Hong Kong Budget 2021: Green Finance, Financial Services & Investment Funds Market Outlook

On 24 February 2021, the Financial Secretary of the Hong Kong Special Administrative Region, Mr. Paul Chan Mo-po, delivered the 2021/22 budget speech (Budget). In his speech, the Financial Secretary emphasised that Hong Kong has always been an offshore financing centre for Mainland enterprises and an important conduit for international capital to enter the Mainland market, and that the capital markets of Hong Kong and the Mainland can complement and interact positively with each other. The Financial Secretary stated that there will be a joint working group set up by the Financial Services and the Treasury Bureau, Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC) and the Insurance Authority to explore how Hong Kong can complement the economic and financial development of Mainland China and meet the needs of international investors while enhancing Hong Kong’s competitiveness as an international financial centre. The working group will set out the development blueprint and put forward concrete proposals and measures for engagement with the Central Authorities to secure their support.

In this publication, we set out key measures in the Budget targeted to further spur the development of green finance and expand the investment funds and financial services markets in Hong Kong.

The Financial Secretary restates the Government’s target to achieve carbon neutrality before 2050, as previously announced by Hong Kong Chief Executive Carrie Lam, and further added that Hong Kong’s Climate Action Plan will be updated later this year to set out more proactive strategies and measures to reduce carbon emissions. The Government will also take forward the Strategic Plan announced at the end of last year by the Green and Sustainable Finance Cross-Agency Steering Group.

The Budget also announced government subsidy for the expenses for OFCs established or re-domiciled in Hong Kong, and the proposed introduction of law to provide tax concessions for carried interest issued by private equity funds operating in Hong Kong. The Financial Secretary also referred to plans to continuously expand the capacity of the Stock Connect, including progressive inclusion of exchange-traded funds (ETF) and other types of assets as well as expansion of the scope of eligible securities, and to further encourage the development of the REITs market in Hong Kong,

Read about these and more in our publication:

We welcome the various key measures in the Budget in support of the financial services industry. In particular, we welcome the proposed initiatives and subsidies to encourage the set-up of OFCs, LPFs and listing of REITs in Hong Kong to further enhance Hong Kong’s status as a premier asset and wealth management as well as capital raising hub. We look forward to the announcements from SFC and the Government in these regards. It is also encouraging to see that the Government is developing and expanding its green and sustainable finance support and offerings in light of the growing importance and focus on ESG and sustainability globally.

We recently published with Chambers Practice Guide Investment Funds 2021 on the trends and developments of the Hong Kong investment funds market [1], we covered extensively on Hong Kong’s unique position with respect to Mainland China, as a key international capital market and leading asset management centre, which are being enhanced with rapid legal and regulatory developments in recent years for Hong Kong to remain competitive as an attractive location to set up investment management business. Such measures include the new Hong Kong fund domicile structures offered along with tax incentives, which the Budget strongly demonstrates the government’s clear intention to further support with the government subsidy on OFCs and the tax concession for carried interest to be introduced very soon.

Besides the measures relevant to green finance, investment funds, fintech and financial services markets we outlined above, importantly, the Budget covered the Hong Kong government’s proposed relief measures from the impact of the Covid pandemic and for economic recovery. There is cause for optimism and confidence for Hong Kong to build back better, in Hong Kong’s ambition and efforts to be the global ESG investment hub of Asia and be a leader in the growing adoption of green and sustainable finance globally.


[1] Chambers Practice Guide – Investment Funds 2021: Hong Kong Trends & Developments: (https://practiceguides.chambers.com/practice-guides/investment-funds-2021/hong-kong/trends-and-developments)

Response to SFC Consultation on Climate-related Risks

Under the “Consultation Paper on the Management and Disclosure of Climate-related Risks by Fund Managers” issued at the end of October 2020, Hong Kong Securities and Futures Commission (SFC) has proposed to introduce specific regulatory requirements on Hong Kong licensed fund managers to take into account climate-related risks in investment and risk management processes, make appropriate disclosures to investors on climate-related risks, and combat greenwashing.

