Hong Kong Plans to Liberalise Rules for Mutual Funds

The Hong Kong Securities and Futures Commission (SFC) has launched a three-month consultation on proposed amendments to the Code on Unit Trusts and Mutual Funds (UT Code), which will align Hong Kong’s regulatory regime for SFC-authorised funds with the latest international regulatory standards and broaden product offerings for investors.

Under the proposals, the UT Code allows investments by unlisted mutual funds would be allowed to invest up to 50% of their assets in private credit or other illiquid assets, up from the current cap of 15%, SFC said.

The changes were proposed following the recommendations from the International Organisation of Securities Commissions (IOSCO) in May this year, after global episodes of large-scale redemptions underscored the need for stronger safeguards.

Key revisions to the UT Code include allowing an alternative approach for managing derivative investments in retail funds, updating requirements for fund liquidity risk management, and enhancing the requirements for money market funds.

Once implemented, the proposals will not only drive fund market growth but also strengthen the resilience of the city’s asset management sector, SFC said on Wednesday after the closure of the markets.

According to a Bloomberg report, SFC, Hong Kong, which is seeking to cement itself as one of the world’s largest wealth centres, has eased rules to attract high-net-worth individuals (HNWIs) over the past few years.

The total assets under management (AUM) in Hong Kong rose to $4.5 trillion in 2024, falling short of $4.57 trillion recorded in 2021. The rebound was supported by a surge in net fund inflows, which rose 81% y-o-y to $90.69 billion, South China Morning Post, citing the regulator said in its report.

The number of Hong Kong-domiciled, SFC-authorised funds also expanded by 64%, from 607 in mid-2015 to 993 as of June 2024, while their assets more than doubled to $270 billion during the same period.

SFC’s Firm Commitment

Meanwhile, SFC’s Executive Director of Investment Products Christina CHOI Fung Yee said that these enhancements reflected the Commission’s firm commitment to advancing the public fund market through robust regulations and reinforcing Hong Kong’s position as a leading international asset and wealth management centre.

“We are dedicated to ensuring our regulatory regime remains competitive globally by fostering product innovation and upholding investor protection,” Christina pointed out.

“We want the rule changes to attract more fund managers from the US and Europe to bring their fund products to Hong Kong, while also allowing retail investors to have more product choice,” she added.

The SFC will adopt a step-by-step approach to facilitate new fund offerings for retail access to private markets, first, by admitting listed closed-ended alternative assets funds, and then by allowing, on a case-by-case basis, greater flexibility for SFC-authorised unlisted funds to invest a larger portion in illiquid assets, subject to robust safeguards on the fund’s overall liquidity risk management.

The SFC has also proposed consequential amendments to relevant provisions of the SFC Code on MPF Products, the Code on Pooled Retirement Funds, the Code on Investment-Linked Assurance Schemes and the Code on Real Estate Investment Trusts.