Hong Kong, Singapore Gear Up Reform in Asset Management Sector

Regulators in Hong Kong and Singapore have been working on several initiatives aimed at nurturing growth of their respective mutual fund industries.

According to Remi Toucheboeuf, Head of Products, Investment and Fund Services for BNP Paribas Securities Services, Hong Kong in particular has seen a host of regulatory changes that are making it an important destination for asset management firms around the world.

“When we talk to our clients from Europe and the US, they see Hong Kong as one of the best places to set up their businesses for expansion into Asia,” he said.

Toucheboeuf noted Hong Kong’s MRF (mutual recognition of funds) agreement with China, which since 2015 has seen 15 Hong Kong funds distributing in China (and 50 mainland funds distributing in Hong Kong). However, he said, the market expected a bigger take off for ‘northbound’ fund distribution, suggesting that Chinese regulators might have capital controls in mind when approving funds.

“But the pipeline is getting bigger and bigger,” Toucheboeuf added. “A very positive sign is that in 2018, we have seen more funds being approved for distribution into China than in the entire year of 2017.”

A bridge to Europe

Hong Kong has also announced MRF agreements with Switzerland in December 2016, and France in July 2017. “This is very positive because if you want to access Europe you would traditionally have to set up either a pure domestic fund or create a UCITS structure, which takes time and might be cost prohibitive for some fund managers,” he said.

“With these MRFs, local fund managers in Hong Kong can distribute their funds automatically. The process is straightforward, with the host regulator requiring only standard product documentation in carrying out its due diligence, and there have been no rejections so far.”

The creation of this “bridge” between Europe and Asia, he added, may have a knock-on effect in enabling greater access to the China market.

“The bigger your fund is in Hong Kong, the more funds you can raise in China, due to a rule which prevents Hong Kong funds from raising more than 50 percent of their total AUM in China,” he said. “By creating these bilateral agreements with Switzerland and France, the Hong Kong SFC [Securities and Futures Commission] is giving fund managers an opportunity to increase the size of their local funds, and by consequence they will be able to raise more money in China.”

According to Toucheboeuf, Singapore has taken a very similar approach, announcing a plan to set up mutual recognition with China a few months ago. Singapore is also exploring setting up MRFs with European jurisdictions to create more opportunities for local fund managers, he said.

“In Hong Kong, we are anticipating that further European jurisdictions could be signing MRF agreements with potentially the UK or Germany,” he said.

Flexibility in structure

But recent developments are not just beneficial to existing Hong Kong fund managers looking to distribute their funds elsewhere. Hong Kong, Singapore and Australia are enabling greater flexibility for fund managers looking to set up locally through the introduction of new corporate structures for funds.

Hong Kong’s OFC (Open-ended Fund Companies) regime, implemented in July 2018, does not require the appointment of a trustee, which traditionally has a lot of involvement under the unit trust scheme. Under the new regime, the main party is the OFC’s board of directors, which is tasked with signing contracts, taking on liabilities and making decisions. This allows for more flexibility in the day-to-day operation of the fund, said Toucheboeuf.

“It is also going to be less costly as a part of the layer of fees associated with the trustee is removed.” He added that a custodian still needs to be appointed, taking on part of the fiduciary duty traditionally reserved for the trustee, including controlling the safekeeping of assets.

“The OFC regime presents a new opportunity for Hong Kong fund managers to create a more flexible structure,” said Toucheboeuf, suggesting that it could serve as a replacement for Cayman funds.

“When you set up your Cayman structure from Hong Kong, for example, you have to comply with the rules of two jurisdictions. But under an OFC structure, you would no longer need to comply with a foreign jurisdiction,” he explains, however adding that regulatory requirements under the SFC are more stringent and there might be some reluctance from hedge fund managers who prefer less onerous regulatory obligations.

Ultimately, corporate structures like the OFC are a much more familiar and popular structure for European firms looking to expand business to Asia. They allow much more flexibility, such as in allowing an umbrella structure and sub-funds.

Similarly, the MAS (Monetary Authority of Singapore) has just passed a bill enacting its legislative framework to enable a VCC (Variable Capital Company) structure for funds domiciled in Singapore. The regulator said it will strengthen Singapore’s position as a key fund domiciliation hub and full-service international fund management centre.

Meanwhile in Australia, the regulator has “really pushed for” the CCIV (Corporate Collective Investment Vehicle), believing it to be the best vehicle to facilitate cross border distribution, said Toucheboeuf. The government issued the second tranche of its CCIV Bill for consultation in July.

A dynamic funds ecosystem

But between Hong Kong’s OFC and Singapore’s VCC (Variable Capital Company) structure, there have been two different approaches, according to Toucheboeuf.

“In my personal view, we will see much more interest from retail fund managers in the OFC, while Singapore’s new VCC structure might be more interesting to the alternative fund managers,” he said. “This is because of the tax benefits in Singapore as well as the added flexibility which will be provided to these fund managers.”

But one thing that has yet to be clarified by regulators is the “passportability” of these structures, including whether OFC funds will be able to distribute in China. Additionally, questions remain relating to the process of converting existing funds to a Hong Kong OFC. But clarification will likely be provided in due course, said Toucheboeuf.

“Clients are already interested in this conversion even though details are still due to be released, as they see benefit of moving away from the trustee structure,” he said. “The OFC will be much easier.”

Singapore’s finalised VCC framework does specify that foreign-domiciled funds with similar structures can re-domicile as VCCs in Singapore.

One thing is clear: Asia’s main international centres are putting a lot of effort towards attracting more fund managers to establish a local presence, says Toucheboeuf. And this makes sense as Asia Pacific has the potential to become a new engine spurring the growth of global funds.

The next step would be to encourage greater cooperation within the funds industry as a whole, to ensure that the ecosystem is developing to support new players. According to Toucheboeuf, developments that would support a dynamic funds ecosystem in Asia include increasing the pool of available talent, supportive regulation, a cross industry platform and a greater focus on digital initiatives.

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