The SFC Fund Manager Code of Conduct is proposed to be amended and a circular to be issued, to introduce baseline requirements that shall apply to managers of collective investment schemes, with enhanced standards expected of large fund managers of assets under management (AUM) of HK$4 billion or above, for fund-level disclosure on weighted average carbon intensity (WACI) of Scope 1 and Scope 2 GHG emissions associated with the funds’ underlying investments, on top of entity-level disclosures expected of all fund managers. Proposed requirements involve four key elements, covering (a) governance, (b) investment management, (c) risk management and (d) disclosure.  For each key element, the Consultation Paper provides examples on how these key elements may be applied in practice.

Market participants and interested parties were invited to submit comments to the SFC by 15 January 2021. Our firm has submitted a response to the SFC consultation, which we hope contributes to the industry and the development of sustainable finance in Hong Kong, as the SFC considers its regulatory approach and necessary steps.

In our response, we provided the following key suggestions and feedback:

– While we agree with the SFC’s primary focus on climate-related risks, we suggest that the SFC makes it clear the distinct policy objectives and expectations for managers to take into account climate-related risks in investment decisions (as risk management), on the one hand, and on the other hand, to direct capital to investing in climate-related opportunities and climate transition, especially in view of Mainland China and Hong Kong’s respective net-zero pledges.

– We urge the SFC to also consider encouraging managers to manage and disclose its investment and risk management policy around social or governance factors, although not mandatory, given it is increasingly expected globally for investment managers to take into account ESG issues in investment decisions, not just climate risks.

– We suggest that the SFC makes it expressed and clear that the enhanced requirements are aimed at requiring fund managers to intentionally adopt a framework or policy on how climate-related risks (or S or G factors) are taken into account in investment decisions and risk management, but that the SFC is not prescriptive, since the management of E, S or G factors are subject to the investment strategies, specific portfolio and/or investment management discretion.

– In applying TCFD recommendations, we suggest that the SFC clarifies that the proposed requirements are TCFD-based, rather than TCFD-aligned, so that it is clear the requirements form SFC’s expectation for fund managers to adopt a framework for governance and approach for assessing, managing, disclosing and measuring climate-related risks, but give room for the practicalities of fund management companies in the business of managing investment funds of varying investment strategies or portfolio composition, or funds with specific structure or governance, and the exercise of investment management process and discretion under different management or operational process that caters to specific strategies.

– We suggest the SFC gives fund managers flexibility to adopt or apply different policies, practices, standards or frameworks that may be appropriate for the different investment funds or different investment strategies under management. We consider that in mandating a specific framework or a single policy or approach for managing or disclosing climate-related risks for fund management organisations across the board and across strategies, there may be potential unintended consequences of managers adopting broad-brush general policy or disclosures which may carry increased risk of green-washing.

– The investment objective, preference or needs of investors should also be taken into account. Here, while the SFC Consultation proposes to apply the enhanced requirements to fund managers, we suggest that the SFC also considers encouraging managers of discretionary managed accounts to proactively clarify the clients’ expectation on managing E, S or G issues.

– We suggest that the SFC provides more specific clarifications and guidance on what and where disclosures should be made at the fund level in fund documents to investors, and what and where fund manager’s entity-level disclosures should be made. However, we consider that more emphasis should be on disclosures to be made at the fund level, for transparency to investors and also the relevance of climate-related risks really varies depending on the specific investment strategies or make-up of the investment portfolio.

While there is urgency to act, in terms of the timeline for the proposed requirements to apply, given corporate climate or ESG reporting is being enhanced (updated ESG reporting requirements of the Hong Kong Stock Exchange apply to reporting of periods from July 2020), and also alignment and harmonisation of global reporting framework, standards, tools and metrics are just underway, we suggest the transition period for fund managers to comply with specific data or reporting requirements give time for those developments to settle.

