The upcoming mutual fund recognition will help to boost Hong Kong’s position as a regional fund centre, the city’s securities regulator has said.

Officials hope that the scheme, which will go live on July 1, will encourage the domiciling of more funds in Hong Kong, up from only a relatively small proportion in the city.

However, it has been predicted that mainland approval of Hong Kong funds will take up to six times longer than for local funds, as the mainland regulator will take longer in the early stages to understand the products.

Speaking to the media last Friday, Julia Leung, executive director of the Securities and Futures Commission, said that the SFC’s aim was to push Hong Kong to become a domicile centre, and also encourage investment flows into the city.

“If we just distribute Ucits funds, the managers would be based in Europe and not Hong Kong, so investment management and other value-added [services] are abroad,” said Leung. She noted that the scheme would add to Hong Kong’s human resources capabilities and employment in the funds sector as well as service providers such as accountancy and the legal profession.

Of the approximately 2,200 funds currently distributed in Hong Kong, only around a quarter of them are Hong Kong-domiciled, with the remaining being foreign funds such as European Ucits. However, Leung noted that the 570 Hong Kong-domiciled funds have doubled over the past five years – a pace never seen before – in part because of the upcoming mutual recognition scheme.

The fund houses which have set up Hong Kong-domiciled fund ranges include Barings, which launched global multi-asset income, European equity and Greater China equity funds earlier this month, as reported. However, the funds may not be eligible for the scheme yet because they have been available for less than a year.

The SFC estimates that at least 100 of the 570 Hong Kong-domiciled funds are eligible to apply for cross-border distribution on July 1. The funds have to meet certain criteria, such as having a track record of at least one year, they must not primarily invest in the Hong Kong market and the size of the fund must be under Rmb200 million ($32.2 million).

Of the 100 funds, 57% are invested in equities, while 22% are mixed assets and the remainder are bond funds. Similarly, 31% of the 100 funds are invested in the Asia-Pacific markets, with 23% in global markets, 22% in Hong Kong and the remaining 24% in other markets.

Meanwhile, of the 850 mainland funds eligible for southbound distribution, 50% are A-share funds, 33% mixed assets, 13% in fixed-income and the remainder in other markets.

Asked why it has taken so long for the official announcement of mutual fund recognition, Christina Choi, the SFC's senior director for policy, China and investment products, noted that there has been a lot of work in ensuring that legal issues and rules, especially around investor protection, are equivalent between the mainland and Hong Kong.

“This is the first time that the mainland has accepted a foreign manufactured fund distributed onto its land, so there needs to be an unprecedented mode of working,” she said.

For example, mainland funds sold in Hong Kong must not have a weaker investor protection guarantee than funds already registered for distribution in Hong Kong.

“Even if mainland funds are established and manufactured in China, when they come to our market, we need to make sure that investor protection must be guaranteed with our generally high quality of protection,” said Leung, noting that mainland funds must abide to greater disclosure rules in Hong Kong than would be the case in their home markets.

Meanwhile Shanghai-based law firm Llinks has predicted that it will take about six months for Hong Kong managers to obtain approval for fund sales on the mainland.

The rules state that the China Securities Regulatory Commission will approve Hong Kong funds within six months after an application is received; on the mainland, a new locally-domiciled fund usually gets CSRC approval within 20 working days. But Llinks said that at the start of mutual recognition, the regulator will need more time to understand Hong Kong funds’ structure, hence the longer approval time.