MoU, click here.

To read the “AFM requirements and process for mutual recognition of Hong Kong funds”, click here.

To read the AFM FAQs, click here.

Hong Kong – Luxembourg MoU

Hong Kong

A Luxembourg Covered Fund authorised by the Commission de Surveillance du Secteur Financier (“CSSF”) can only be

• a general equity fund, bond fund or mixed fund

• a feeder fund of an equity, bond or mixed fund

A Luxembourg Covered Fund must not invest in physical commodities including precious metals or commodity based investments or real estate, crypto-assets or crypto-currencies or certificates representing these assets.

A Luxembourg Management Company is required to have a minimum paid-up share capital and non-distributable capital reserves of HK$10 million or its equivalent in Euro.

The offering document registered by the CSSF may be supplemented by a Hong Kong covering document to comply with the disclosure requirements issued by the SFC.

There are streamlined measures in place for processing the authorisation of UCITS funds pursuant to the Code on Unit Trusts and Mutual Funds (UT Code). Luxembourg UCITS would still be eligible for authorisation under these measures if not eligible under the new MoU. As such, the MoU has effectively expanded the retail fund market for Luxembourg UCITS and consequently, it is envisaged that cross-border offerings in Hong Kong and Luxembourg markets will become more active.

Luxembourg

To be capable of recognition in Luxembourg, a Hong Kong Covered Fund authorised by the SFC must be (i) a general equity fund, bond fund or mixed fund or (ii) a feeder fund of a general equity fund, bond fund or mixed fund. A Hong Kong Covered Fund must not invest in physical commodities including precious metals or commodity based investments or real estate, crypto-assets or crypto-currencies or certificates representing these assets.

The Hong Kong Covered Fund must have at least one dealing day for redemption every two weeks.

The Hong Kong Covered Fund must appoint a credit institution in Luxembourg in compliance with the Luxembourg law of 17 December 2010 relating to undertakings for collective investment as amended in order to ensure that facilities are available in Luxembourg for making payments to unit-holders or redeeming units. The CSSF must be provided with a proof of the appointment of a Luxembourg paying agent among the application documents.

The Hong Kong Covered Fund is considered as an alternative investment fund (“AIF”) under Luxembourg law, for the purpose of the mutual recognition of funds between Luxembourg and Hong Kong (“MRF”). Consequently, the marketing rules applicable to the AIF apply. All marketing communication issued to investors in Luxembourg must therefore be clearly identifiable as such.

In respect to the offering documents, the disclosure of information must be complete, accurate, fair, clear, effective and easily understood by investors. Such documents must be up-to-date and contain the necessary information in order for an investor to be able to make an informed judgement of the proposed to them. The Hong Kong Covered Fund may reuse the prospectus authorised by the SFC. Unless otherwise provided for in the MRF, matters such as the type of documents, content, format, frequency of update and the updating procedures must comply with the applicable Hong Kong laws and regulations and the provisions of its constitutional documents. The offering documents, notices, financial reports, advertisement and the constitutional documents must be provided to investors in Luxembourg in either French, German, English or Luxembourgish.

Prior to any marketing to Luxembourg retail investors, a Hong Kong Covered Fund must be authorised for such marketing by the CSSF.

To read the Hong Kong – Luxembourg MoU, click here.

Hong Kong – UK MoU

Hong Kong

A UK Covered Fund authorised by the Financial Conduct Authority (“FCA”) can only be one of the following types of fund that does not invest in real estate:

• general equity funds, bond funds, mixed funds and fund of funds

• unlisted index funds

• passively managed index tracking exchange traded funds

• feeder funds, where the underlying fund falls within one of the three fund types specified above

The offering document registered by the FCA may be supplemented by a Hong Kong covering document to comply with the disclosure requirements issued by the SFC.

The Hong Kong – UK MoU will offer investors in both markets with greater choice and diversification in their investments. It is further intended that the FCA and SFC will continue to work together, not just in connection with cross-border fund offerings but in wider areas of mutual benefit.

UK

Although the FCA aim to process applications for Hong Kong Covered Funds to be recognised in the UK under s 272 of FSMA through a streamlined process, we consider it unlikely that there will be a great level of take-up amongst Hong Kong domiciled funds looking to market to retail investors in the UK. At present, the FCA’s register shows 7 stand-alone funds as being individually recognised, 7 umbrella funds, and 25 sub-funds, globally. This contrasts with the number of overseas domiciled UCITS funds recognised in the UK of which there are currently over 8000 sub-funds on the FCA register.

The issue, we suspect, is the need for the Hong Kong Covered Fund to demonstrate compliance with certain requirements of the FCA which are not common in the Hong Kong market, such as the requirement for a depositary or trustee to be independent, in accordance with COLL 6.9.2G – COLL 6.9.5G. By way of further example, the FCA have also stated that any Hong Kong Covered Fund will also need to demonstrate equivalent outcomes to the assessment of value disclosures which UK funds will be required to comply with from September 2019.

These kinds of additional requirements may well dampen enthusiasm for taking advantage of the streamlined process where they require a restructuring of existing business relationships, or, indeed, additional compliance requirements which are not commonplace in the Hong Kong market.

Further information about the obligations the FCA require Hong Kong Covered Funds to comply with to be eligible for recognition in the UK can be obtained here.

To read the Hong Kong – UK MoU, click here.

Impact

The framework of mutual recognition of funds between the SFC and other jurisdictions has expanded with the addition of the above-mentioned MoUs. Including those schemes with Switzerland, France and Guernsey, the MoU framework has increased opportunities for the Hong Kong asset management industry in the wider European markets and, conversely, for European asset management industry in the Hong Kong market. With strengthened ties and regulatory cooperation, Hong Kong is seeking to position itself as an international financial services hub.

How Eversheds Sutherland can help

The Eversheds Sutherland financial services team act as trusted legal advisers, risk managers and strategic business partners. Our international network of lawyers and former regulators, advise leading, asset managers, banks and broker-dealers on the full range of regulatory process, including regulatory change implementation, enhanced supervision and regulatory investigations as well as ongoing regulatory and compliance advice.

Our in depth understanding and experience with the practical implementation of new governance arrangements, means that, when these rules are implemented, we are very well placed to guide you through your implementation process. We can also offer bespoke training on the issues raised, as well as general Solvency II training, for all sectors of the financial services industry.


1. In fact, open-ended fund companies, which was introduced in Hong Kong in July 2018, are already eligible under Hong Kong’s MoU with Switzerland.

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