Hong Kong will review and update regulations governing funds in the hope of attracting more fund management companies, industry professionals, and fresh money to the territory.

The Securities & Futures Commission (SFC), which regulates the fund industry, will review its Code on Unit Trusts and Mutual Funds, according to SFC deputy CEO Alexa Lam, who is also executive director of the regulatorÆs policy, China and investment products divisions.

The planned updates to the code are aimed at providing greater flexibility in meeting market growth and innovation, which will allow Hong Kong to remain competitive in Asia, Lam told delegates of the Fund Forum Asia 2008.

Last year turned out to be a banner year for Hong KongÆs fund industry. According to the Hong Kong Investment Funds Association (HKIFA), the fund industry registered gross sales of $45.5 billion and net sales of $6.9 billion in 2007, with both figures up around 80% from 2006 and thus far the highest on record.

Last year also saw the aggregate net asset value of SFC-authorised funds break the $1 trillion mark, at around $1,060 billion. The number of SFC-authorised funds also reached a new high at 2,040.

ôAs mainland liquidity seeks investment products overseas and mainland managers seek skills outside the mainland border, we have the ability to become the fund supermarket in Asia, serving both the mainland and other parts of this region,ö Lam says.

ôWe must therefore revamp the unit trust code to make it easier for funds and talent to congregate in Hong Kong,ö she adds.

The revised code to contain guiding principles rather than prescriptive measures, but fundamental investor protection tenets will remain, Lam says.

Lam promises the SFC will be ôopen-mindedö during the review process and will consider the industryÆs views and ideas.

She expects to set up several workgroups within the next month û so discussions can start before the summer sets in when managers tend to take time off û and hopes to conclude such discussions by the third quarter of this year. A model of the new code is expected to be completed by the fourth quarter, at which time soft consultations are expected to take place before a full public consultation is held in the first quarter of 2009. Although no specific target has been set for the final version of the new code, Lam says she expects it to be ôfirmly in placeö sometime next year.

Fund investment was introduced in Hong Kong in the late-1960s, when British commercial banks established businesses to provide fund management services to pension funds and expatriates living in the territory. Fund managers from the US joined the industry in the 1970s.

As funds gained popularity among retail investors, the Hong Kong government formulated the Code on Unit Trusts in 1978 to lay down the basic framework for regulating retail funds. The administration of that code was transferred to the SFC in 1989 following its establishment. It was replaced by the Code on Unit Trusts and Mutual Funds in 1991.

Since its inception, that code had been amended from time to time to accommodate new trends and market developments, such as the offering of guaranteed funds and futures and options funds. In 1997, the SFC conducted a thorough revamp of the code to adopt a new and more flexible structure for the authorisation of funds and no major changes have been made since then. Hedge funds, guaranteed funds and index tracking exchange-traded funds are some of the products that have been introduced in the market by way of new chapters added to the code.