Mutual Recognition Presents Opportunities and Challenges for Fund Managers in Mainland China
Category: Asia, China, Hong Kong, Global
By Charles Qin, Sandra Lu and Lily Luo
Since 2013, “Hong Kong – mainland China mutual recognition” has been repeatedly mentioned in various governmental documents and reports. Officers from the CSRC and the SFC have indicated that they have reached consensus on six essential guidelines, i.e. types of funds, qualifications of asset managers, application procedures, investment management of funds, information disclosure and investors’ protection. If conditions permit, detailed rules with regard to the conditions and criteria of recognition, requirements for the distribution of recognised funds will be issued.
I. Concept of “mutual recognition”
Mutual recognition means qualiﬁed SFC-authorised funds domiciled in and operating from Hong Kong can register with the CSRC to raise money from the public in mainland China, and qualiﬁed Mainland funds can get authorisation from the SFC to raise money from the public in Hong Kong. Under mutual recognition, none of QFII, RQFII or QDII licenses and quota are required.
II. SFC’s authorisation for funds domiciled in mainland China
We understand that mutual recognition is different from the authorisation of “Recognised Jurisdiction Schemes” (RJS) by the SFC (i.e. the SFC accepts RJS, recognises that such schemes’ structural and operational requirements, and core investment restrictions, already comply in substance with Code on Unit Trusts and Mutual Funds (UT Code), but the SFC expects an RJS to comply with all material respects with the UT Code and reserves the right to require such compliance as a condition of authorisation). The most important characteristic of mutual recognition is “mutuality”. It means that both the CSRC and the SFC will fully respect each other’s regulatory regime and recognise the structure, operation, and investment of the funds which are already authorised by or registered with the regulators of their home jurisdictions. For the funds to be submitted to the SFC for authorisation, the SFC will only review the documents tailor-made for investors in Hong Kong rather than making substantive examination on all constitutive documents, which greatly streamlines the authorisation procedures of the funds.
In addition, according to Chapter 9 of the UT Code, a Hong Kong representative (representative) shall be appointed for a retail fund whose manager is not incorporated in Hong Kong. The representative shall be institutions incorporated in Hong Kong and licensed to engage in Type 1 regulated activity (dealing in securities) or a qualified trust company. The functions of representative include receiving applications and money from Hong Kong investors, issuing confirmations and contract notes, receiving redemption notices, transfer instructions and conversion notices from holders for immediate transmission to the managers, notifying the SFC immediately if redemption ceases, or is suspended, providing holders with all constitutive documents/offering documents, and representing the fund and managers for all matters which relate to fund’s distribution in Hong Kong. If a fund manager in mainland China (manager) has established a subsidiary in Hong Kong which has obtained Type 1 license, it is a good choice to appoint such a subsidiary as the representative.
III. Preparation work the managers may carry out
a) Selecting appropriate funds
Generally, the first batch of approved products will be normal funds such as equity funds, bond funds, balanced funds rather than some special types like leveraged funds. For the sake of preventing the impact of hot money, money market funds may not be included in mutual recognition. Moreover, QDII funds, which invest mainly in non-PRC markets, will also be ruled out.
b) Translating, amending or supplementing constitutive documents
As the working language of the SFC is English, managers need to translate prospectuses, fund contracts and other constitutive documents into English.
Referring to the RJS scheme, there are two forms of offering documents (mainly prospectuses): 1) A new summary of prospectuses tailor-made for Hong Kong investors by deleting the contents not suitable to Hong Kong investors and adding distribution arrangement, special risk factors; or 2) Making a cover only containing key information such as a distribution arrangement, special risk factors and attaching the original prospectus. In our opinion, to avoid missing information, the latter may be adopted under mutual recognition.
In addition, as the basic constitutive documents of contractual funds, fund contracts may also need to be amended for the scope of investors, the subscription and redemption arrangements, dispute settlement or other contents that may not satisfy the requirements for selling funds in Hong Kong. Take dispute settlement as an example, it is provided in Article 9.10 in the UT Code that nothing in the constitutive documents may exclude the jurisdiction of the courts of Hong Kong. However, arbitration is always the dispute resolution for funds domiciled in mainland China.
c) Considering the institution/business arrangement in Hong Kong
As previously mentioned, the Hong Kong subsidiary of the manager may act as the representative. Managers that have not established Hong Kong subsidiaries, or those which have set up Hong Kong subsidiaries but which have not obtained a Type 1 license, may consider to make arrangement in Hong Kong in advance.