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Following is the keynote address on "Hong Kong as a Premier International Asset Management Centre" by the acting Permanent Secretary for Financial Services and the Treasury (Financial Services), Miss Salina Yan, at the Deacons' 6th Annual Investment Products and Regulatory Forum today (May 30):
Good morning. Ladies and gentlemen,
It is my pleasure to join you all this morning at the Forum. I see from the programme that for the next few hours you are going to hear views on some very well chosen topics that are at the core of the investment product space. Before you dive into the panel discussions, let me share with you the Government's policy agenda on sharpening Hong Kong's edge as a premier international asset management centre from the perspectives of "Capacity", "Connectivity" and "Consumer Protection".
Capacity
The story of Hong Kong's asset management industry started in the 1980s. In the space of some 20 years, we have grown into a hub with over 1 800 funds authorised by the Securities and Futures Commission (SFC). The assets under management (AUM) of our combined fund management business reached a record high of USD1.6 trillion in 2012. And according to the figures compiled by the Hong Kong Investment Funds Association, the gross sales of the fund industry in Hong Kong amounted to US$71 billion in 2013, representing a 30 per cent increase compared with a year ago, and breaking another record.
We are also witnessing an increase in the number of companies licensed or registered to conduct asset management business in Hong Kong. About 62 per cent of the new licences granted by the SFC in 2013 were asset management licences.
The growth is certainly remarkable. But there is a rub. Under the current legal regime in Hong Kong, an open-ended investment fund may be established only in the form of a unit trust but not in the corporate form due to various restrictions on capital reduction under the Companies Ordinance.
Open-ended fund companies
To further open up Hong Kong's capacity for asset management activities, we are working to introduce a new open-ended fund company structure, or what we call the OFC structure. It will allow funds to be set up in an open-ended structure like a company, but with the flexibility not enjoyed by conventional companies to create and cancel shares for investors to trade the funds.
Under our proposal, the OFC can be a public or private fund structured in the corporate form with limited liability; it will have the flexibility to vary its share capital in order to meet shareholder redemption requests; it may distribute share capital subject to solvency as well as disclosure requirements; it will enjoy streamlined procedures for termination; and is a structure familiar to other fund jurisdictions, particularly those not familiar with trust law.
We propose to align the investment scope with those types of investment activities which are subject to licensing and regulation by the SFC under the Securities and Futures Ordinance, namely securities, futures and over-the-counter derivatives, when the OTC regulatory regime is fully operational. This actually means shares, stocks, debentures, loan stocks, funds, bonds or notes are covered.
The OFC possesses qualities that should make this new fund structure attractive to fund managers, so that in addition to fund distribution and sales, we can grow the full spectrum of investment portfolio management activities including domicile, product design, custodian and administrative services.
Talent training
This brings me to the second area of capacity growth. Our aspiration to develop Hong Kong into a full fund service centre has to be backed up by the availability of talents. The financial sector has a workforce of over 230 000, which amounts to 6.1 per cent of the city's total workforce. The Financial Secretary announced in his Budget this year that the Government was going to conduct an in-depth study on talent training.
Asset management is an area we'll look into in the study. According to the relevant SFC survey, about 32 000 persons were engaged in fund management business, with 24,000 of them engaged in sales and marketing activities in 2012. We would like to gauge your views on training – where the gaps are and what the responses should be. Our aim is to submit our recommendations to the Financial Secretary by the end of this year.
Tax and stamp duty concessions and exemptions
Some of you would put tax matters in the capacity basket. I would not labour on this today. Suffice to say that this forms part of the consultation on the OFC regime (which will close on June 16) and we welcome your views on that. We are also working to waive the stamp duty for all exchange traded funds, or ETFs. In addition, we are undertaking legislative work to enable private equity funds to enjoy the same profits tax exemption currently available to other offshore funds.
Connectivity
Now, let me turn to connectivity. Hong Kong operates a very open system and funds from all over the world can be sold here as long as they fulfill the eligibility requirements. At the same time, it is noted that over 60 per cent of the assets under management here come from investors outside Hong Kong.
