A new fund manager code of conduct (FMCC) comes into effect in Hong Kong this month, but many managers could be ill-prepared for it, say regulatory and legal experts.

The exhaustive list of regulatory requirements, which come into effect on November 17, will apply to all intermediaries licenced to carry out type 9 (asset management) registered activities in Hong Kong. Set to be introduced by the city's Securities and Futures Commission (SFC), they will have significant repercussions for the funds industry, including public and private funds and investors.

“It is a big step up from the current regime,” Philippa Allen, chief executive of Hong Kong-based consultancy ComplianceAsia told AsianInvestor.

As a result of the looming changes, investors stand to benefit from significantly higher levels of disclosure from the funds they invest in, especially private ones such as hedge funds and private equity funds.

The flip side for the funds industry is a greater regulatory burden, which some fund managers could struggle to cope with, potentially leading to a shakeout, according to experts.

One of the most important changes will be the introduction of the concept of the ‘responsibility of the overall operation of the fund', or Roof, Allen said.

While the term is not explicitly defined, the SFC provides examples of instances showing where overall responsibility might be deemed to lie, such as when representatives of an asset manager constitute a majority of a fund’s board or an asset manager is intricately involved in the setting up of a fund.

Aside from the enhanced disclosure obligations, there are many new internal policies that fund managers will be expected to follow. Some of the big changes revolve around risk management, including liquidity risk management, and leverage (see box).

“A lot of work needs to be done by managers to have these requirements in place and [it] will be an expensive process,” Allen said.

While the conclusion consultations for the revised FMCC were issued last year and managers have had a full 12 months to implement the changes, most experts that AsianInvestor spoke to agreed that it is unlikely everyone will be fully compliant by November 17.

“It will be an ongoing process,” Lee Kher Sheng, co-head of Apac and deputy global head of government affairs at the Alternative Investment Management Association (Aima), said.

“Managers have to review their existing policies and procedures and how they can comply with the new requirements, while also updating their fund-offer documents and ongoing disclosures to investors. There is quite a bit of housekeeping going on,” he said.

He added that while many large global managers of long-only funds are likely to have the resources to implement the new requirements, comparatively smaller private fund managers particularly those managing hedge fund, private debt and private equity strategies are likely to find the changes more burdensome.

That could lead to some consolidation over time: “The big boys are likely to get bigger and the smaller ones will need to get smarter about [how] they can pragmatically implement the new FMCC,” Lee said.

It's a sentiment broadly shared by ComplianceAsia’s Allen who thinks the new code of conduct will strain the internal resources of some firms.

“With compliance requirements increasing significantly, more people will [have] to be based in Hong Kong and the pressure will clearly be in the direction of launching funds with higher [assets under management],” she said.

She added that the FMCC is set to change the operating landscape for non-authorised (private) funds.


Still, as Aima's Lee pointed out, the FMCC represents an opportunity to modernise the existing regime to keep pace with the evolving regulatory landscape around the world.

“Many of the changes under FMCC are similar to what has been introduced under the Alternative Investment Fund Managers Directive (AIFMD) in Europe,” concurred Michael Wong, a partner at legal firm Dechert, referring to the regulatory framework for alternative investment fund managers in the European Union.

For companies that don't comply with the FMCC over time, expect the SFC to swoop in and take action.

"The SFC could penalise firms that don’t comply, by fining them, reprimanding them and eventually pulling their licence for not being ‘fit and proper’,” said ComplianceAsia’s Allen. 

In recent years, the SFC has not shied away from flexing its regulatory muscles if companies fail to adhere to the required regulatory norms. In 2017 it levied a record HK$4,797 million ($63.7 million) in fines -- a 632% increase on the 2016 total.

In 2018, the fines have become even larger. For example, CN Capital Management alone was fined HK$1,000,000 in April for failing to maintain an effective compliance function and satisfactory internal controls concerning employee account dealing.


Some of internal policies to be followed by fund managers

  1. Risk management: For each fund, implement risk management        procedures to identify, measure, manage, and monitor all risks relevant to each investment strategy
  2. Delegation: Exercise due skill, care and diligence in the selection and appointment of third-party delegates
  3. Leverage: Formulate policy to calculate leverage
  4. Securities lending and repos: Select third-party service providers with due care, skill and diligence, and establish collateral valuation policy
  5. Liquidity risk management: Establish, implement and maintain liquidity risk management policies and procedures

Some of the key disclosures required in offering documents/made separately to investors

  1. Conflicts of interest: Actual or potential conflicts of interest
  2. Securities lending and repos: Summary of securities lending, repo and reverse repo transactions and risk management policy
  3. Liquidity risk management: Liquidity management policies and risks
  4. Fund manager information: Information relating to fund manager and any conditions under which business is conducted

Source: SFC, Dechert