Asset managers are lobbying Hong Kong’s Securities and Futures Commission (SFC) on parts of the pending China-Hong Kong funds mutual recognition framework, including product eligibility, investment quota, distribution channels and advertising.
The scheme is expected soon, now that the Shanghai-Hong Kong Stock Connect has a start date of November 17 as reported. Hong Kong regulators have been consistent in saying that the mutual recognition initiative will come after the launch of the Stock Connect programme.
Bruno Lee, chairman of the Hong Kong Investment Funds Association, outlined to AsianInvestor what the HKIFA’s 64 fund house members would like to see happen under mutual recognition.
One key issue is product eligibility. While the association agrees with the SFC that fund houses should offer simple products, such as developed-market equity and bond funds, it has asked that they be allowed to offer renminbi share classes to reduce currency risk.
The HKIFA would also prefer not to see a minimum track record for funds under the scheme, because managers may have substantial capabilities in a particular asset class and/or region but not necessarily have domiciled a product in Hong Kong.
“People are buying the skills of a fund manager rather than the wrapper,” said Lee. “If the product is required to have a certain number of years of track record in Hong Kong, that may restrict good products from participating.”
The HKIFA understands that it is necessary to have investment quota under the programme, said Lee, but it would like to see it imposed at manager level rather than product level.
“If you earmark quota for a particular fund, changing market and investor preferences may not allow for optimised use of the quota,” he noted. “We understand there will be restrictions to how much we can sell, but minimal control would be better.”
On the distribution front, the association wants the regulators to consider expanding the range of entities allowed to conduct wholesale marketing in China to include wholly-owned foreign enterprises. WOFEs are currently merely liaison offices for foreign firms.
Not all HKIFA members have joint ventures with Chinese fund houses, Lee pointed out, so some are not eligible to carry out wholesale marketing on the mainland.
The association also wants to see the range of distribution channels extended beyond banks and brokers to include e-commerce platforms, such as Taobao. The Alibaba-owned operation has helped Tianhong Asset Management become the largest Chinese fund house thanks to sales of its Yu’ebao money-market product.
Moreover, fund managers should be allowed to conduct normal promotional activities for funds recognised under the scheme, said Lee. Fund advertising is allowed in China, but the HKIFA hasn’t seen much promotion occur after fund launches, so would like to see more clarity around this issue.
Lastly, the association has asked the regulator for clarity on which entity will keep end-customer records. In China, this is the fund manager’s role, but not so in Hong Kong. Distributors in Hong Kong maintain the end-customers’ records and deal with fund managers under an omnibus arrangement, where money or securities for more than one beneficial owner are commingled under a custodian or a sub-custodian.
“If fund managers have to keep all customer records, the burden is high. It also has implications for anti-money laundering and know-your-client requirements, said Lee. “We want to know if we will have the same arrangement we have in Hong Kong when selling funds in China.”