As this is the first time that the SFC will introduce specific requirements for Hong Kong licensed managers to take action on managing and disclosing climate-related risks, we also suggest that the SFC adopt requirements that clearly set out the policy and principles of the SFC’s regulatory expectations, while providing different compliance timelines to cater to different stages of enhanced standards for developing Hong Kong managers in climate-related investments and risk management, sustainable finance and ESG.

Our submission response to the SFC may be published by the SFC along with other market and industry response to the Consultation in due course (typically when SFC publishes the consultation conclusions).

The enhanced requirements of the SFC will be an important and meaningful step to set the Hong Kong funds industry’s standard and providing guidance on best practices for Hong Kong licensed fund managers for sustainable finance, while we appreciate the issues and tasks involved are highly challenging and complex.

Further background and details of the SFC proposals are outlined in our previous legal update: SFC-Consultation-Paper-on-Climate-related-Risks Download

The full Consultation Paper is available on the website of the SFC:

Consultation Paper on the Management and Disclosure of Climate-related Risks by Fund Managers

Joining Dentons Hong Kong & Global Network 加入大成Dentons香港

To our clients, business partners and colleagues,

Our firm will turn 6 on 19 January 2021, and we are grateful for the opportunities we have had engaging and working with you all these years. The philosophy of our firm’s founding is to offer quality legal services with unique focus on asset management, financial services, finance and securities regulatory, as areas which our team seeks to offer particular strength, knowledge and experience. Since 2018, we have also developed capabilities in ESG, sustainable finance and impact. First and foremost, it is to deliver quality work to our clients and contribute to the industry and community.

With the increasingly cross-border nature of our work with asset managers, in investment funds, regulatory, ESG and impact, often advising on situations or issues of a regional or global nature, it is a tremendous opportunity to join the Dentons global network, to better serve our clients’ expanding needs.

Vivien Teu & Co LLP has commenced the process of filing with the Hong Kong Law Society to cease practice from 15 March 2021, and thereafter, together with my team, I will join Dentons Hong Kong LLP as Partner, Head of Asset Management & ESG. (Dentons’ press release: https://hongkong.dentons.com/en/news-and-recognition/2021/january/investment-funds-and-corporate-partner-vivien-teu-will-join-dentons-hong-kong)

Many thanks to everyone who has been with us in our journey, and we hope to continuing engaging with you going forward at Dentons.

Vivien Teu, Founder & Managing Partner

致敬爱的客戶,業務合作夥伴和同事们:

2021年1月19日本所将已设立6周年,我們十分感謝這些年來與您合作並向您提供服务的機會。 本所成立的宗旨是为提供特別關注資產管理,金融服務,金融和證券監管方面的高質法律服務,是我們團隊力求提供特定實力,知識和經驗的領域。 自2018年以來,我們還開展了ESG,可持續金融和影響力的专注和能力。 首先,是為我們的客戶提供優質的服务,並為行業和社區做出貢獻。

隨著我們與資產管理机构就投資基金,監管,ESG和影響方面的工作越來越具跨國性,經常就區域或全球性的情況或問題提供諮詢,加入Dentons全球網絡是个巨好機會,能更好地服務於客戶不斷增長的需求。

谨此通知,张慧雯律师事务所將於2021年3月15日停止執業,我將與我的團隊一起加入Dentons 香港律师事务所,擔任合夥人兼資產管理和ESG业务負責人。(Dentons发布的有关新闻https://hongkong.dentons.com/en/news-and-recognition/2021/january/investment-funds-and-corporate-partner-vivien-teu-will-join-dentons-hong-kong

再次感謝在我們旅途中與我們在一起的每個人,我們希望在大成Dentons繼續與您保持聯繫及更多的合作机会。

张慧雯律师,創始人兼執行合夥人

《商法》2020年法律精英

Vivien Teu 张慧雯律师 – 《商法》2020年 “法律精英“ 100(外所律师)

