5 Facts to Know About the Fund Administration Industry in Hong Kong in 2022
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Fund administration services are a key industry that makes Hong Kong one of the world’s leading international financial institutions. And despite the ongoing global challenges, Hong Kong still holds various opportunities for top fund administrators.The 2% year-on-year increase in AUM to $35,546 billion in Hong Kong’s asset and wealth management business has emphasised the resilience of the country’s industry.
If you are interested in extending your business into the Hong Kong fund investment or fund administration industry, read on to learn more about it. You can also check the Lanturn blog for a guide to Hong Kong’s tax system.
The primary regulatory framework for fund management in Hong Kong is the Securities and Futures Ordinance (SFO). The Securities and Futures Commission (SFC) was established in 1989 as an independent statutory body under the SFO. The SFO gave the Securities and Futures Commission the authority to oversee fund administration services and operations, collective investment schemes (funds) and securities offerings.
Fund administrators in Hong Kong must abide by the Code of Conduct for Persons Licensed by or Registered with the SFC and follow the SFC Fund Managers Code Of Conduct (FMCC). Retail Funds must comply with the SFC Code on Unit Trusts and Mutual Funds. Providing incorporation or registration services of corporate structures, funds and trusts companies are the Companies Registry of Hong Kong.
Open-ended Fund Company (OFC) Structure
An OFC is a collective investment scheme to create a company with variable capital and limited liability in Hong Kong. The primary purpose of this corporate form is to act as an investment vehicle for its shareholders. An overseas corporate fund may then be registered by the SFC provided it satisfies the conditions set out by the SFO on qualifying OFCs. In this way, the SFO can facilitate the re-domiciliation of overseas corporate funds to Hong Kong using the OFC structure. For fund administrators in Hong Kong, the incorporation of a fund in the form of OFCs comes with advantages.
One of the advantages is the lower operating cost compared to establishing and maintaining an offshore fund. Another advantage is that the OFC structure may be used by different types of funds. A grant scheme for OFC funded by the government of Hong Kong was established by the SFC. With the purpose of promoting the use of the OFC structure in incorporating funds into the country, the grant scheme covers up to 70% of eligible expenses incurred in the re-domiciliation of a qualifying OFC and paid to fund administrators in Hong Kong.
Our team at Lanturn can provide you with fund formation services to assist you in this matter as well as provide you with general information on possible tax incentives connected with OFCs.
Limited Partnership Fund (LPF) Regime
Under the LPF structure, a fund takes on a form of limited partnerships created for the primary purpose of managing investments for the benefit of its investors. The LPF regime was launched to attract private investment funds including private equity and venture capital funds, to set up and register in Hong Kong. LPFs have no minimum capital requirements on their partners and are not subject to investment restrictions.
Qualifying LPFs can acquire tax exemption from Hong Kong profits tax provided they are able to meet the conditions under the Inland Revenue Ordinance (Cap.112). Qualifying fund administrators in Hong Kong may also be able to benefit from the recent tax concession for carried interest. An LPF must consist of one general partner (GP) and at least one limited partner (LP).
The LPF will also require an investment manager or the GP can be appointed as the investment manager or any other capable party. The parties must be governed by its limited partnership agreement (LPA). Unlike the OFC the establishment of an LPF does not require the approval of the SFC Hong Kong. An LPF can be registered straight to the Companies Registry of Hong Kong provided that all the needed legal requirements have been met.
With Hong Kong’s rapidly developing fund administration industry, a fund administrator in Hong Kong must constantly adhere to every relevant regulatory requirement while keeping clients on track with the performance of their investments. If you are a Hong Kong fund manager wishing to be able to concentrate more on portfolio management and keeping tabs on every investment opportunity that comes your way, outsourcing fund administration services may be helpful for you.
The Management and Disclosure of Climate-Related Risks by Fund Managers
Last August 2021, the SFC issued the Management and Disclosure of Climate-related Risks by Fund Managers circular for (LC) licensed corporations. This circular sets out the expected standards for complying with the amended Fund Manager Code of Conduct (FMCC). The circular requires fund managers to consider climate-related risks in their investments and make appropriate disclosures. Most affected by this regulation were the top fund administrators in Hong Kong. Under the scope of this new regulation are fund managers managing collective investment schemes (CISs).
The SFC took on a two-tier approach for the implementation wherein all fund administrators in Hong Kong are to comply according to the baseline requirements while large fund managers must also comply with enhanced standards. Those considered to be “large fund managers” had assets under management (AUM) of equal to or more than HKDD8 billion. The disclosures should be released through various channels such as websites, newsletters or reports. Disclosures can be made across channels to bring fund investors’ attention to the information and changes relevant to them and reviewed at least annually.
The information disclosed should be proportionate to the degree climate-related risks are considered during the investment and risk management process. According to the 2021 circular, large fund administrators in Hong Kong are given a 12-month transition period to provide the baseline requirements (20 August 2022) and a 15-month transition period for them to comply according to the enhanced standards (20 November 2022). All other fund managers are provided with a deadline of 20 November 2022 to comply with the baseline requirements.
Online Investment Services
Last 31 Aug 2022, the SFC released their findings on a review of licensed firms providing online brokerage, distribution and advisory services. Therein they reminded licensed corporations of the acceptable account opening approaches and the circular on online onboarding of overseas individual clients.
According to the review, the most commonly offered products (98% of the LCs) were online trading of equities and exchange-traded funds followed by the selling and distribution of CISs. Unfortunately, there were deficiencies in following the standard for non-face-to-face client onboarding procedures, cybersecurity and online trading, distribution and marketing. The circular shows that technological changes and improvements will remain a part of the fund administration industry of Hong Kong.
As both older, mature investors and new younger investors will move toward online investment platforms, a balance of the human touch and technology must be found to provide clients with the best user experience. The SFC review shows that a need for better identity verification procedures must grow alongside the evolving technological investment landscape.
You can speak with an expert at Lanturn for KYC and AML checks. Let us assist you in protecting your business while complying with regulatory requirements.
It is significant to note that with the rise of Environmental, Social, and Governance (ESG) Investing, regulatory amendments like the management and disclosure of climate-related risks will become more common. However at the moment, Hong Kong is still in the process of developing consistent ESG policies and practices.
Lanturn’s Fund Services
We at Lanturn would love to have the chance to discuss with you the above regulatory standards and fund services that might be applicable to your business. We provide both fund formation and fund administration services for your Hong Kong-based business.
Contact us today; we would be more than happy to hear from you.