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SFC seeks control over fund depositaries

Hong Kong’s financial regulator proposes licensing trustees and custodians of SFC-authorised collective investment schemes (CIS).

The Securities and Futures Commission (SFC) has launched a consultation that would allow it to regulate depositaries (trustees and custodians) of public funds and subject them to a new type of licensed activity.

The license would cover depositories of SFC-authorised unit trusts, mutual funds, open-ended fund companies, real estate investment trusts and pooled retirement funds, but exclude mandatory provident fund products, according to the SFC website.

“The proposed regime will provide better protection for scheme assets and help safeguard the interests of retail investors,” said Ashley Alder, the SFC’s chief executive office in a statement.

At present, depositories of public funds in Hong Kong are not subject to any specific licensing system. The SFC insists on the appointment of an acceptable depositary when a CIS applies for authorisation,  but the it does not have direct powers to supervise or take disciplinary action against them.

If the proposal goes ahead, in future the depositary would have to be registered with the SFC under a new type 13 regulated activity. The regulator  has indicated that depositories affected will have between 12 and 18 months to complete the licensing or registration process prior to the implementation of the new regime.

The intention is to enhance investor protection and provide the SFC with enforcement and disciplinary powers.

In separate initiative in August, the SFC warned fund houses about the risks arising from a mismatch between the liquidity profiles of the assets and the liabilities of open-ended funds, and found deficiencies in some asset manager’s risk monitoring systems.

Since the global financial crisis a decade ago, regulatory authorities in several major overseas markets have already reformed their custody regimes for CISs, and the International Organisation of Securities Commissions upgraded its standards and recommendations for the physical and legal integrity of scheme assets in November 2015.

Responses to the SFC consultation must be submitted by 31 December 2019.

Part of the Mark Allen Group.