本所荣幸以管理合伙人张慧雯律师获评《商法》2020年 “法律精英“ 中国业务 100位外所优秀律师之一的消息迎接2021新年。

“经过广泛的调研,《商法》编辑部选出了200位中国相关业务的优秀律师(包括100位来自中国律所的律师以及100位来自外国律所的律师)。

“法律精英”名册上的律师是《商法》月刊根据广泛调查研究评选而来的。为了评选出在中国市场表现出色的私人执业律师,我们向中国和全球上千名法务顾问及众多中外顶尖律师事务所的合伙人发出了调查邀请,听取业界的声音,助我们做出甄选。

我们从大量中外企业、律师事务所和其他机构的专业人士收到了提名。最终的获奖名单基于了我们收到的提名,并结合《商法》编辑团队多年来观察和分析中国法律市场的集体经验。“

查看100位中国律所优秀律师100位外资律所优秀律师

2020 A-List Elite-100 lawyers China practice

China Business Law Journal A-List China Elite-100 (foreign lawyer)

We are delighted to start the 2021 work year with the news that our Managing Partner Vivien Teu is named in the A-List China Elite 100 lawyers (foreign firm) 2020, based on extensive research conducted by the China Business Law Journal, with input from thousands of in-house counsel in China and around the world as well as partners at Chinese and international law firms.

According to China Business Law Journal:

“The A-List is based on extensive research conducted by China Business Law Journal. To identify the elite lawyers for the Chinese market, we turned to thousands of in-house counsel in China and around the world, as well as partners at Chinese and international law firms, and asked them to tell us which lawyers should make the cut.

Nominations were received from professionals at a wide range of Chinese and international companies, law firms and other organizations.

The final list that we have produced reflects the nominations received combined with the China Business Law Journal editorial team’s years of collective experience in documenting and analyzing China’s legal market.”

The full list of 200 elite lawyers for China practice – 100 lawyers in PRC law firms and 100 lawyers in foreign law firms has just been published.

Access the full list and the report:

https://law.asia/china/china-top-lawyers-2020/

Hong Kong SFC proposes enhancements to competency framework of intermediaries and market practitioners

The Securities and Futures Commission (SFC) has launched a consultation on “Proposed Enhancements to the Competency Framework for Intermediaries and Individual Practitioners” on 11 December 2020 (Consultation Paper). The consultation is open for comments for two months. Public comments are required to be submitted to SFC no later than 10 February 2021.

The following key enhancements are proposed:

  • the minimum academic qualification requirements for individuals would be raised and a broader range of academic qualifications would be recognised;
  • applicants would have more flexibility for meeting the industry qualification and regulatory examination requirements;
  • competence requirements for individuals who are to advise on matters regulated by the Codes on Takeovers would be upgraded to address SFC’s concerns about the quality of work performed by some financial advisers on matters regulated by the Codes on Takeovers; and
  • continuous professional training (CPT) requirements for individual practitioners would also be enhanced.

Background

The SFC notes there have been substantial changes in its regulatory landscape since 2003 when the Guidelines on Competence (Competence Guidelines) and the Guidelines on Continuous Professional Training (CPT Guidelines) were issued, which outline the entry and ongoing competence requirements expected of a person engaging in regulated activity (RA). Separately, many other local and overseas regulators have recently updated their competence standards. In view of the development of the financial markets which have been evolving and becoming more sophisticated, the SFC therefore sees it essential to raise the industry’s professional standards bringing its competency framework up-to-date and thus would like to revise and modernize the competence requirements. Details of the proposed changes to the Competence Guidelines and CPT Guidelines are set out in Appendix A and Appendix C of the Consultation Paper respectively.