Market connectivity is indeed Hong Kong's natural competitive advantage. Overseas fund houses that wish to tap the opportunities arising from the Mainland and other emerging Asian markets have established their operations and manage their portfolio allocation from here. Our link with the Mainland market is a big part of the connectivity story.
Development of offshore Renminbi business
Hong Kong provides a platform that saw successive breakthroughs in the utilisation and circulation of RMB before a total liberalisation of the Mainland's capital account. The deep pool of offshore RMB liquidity accumulated in Hong Kong, now amounting to over RMB1.1 trillion, has found channels of circulation by means of trade settlement, direct investment and equity investment.
The two-way street is open wider with the announcement of the Shanghai-Hong Kong Stock Connect initiative on April 10. This pilot programme will allow Mainland investors who satisfy the eligibility criteria to trade for the first time eligible stocks listed on the Stock Exchange of Hong Kong. At the same time, it will allow Hong Kong and overseas investors to trade for the first time eligible stocks listed on the Shanghai Stock Exchange. The existence of aggregate net quotas (RMB300 billion northbound and RMB250 billion southbound) and daily net quotas (RMB13 billion northbound and RMB10.5 southbound) should come as no surprise, since this is the prudent way of experimenting with bold schemes of capital account opening. For example, the RQFII scheme that you would be very familiar with, the quota level, scope of investment as well as financial institutions that could apply for the quota have undergone several stages of expansion since its launch in 2011.
I cannot leave the theme of connectivity without mentioning the proposed mutual recognition of funds scheme between the Mainland and Hong Kong. Technical landscape mapping between the regulators has been completed and it is now at the policy approval stage.
Consumer Protection
In developing various proposals to promote the development of Hong Kong's asset management industry, it is always our guiding principle that we should strike a balance between facilitating market development and maintaining Hong Kong's competitiveness on the one hand, and ensuring market integrity and adequate investor protection on the other.
For example, under the OFC regime, we propose to make it a mandatory requirement that the day-to-day management and investment functions of the OFC have to be delegated to an investment manager licensed by or registered with the SFC, subject to the oversight of the OFC board. This would help safeguard the interest of investors, as it separates the investment functions and day-to-day management from that of supervision. Also, we propose to require segregation of assets of the OFC from that of the investment manager. The OFC assets should be entrusted to a separate, independent custodian for safekeeping. This aims to strengthen investor protection and avoid potential conflict of interest.
Regulatory initiatives play no small part in strengthening Hong Kong's position as the international premier asset management hub. Over the years, our market has been manufacturing increasingly complex financial products that cut across the traditional boundaries of our banking, insurance and securities sectors.
The global regulatory trend has increasingly focused on the early stages of the product life-cycle, as well as the product governance of the Product Providers throughout the product life-cycle. In line with this global regulatory trend, the SFC has introduced a new "Guidance on Internal Product Approval Process" with effect from May 1, 2014. The set of Guidance is built on existing requirements, in particular the requirement that product providers shall act honestly, fairly and professionally.
While Hong Kong is keeping in pace with new global regulatory benchmarks and obligations, we are mindful of the fact that too much burden on the industry will stifle market development and competitiveness. That is why we have engaged in intensive discussion with the United States to come up with measures to facilitate compliance with the US Foreign Account Tax Compliance Act (FATCA) by financial institutions in Hong Kong. Thanks to useful feedback from the industry, Hong Kong and the United States have substantially concluded discussions on an inter-governmental agreement (IGA), which will reduce the reporting burden and facilitate compliance with FATCA by financial institutions in Hong Kong. Notably, the IGA will cover exemptions for financial institutions or products which present low risks for tax evasion by US taxpayers.
Conclusion
Ladies and gentlemen, I would like to end my speech with a Chinese saying, "The capacity of the sea is huge; it embraces water flowing from a hundred rivers". With that, I have every confidence that the asset management industry in Hong Kong will grow from strength to strength and I wish you a successful Forum.
Thank you.
Ends/Friday, May 30, 2014
Issued at HKT 18:38
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