Since a public statement by the Hong Kong Securities and Futures Commission (SFC) in January regarding the new Hong Kong-China Mutual Funds Recognition Passport scheme, there have been no additional formal announcements by either the SFC or the China Security Regulatory Commission (CSRC) on the Mainland regarding the scheme’s implementation, although there has been no lack of market commentary and discussion in the industry.
Hong Kong-based asset managers, as well as asset managers based further afield, are viewing this as an opportunity for Hong Kong-domiciled and SFC authorized (likely RMB-denominated) funds to tap into the vast Mainland Chinese domestic retail investor market.
On the other side of the border, this opportunity is seen as an avenue to address Mainland domestic retail investor demand for a greater variety of permissible investment options, as well as an opportunity in the first instance for larger Mainland Chinese asset management companies to be test cases to distribute their products offshore.
On 15 March 2013, the CSRC released the Interim Administrative Rules for Securities Investment Fund Sales Institutions’ Business Operations via Third Party e-commerce Platforms (the Interim Rules), allowing third party e-commerce platforms to provide services for fund distributors, effectively allowing more financial institutions to transact fund products. These Interim Rules have opened up the fund distribution channel that was previously limited to commercial banks, fund investment companies, securities firms and independent fund sales organizations.
Authorized fund sales institutions will now be permitted to sell their products using third party e-commerce platforms such as taobao.com or 360buy.com. Taobao Marketplace has applied to the CSRC to become one of the first Chinese online shopping websites to offer fund distribution, and it has already partnered with certain banks and insurance companies in distributing their banking or insurance-linked products.
Widening sales channels for funds will likely drive down commission fees charged by banks. For joint venture securities companies and foreign asset management companies, an alternative distribution channel should allow for greater product exposure and for global brands to stand out among domestic retail funds offered at commercial banks.
An announcement at an industry event in March 2013 indicated that the Monetary Authority of Singapore (MAS) will conduct a review of product offerings to retail customers in the banking, insurance and capital markets industries. The review will cover three aspects:
significant product gaps in the market;
the existence of inherently unsuitable products for retail distribution; and
whether products are efficiently created.
The review will concentrate on costs, i.e., ensuring that fixed costs such as fund management fees are adequately disclosed and open to competition. For expenses that may vary over time, the MAS advocates clarification so that these costs can be appropriately managed. We understand the MAS will be working with the industry to review these questions, although a full consultation paper has yet to be published.
The Securities and Exchange Board of India (SEBI) issued a notice in March 2013 inviting applications for entities interested in becoming a self regulatory organization (SRO) of mutual fund distributors. An SRO is an association or a group of entities with authority to regulate commission-based distributors of the mutual funds. Investment advisers, those who are remunerated by fees, will not be subject to regulation under this SRO. We understand that it is proposed that registered mutual funds will be charged up to 0.3% of their assets under management to fund the operation of the SRO.
Under the norms set out in the Securities and Exchange Board of India (Self Regulatory Organizations) (Regulations) 2013, applicants must be a registered company under the Companies Act, have a minimum net worth of Rs10 million (approximately US$184,200), have directors who are professionally competent and financially sound, and neither the applicant nor its directors can be involved in legal proceedings connected to the securities market that may have an adverse impact on the interests of investors amongst other criteria.
Regional Funds Passports
Financial sector regulators and officials from thirteen Asia Pacific Economic Co-operation (APEC) economies1 participated in an Asia Region Funds Passport (ARFP) policy and technical workshop in December 2012. It was the first time that China had participated in AFRP discussions. The workshop also engaged with fund management industry representatives.
Following this meeting, APEC invited tenders to study the potential economic benefits and costs of ARFP, although the report is not expected to be finalized until 2014. According to APEC, a working group was formed from representatives of interested economies to undertake detailed technical work on the proposed regime and met in May 2013. A technical model is expected to be presented to APEC Finance Ministers for endorsement in September 2013.