The SFC also raised concern about the quality of work performed by some financial advisers on matters regulated by the Codes on Takeovers and Mergers and Share Buy-backs (Codes on Takeovers), where certain financial advisers were unaware of or did not understand the requirements under the Codes on Takeovers or relied excessively on their legal advisers in relevant transactions and failed to discharge their own duties and roles. To address this, SFC has proposed to upgrade and set out expressly the competence requirements for individuals who are to advise on matters or transactions falling within the scope of the Codes on Takeovers.

The proposed enhancements would be the first time the competency requirements are revised since 2003 and the proposed changes are fairly extensive.  We outline the key proposed changes and summarise the details in this legal update:

Proposed implementation timeframe

The SFC has proposed to implement the revised Competence Guidelines and CPT Guidelines at least six months after their publication and in any event no later than 31 December 2021.

Given the proposed implementation timeline, industry practitioners should consider whether to make any consultation response and/or to prepare themselves for the revised competence requirements, and CPT training providers may wish to make corresponding adjustments to their training programs and CPT courses to be ready for the proposed enhancements once they are in force.

Access the SFC’s website here for the full consultation paper: https://apps.sfc.hk/edistributionWeb/gateway/EN/consultation/intermediaries-licensing/openFile?refNo=20CP8

Stewardship & Principles of Responsible Ownership

Stewardship is about the exercise of shareholders or investors rights, and on investment managers or asset owners as institutional investors as stewards of capital, and that it is part of fiduciary duty to vote as investors or engage with investee companies with a view to generating value or return from investments to clients or beneficiaries.   There may be different names, such as responsible owner or active ownership, but in essence it is about asset owners and asset managers discharging responsible investment, as stewards of capital. 

Hong Kong Securities and Futures Commission (SFC) published the Principles of Responsible Ownership (HK PRO) in 2016.  The HKPRO was issued with the stated objective to guide and assist investors to determine how best to meet ownership responsibilities, encompassing seven principles, though it is a set of voluntary and non-binding principles.

In our previous publication, Hong Kong Green or ESG Investing & SFC Authorised Funds, we focused on green or ESG investing of Hong Kong licensed investment managers, including a reflection on the results of the SFC ESG Survey, and an overview on the current range of SFC authorised green or ESG funds available for public offer, with reference to the SFC requirements on green or ESG funds, and also the range of investment strategies adopted by such funds.

An important element and commonly cited investment approach in green or ESG investment strategies adopted by green or ESG funds is ‘active ownership’.   In this publication, we focus on stewardship and responsible ownership, current market trends and developments, guidelines and standards, and also consider how managers may adopt and implement stewardship and responsible ownership policies. 

SFC Consultation on proposed requirements on fund managers to manage and disclose climate-related risks

As global regulatory focus intensifies on climate risks, Hong Kong Securities and Futures Commission (SFC) is proposing specific regulatory requirements on Hong Kong licensed fund managers to take into account climate-related risks in investment and risk management processes, and make appropriate disclosures to investors on climate-related risks, combat greenwashing.

Under the “Consultation Paper on the Management and Disclosure of Climate-related Risks by Fund Managers”, the Fund Manager Code of Conduct is proposed to be amended and a circular to be issued, to introduce baseline requirements that shall apply to managers of collective investment schemes, with enhanced standards expected of large fund managers of assets under management (AUM) of HK$4 billion or above, for fund-level disclosure on weighted average carbon intensity (WACI) of Scope 1 and Scope 2 GHG emissions associated with the funds’ underlying investments, on top of entity-level disclosures expected of all fund managers.

Proposed requirements involve four key elements, covering (a) governance, (b) investment management, (c) risk management and (d) disclosure.  For each key element, the Consultation Paper provides examples on how these key elements may be applied in practice.

Further background and details are outlined in our legal update:

The full Consultation Paper is available on the website of the SFC:

Consultation Paper on the Management and Disclosure of Climate-related Risks by Fund Managers

Market participants and interested parties are invited to submit comments to the SFC by 15 January 2021.

