For Hong Kong, mutual recognition deals of this type are key to establishing its position as an international asset management centre, developing the local fund management industry and providing managers access to new markets to strengthen their capabilities.
The MRF with the UK is exemplary in this regard as the UK is the second-largest global asset management centre, after the US, and accounts for 35% of the AUM in Europe. The MoU gives Hong Kong fund managers access to assets of authorised recognised funds domiciled in the UK and overseas worth over £1.2 trillion in 2017, up 15% from the previous year1.
For the UK, the MoU provides a new distribution channel separate from the EU’s UCITS (under which authorised funds are already eligible for distribution in Hong Kong), since UK-authorised UCITS schemes may lose this designation when the country leaves the EU2. The MoU covers funds already designated UK UCITS but will entail a more streamlined application process than the existing UCITS framework3.
Rules and Requirements
The MoU covers around 2,500 retail funds1, subject to certain eligibility and operational requirements. These include:
- Strategies are restricted to equity, bond and mixed funds;
- Types of funds are restricted to regular funds, funds of funds, index funds, ETFs and feeder funds where underlying assets are eligible;
- No funds shall have leverage exceeding 100% of the fund’s NAV;
- No hedging other than currency hedging is allowed;
- Additional restrictions are in place relating to real estate products and physical commodities.
Operational requirements, meanwhile, include rules governing market access and distribution, operating activities in the reciprocal markets, and other stipulations regarding disclosure and advertising.
Regarding applications, the MoU establishes a framework that includes a two-month process where both the FCA and SFC grant authorisation to a Covered Fund for public distribution into their respective territories. Any change to a Covered Fund affecting investors of the host market, including fund termination, must be made in accordance with the terms of the FCA-SFC MoU and must be filed with the host competent authority4.
Market Trends and Opportunities
Some £147 billion of UK funds’ £1.2 trillion in AUM in 2017 was held in funds domiciled overseas, suggesting UK investors are not shying away from overseas funds following the Brexit referendum1. The MoU will give UK investors access to new strategies and exposure to Asian markets and assets, with the opportunity to benefit from local expertise in these markets.
Other key trends driving the UK market include the shift towards liability-driven investment, fuelled by interest from defined-benefit pension schemes, and a strong demand for lower-cost passive solutions (UK listed ETFs have grown from £11bn to £250bn in the past decade1).
Fund managers should be aware of the differing distribution channels in each market: in Hong Kong the market is still dominated by banks, while in the UK distribution of retail funds remains heavily intermediated. This puts managers under pressure to improve connection with customers by harnessing digital innovation, including improving back-office systems and transactions processing, using big data to offer sophisticated quantitative strategies, and enhancing investor experience by giving better access to funds via a variety of media.
BNP Paribas Securities Services is ideally positioned as the preferred provider to support Hong Kong mutual recognition programmes in the UK. We are the leading bank in Europe with overall capacity to provide all-round support for cross-border distribution services.
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1For details, see: www.theinvestmentassociation.org/assets/files/research/2018/20180913-fullsummary.pdf
2For details, see: www.gov.uk/government/publications/draft-eu-exit-sis-for-investment-funds-and-their-managers/the-collective-investment-schemes-amendment-etc-eu-exit-regulations-2018-explanatory-information
3For details, see: www.deacons.com.hk/news-and-insights/publications/launch-of-uk-hk-mutual-fund-recognition.html
4For full requirements see FCA and SFC guidance at www.fca.org.uk/publication/mou/fca-circular-mrf-uk-hong-kong.pdf and www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=18EC70