The European Commission is seeking to strike a mutual recognition agreement with mainland China and is at the fact-finding stage, the head of its asset management unit has told AsianInvestor.

Tilman Lueder recently led a delegation to Beijing to meet the China Securities regulatory Commission (CSRC) and People's Bank of China (PBoC) to promote use of Ucits, the cross-border collective investment scheme in operation throughout the European Union.

“We believe an agreement is possible,” Lueder told AsianInvestor in an interview. “We are at the fact-finding stage and in the process of looking at each other’s systems. We will offer presentations [to Chinese institutions] on Europe’s Ucits system.”

He noted that negotiations on a separate recognition scheme were yet to begin between the two sides. It is speculated that the European Commission will only seek such an arrangement once Hong Kong-China’s mutual recognition scheme had been initiated and its operational issues ironed out, although Lueder declined to comment on this.

Alexa Lam, deputy chief executive of Hong Kong’s Securities and Futures Commission (SFC), first unveiled plans for the cross-border RMB funds scheme in January last year, since when it has collaborated with the CSRC on standardisation.

While the launch of this mutual recognition scheme had been widely tipped this year, it is understood regulatory deliberations have taken a back seat recently following the announcement of the HK-Shanghai Stock Connect programme, which is expected to begin by October.

These talks between the European Commission and Beijing come at a time when Hong Kong is also trying to promote itself as an funds domicile for international fund houses, on the back of its special relationship with the mainland.

Any mutual arrangement for Chinese investors to be able to directly access European Ucits products onshore could be seen as counterproductive to Hong Kong establishing itself as a fund domicile centre. In other words, why would international asset management firms set up in Hong Kong if their Ucits products would become eligible for sale in China. The big question is when?

But Lueder believes any separate mutual recognition agreement between Europe and China would not compete head-to-head with a similar scheme between China and Hong Kong. It is a point of view that has been previously expressed by Marc Saluzzi, chairman of Luxembourg's fund industry association.

Lueder speculates that Europe-based Ucits fund providers could specialise in specific strategies such as sector, thematic or single-country funds, which could complement funds run by other houses.

This would be relevant for mid to small fund houses that would be unlikely to generate economies of scale required to go to the expense of setting up fund ranges domiciled in Hong Kong, Lueder noted.

Asked whether mainland China would be less likely to agree to mutual recognition with Europe on the grounds that European laws and regulations are extra-jurisdictional, Lueder responds: “The mainland would have a direct say because any type of mutual recognition scheme would be negotiated between China and the EU. When two partners negotiate passporting arrangements, both sides can specify what type of product should be part of the scheme.”

Another relevant question is how the two sets of regulators would cooperate with each other, having not had any history of cooperating in the past. For instance, there would need to be an education process for Chinese investors to understand strict Ucits rules, such as limits on investing in a single issuer.

Lueder suggested that regulators from both jurisdictions would be likely to conduct frequent thematic reviews, conduct and control system checks and other supervision.

“This is the beginning of a process and we are now scheduling the first round of get-to-know-each-other sessions,” he stated. “But we are aware, of course, that regulatory and supervisory cooperation requires sorting out a lot of nitty-gritty details on his this cooperation works on a daily basis.”

Another EU official, who declined to be named, stated the belief that Hong Kong would be better served by focusing on attracting fund houses to set up in the city rather than on seeking to become a funds domicile centre, such as Luxembourg.

He pointed to the examples of London or Paris, which have concentrated on building a fund management industry, leading to job creation in highly skilled investment management roles.

 “I am wondering whether the strategy to say that we are becoming a fund domicile makes you a huge financial centre,” he said. “Just because you have a legal domicile in Luxembourg, you wouldn’t consider the country to be an international financial centre for fund management. It just has a good tax system and legal domicile and lawyers draw up the fund papers up there.”

A report from PwC showed that 70% of the 1,800 mutual funds domiciled in Hong Kong are offshore products. If these were converted into onshore domiciled funds, PwC estimated that service providers could gain up to $3.5 billion in fees, add 18,000 asset management jobs and add 1.5% to the city’s GDP.