China integrates and further liberalizes QFII/RQFII schemes

On 25 September 2020, China Securities Regulatory Commission (CSRC), People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) released the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (the Measures) as a measure of further opening-up of China’s capital market.  Meanwhile, the CSRC released the Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (the Provisions) to facilitate the implementations of the Measures.

With the Measures and the Provisions coming into effect on 1 November 2020, China’s QFII and RQFII schemes introduced since 2006 and 2013 respectively and which have been governed by separate set of rules and regulations will be integrated, and past QFII and RQFII rules and guidelines will be invalidated.  The new QFII/RQFII integrated scheme will be further liberalized with eligibility requirements further relaxed and application procedures streamlined, among others.  

Most noteworthy and which has been highly anticipated by the market is the expansion of investment scope under the new QFII/RQFII scheme. Further, under the new rules, QFIIs and RQFIIs may appoint a domestic private fund manager or investment fund manager which is either its subsidiary or group company as its investment advisor.  This will clearly enable private fund management enterprises or investment fund management company set up by foreign fund managers in China to act as investment advisor to the parent or group QFII or RQFII licensed managers in investing in China onshore securities and futures markets.  Notably, global fund managers establishing and developing onshore capabilities through setting up fund management entity in China can now offer this on its global China investment products.

Institutions currently holding multiple QFII/RQFII qualifications may also wish to note the new rules indicate there may be non-trade transfer for transfer of qualification to another entity under same control, rearrange its accounts or change manager of its fund products or accounts, to improve investment and operation efficiency or to streamline account structure.

Foreign managers should also note that the Measures clearly require a qualified foreign investor to lawfully aggregate the interests of its shareholdings in a company including shares listed in overseas markets and shares listed in China domestic markets, and comply with relevant disclosures rules (including rules on parties acting in concert).  On the other hand, qualified foreign investors may exercise rights as shareholders of domestic securities, by itself or through its custodian, domestic securities company, an independent director or the secretary of the board of directors of an exchange-listed or NEEQ-admitted company, or a foreign investor under its name. 

See our Legal Update for more details of the integrated and updated QFII/RQFII scheme:

Enhancement to Hong Kong’s Open-ended Fund Company Structure

On 20 December 2019, Hong Kong’s Securities and Futures Commission (SFC) issued a consultation paper on proposed enhancements to the open-ended fund company (OFC) regime (Consultation Paper). On 2 September 2020, the SFC released its consultation conclusions with proposed amendments to the Code on Open-ended Fund Companies (OFC Code) to implement the enhancements to the OFC regime (Consultation Conclusions). The revised OFC Code were gazetted on 11 September 2020 and become immediately effective upon gazettal (Revised OFC Code), while a six-month transition period is given to existing private OFC custodians to comply with certain new safekeeping requirements by 10 March 2021. The proposed enhancements to the OFC regime are discussed below.

To implement the enhanced OFC regime, the SFC has also updated the Information Checklists, Template of Instrument of Incorporation for Umbrella Private OFC and the Frequently Asked Questions relating to OFCs, all of which are available on SFC’s website.

Expansion of custodian eligibility requirements for private OFCs

In the Consultation Conclusions, the SFC confirms to expand the custodian eligibility requirements for private OFCs such that the custodian of a private OFC is now not required to meet the same eligibility requirements as set out in the Code on Unit Trusts and Mutual Funds (UT Code) for SFC-authorised funds, but rather intermediaries licensed or registered for Type 1 regulated activity of dealing in securities (RA1) are also eligible to act as custodians for private OFCs. However, while the custodian eligibility requirements for private OFCs now include RA1 intermediaries, the SFC will not further expand them to intermediaries licensed for the regulated activity of dealing in futures contracts (RA2) or for the regulated activity of dealing in OTC derivative products or advising on OTC derivative products (RA11), as it considers that RA2 and RA11 intermediaries do not normally perform an incidental securities custodial function as RA1 intermediaries when carrying on their respective regulated activities and also that these regulated activities are very different in nature from RA1.

