Alder, speaking at the Morningstar Institutional Conference today, said there is ongoing discussion with the Hong Kong Stock Exchange about rolling out an online fund distribution platform for investors. Currently the platform is under SFC consulation.
The aim is to “address the currently extremely narrow bank-based distribution channel in Hong Kong, which limits choices for investors and raises costs”, said Alder.
In Hong Kong, a handful of banks dominate fund distribution.
Alder, who in April was re-appointed as SFC CEO for another three-year term, also expressed optimism for the MRF scheme.
The majority of public funds selling in the SAR are Ucits products because fund penetration among the domestic investor base is relatively small, he noted. But he believes Hong Kong-domiciled funds, which are the only type of fund allowed for sale through the MRF, have huge potential.
Alder believes the MRF is well-suited for global firms seeking mainland investors who wish to invest in global markets. For China, the MRF gives mainland funds an avenue to establish an international hub via Hong Kong.
“We are ambitious about transforming Hong Kong into a true fund management center, and that, without a doubt, is linked to Hong Kong’s relationship with mainland China.”
However, others have pointed out the MRF’s shortcomings. For example, An AUM limitation states no more than 50% of an MRF fund’s assets can come from either market. Hong Kong has a population of 7 million and China 1.2 billion, Daniel Caleghin, head of wealth management strategy for Asia-Pacific at Deloitte subsidiary Casey Quirk, pointed out in an previous interview.
“The 50% rule means that an MRF fund will never be a big fund in China” due to the limitation on asset gathering,” Caleghin said.
In his speech, Alder did vaguely comment on the imbalance of the number of MRF funds approved for sale in the mainland and in Hong Kong, as well as on the contrasting fund flows since the launch in November 2015. The MRF, he said, is “still in the early days. Flows should improve as distribution outreach issues, and concerns about capital controls, currency and the mainland economy [are dealt with].”
More MRF links?
Alder said the SFC is in talks with at least four European Union countries to launch similar MRF schemes. However, he did not specify which countries.
In December last year, the SFC signed a memorandum of understanding with the Swiss Financial Market Supervisory Authority (Finma) to enable cross-border retail sales of funds.
BNP Paribas Securities Services believes there is appetite for the Swiss-HK MRF program, as does BEA Union.
The regulator is also in discussion with its mainland counterpart about the ETF Connect, which is expected to permits cross-border trading of Hong Kong and mainland-listed ETFs, Alder added.
On the regulatory side, Alder said the proposed introduction of open-ended fund companies, a legal form of investment funds other than the unit trust form, will be formalised next year. The SFC will consult the market about tax issues for this fund structure later this month, he added.
He also raised the issue of regulating custodians and trustees, which are regulated by the Hong Kong Monetary Authority at the moment. The SFC only indirectly regulates them through fund managers who use the custody and trust services, which is not satisfactory, he noted.
