Hong Kong regulator to amend fund industry rules amid increasing financial innovation-related risks

Hong Kong’s Securities and Futures Commission (SFC) recently proposed to amend rules on fund houses and their custodians to better address risks posed by financial innovations.


Financial innovations such as blockchain and big data represent new ways of doing business, but they also come with more regulatory pressure, according to Leo Lee, president of Association of Chartered Certified Accountants (ACCA).

“Increased regulation is the new normal. Managers nowadays need to put more focus on risk management and they are expected to learn from past mistakes but at the same time anticipate potential future problems,” said Lee. “People need to know Hong Kong is a fair market place, as it is what makes it qualified to become an international financial center.”

Key proposals from the SFC include strengthening requirements for key operators, while at the same time providing greater flexibility and enhanced safeguards for some of the funds’ main investment activities, including derivatives, securities lending, repos and reverse repo transactions. In addition, the SFC proposal also added active exchange-traded funds (ETFs) as a new class of funds, which some fund managers are reportedly keen to launch.

“An important part of the SFC’s strategy to strengthen Hong Kong as an international, full-service asset management center is to ensure that the regulations governing public funds remain robust and aligned with international standards,” said Ashley Alder, chief executive of the SFC.

“These updates to the Unit Trusts and Mutual Funds will provide a foundation for further growth in our retail fund industry,” Alder added.

This latest market consultation followed a chain of initiatives by the regulator to cover Hong Kong’s ever-growing fund industry. In October 2017, a range of new “manager in charge” regulations were implemented, under which firms were required to hire SFC-licensed professionals for senior management roles in eight key areas at brokerages, fund management companies and financial advisory firms.

This was in addition to the case in November last year when SFC inspected 250 licensed asset management firms and identified multiple cases of regulatory non-compliance. The regulator then warned firms to review their internal control procedures and asked to enhance them to meet the SFC’s expectations to avoid further penalties (See Harbour Times November 29, 2017 “HK regulator zeroes in on asset management sector” for more)

The city’s fund industry is now seeing a lot of newcomers, as the SFC noted that 13% of local brokerages, fund houses and financial advisers are now owned by mainland shareholders, overtaking US investors as the largest group of non-Hong Kong owners of local firms.

Some are concerned that without sound regulations and monitoring systems, such waves of Chinese investors joining the fund industry in Hong Kong would bring a large degree of volatility often found in China’s market but not so much here.

Traditionally, mainland’s A-share market has been dominated by the so called “mom-and-pop” momentum driven by individual investors that are subject to panic buying and selling instead of corporate investors who are usually more knowledgeable and experienced when it comes to investing.

One example was the summer of 2016. While analysts around the world have suggested that the Chinese market has become “irrational and overheated”, Chinese investors were convinced the government would not let the market drop. The

subsequent collapse erased trillions of Renminbi from the country’s stock market in a matter of days and have caused the Chinese government to step up its regulatory effort since then.