Currently, fund managers can distribute products to Hong Kong investors only through third-party distributors, such as banks or wealth managers.
When online distribution is allowed, firms can cut out the intermediaries and distribute their funds directly to investors using online platforms. Stewart Aldcroft, Hong Kong-based chairman and managing director at Cititrust, said he expected it to happen soon after the guidelines come into effect.
Such platforms will allow firms to market and distribute mutual funds, ETFs and other products authorised by the SFC for sale in Hong Kong.
The Guidelines on Online Distribution and Advisory Platforms, published by the SFC in April, paved the way for asset management firms to set up online distribution channels. The guidelines will become effective on 6 April 2019.
They are a result of a consultation process SFC announced in May 2017. They apply to existing distributors of investment products, such as banks, wealth managers and robo-advisors, but extend their scope to asset managers.
Some asset management firms that have not been able to gain much business in the territory see online fund distribution as a major opportunity, according to Aldcroft.
“There are firms that have these programs already set up in other parts of the world,” he told FSA. “They would just bring them here to Hong Kong.”
Firms that would benefit most from direct distribution would be the low-cost fund giants such as Vanguard or Blackrock, which already have some presence in the Hong Kong market. “All they need to do is to tailor what they’ve got elsewhere to suit the domestic market,” Aldcroft said.
Stewart Aldcroft, Cititrust
Although online distribution of investment products in Hong Kong has not been, strictly speaking, banned, the existing regulatory environment makes compliance very difficult, according to Aldcroft. The new guidelines aim to clarify and simplify the rules, thus encouraging development of the online distribution channel.
The online distribution space in the territory is not empty today, with some banks and robo-advisors acting as third-party distributors.
“The regulations that the SFC is announcing extends the ability of fund companies to be their own distributors,” Aldcroft said.
Nevertheless, some areas remain unclear. In particular, the guidelines carve out “complex products” as a separate category, with additional suitability requirements for distributors.
However, at this stage it is not clear what qualifies as a “complex product”. In particular, derivatives are flagged as one example, but the status of funds that use derivatives in their portfolios still remains to be clarified.
“At the moment the SFC will regard anything that uses derivates as a complex product,” Aldcroft said. “But a lot of mutual funds use a small amount of derivatives for investment purposes, not in the way that a hedge fund would do, but just for better portfolio management. Does that constitute complex product?”
The SFC is expected to issue further guidelines in that matter.