Faced with asset manager frustration at the delay in mutual recognition fund approvals, Hong Kong’s top investment products regulator has responded that the watchdog was “cautious about the imbalance of fund flows” between China and Hong Kong.

The money pouring into the Hong Kong-domiciled products has far oustripped the amount going into Chinese funds.

The comments by Christina Choi, executive director for investment products at Hong Kong’s Securities and Futures Commission (SFC), appear to reinforce what many suspect: that the delay in approvals stems from Beijing’s efforts to restrict capital outflows from China.

Choi was speaking on a panel discussion at this week’s annual conference of the Hong Kong Investment Funds Association. She had been asked how the SFC could help accelerate the application process under the Hong Kong-China mutual recognition of funds (MRF) scheme.

In addition to mentioning the flow imbalance, she pointed to the importance of keeping everything operating smoothly from a regulatory perspective. The SFC is working closely with the mainland regulator the China Securities Regulatory Commission in terms of information exchange and regulatory cooperation, added Choi.

Big imbalance

Fund flows have been unbalanced between the northbound and southbound schemes since the approved funds started selling in January. Between them, the six Hong Kong products approved for sale in China attracted Rmb8.5 billion ($1.2 billion) of net inflows from mainland investors in the first 10 months, while the 50 approved Chinese funds took in a total of just Rmb96 million in Hong Kong. 

Hong Kong managers are frustrated as they have had fund applications under MRF pending for more than a year. Some have questioned why the SFC has worked on initiating a new MRF link with Switzerland rather than making progress with the original scheme.

Choi said the Swiss MRF link plan was a response to market demand and to help Hong Kong develop as a fund service centre and promote the city as a fund domicile.

She did not say which other countries or regions the SFC might be considering for the next fund passport scheme, but noted that the regulator was “delighted” that Hong Kong funds could now have access to Europe.

Fee disclosure worries

Meanwhile, industry executives have indicated their concern over new proposals that distributors must disclose all fees being placed on products at the point of sale and annually. In an audience poll taken during the panel, 21% said their biggest regulatory challenge in 2017 would be complying with the SFC’s for the sale of funds to retail investors. 

Although the new rules would bring Hong Kong closer to global standards, asset managers worry they could make it less attractive for banks to sell funds.

Choi said: “We have been asked many times whether we are going for a fee-based or commission-based model.” The main regulatory issue here, she noted, is dealing with conflicts of interest and the risk of mis-selling in terms of selling investment products.

“We would like to go for this model [which does not ban commission payments but requires more transparency around them]. Of course we are keeping a view on the effectiveness of this approach and the changing market dynamic,” she added.