The SFC noted in the Consultation Conclusions that a custodian must be appointed for safekeeping of assets of a private OFC regardless of the types of the assets and even where a private OFC invests in private equity and venture capital. While allowing RA1 intermediaries to act as custodian for private OFCs, the SFC imposes certain eligibility criteria on them which include: (i)an RA1 custodian’s license or registration is not subject to the condition that it shall not hold client assets; (ii) for a custodian which is a licensed corporation, at all times maintains paid-up share capital of not less than HK$10 million and liquid capital of not less than HK$3 million; (iii) the private OFC is, and remains at all times, a client of the RA1 custodian in respect of its RA1 business (though a grace period of six months will be allowed for the RA1 custodian to continue to act as custodian of the private OFC and to transfer the OFC scheme assets to a new custodian); (iv) an RA1 custodian must have at least one responsible officer or executive officer responsible for the overall management and supervision of its custodial function; and (v) the RA1 custodian must be independent of the investment manager (and where asset management and securities affiliates share responsible officers and directors, internal controls must be in place to ensure functional independence). Private OFC custodians are also required to comply with the requirements as set out in Appendix A to be newly added to the OFC Code regarding the safekeeping of private OFC assets. In this regard, the SFC noted that those requirements in Appendix A are minimum requirements which all custodians should comply with and confirms that while the OFC assets must be segregated from assets of the custodian, they may be held in omnibus accounts, provided adequate safeguards in line with international standards and best practices are in place to ensure proper recording and frequent reconciliations of the OFC assets.

For both public and private OFCs, the Revised OFC Code requires that the custodian must (i) have sufficient experience, expertise and competence in safekeeping the asset types in which the OFC invests; and (ii) maintain adequate internal controls and systems commensurate with the custodial risks specific to the type and nature of the assets invested.

Regarding appointment of custodian and/or sub-custodian, the SFC has clarified that more than one custodian can be appointed by an OFC, and custodians can delegate their custody functions to one or more sub-custodians as necessary.

Removal of investment restrictions on private OFCs

The SFC has now removed all investment restrictions on private OFCs under the OFC Code, including the “10% limit” originally imposed on private OFCs such that private OFCs are allowed to invest in all asset classes without limit on management of assets which may not amount to regulated activity. As noted by the SFC in the Consultation Conclusions, this is intended to place private OFCs on a level playing field with other overseas corporate fund structures as well as the recently enacted Hong Kong limited partnership fund (LPF) structure and enhance the competitiveness of the OFC structure. This will allow OFC to be adopted for investments other than securities or futures, such as investments in private companies, real estate, credit or other assets not previously eligible.

While confirming to remove the investment restrictions on private OFCs, the SFC, on the other hand, pointed out that new provisions will be included in the OFC Code to require that investment managers and custodians have sufficient expertise and experience in managing and safekeeping asset classes in which an OFC invests, with enhanced risk disclosure in the offering documents and proper record keeping required.

However, as SFC also noted, profits tax liability may arise if a private OFC makes investments in certain situations under which the profits tax exemption under the new unified profits tax regime for funds does not apply.

Re-domiciliation of overseas corporate funds

The SFC has proposed re-domiciliation mechanism that will allow overseas corporate funds to be re-domiciled to Hong Kong as an OFC, provided key requirements for the registration of an OFC applicable to newly formed OFCs are satisfied. The SFC noted that these are basic requirements such as the appointment of investment managers, custodians and directors who fulfil the eligibility requirements. According to the SFC, any changes to the overseas corporate fund structure which would not affect its ability to meet the key requirements can be effected after re-domiciliation.

The SFC has also considered and indicated there is no restriction on the restructuring of Hong Kong unit trusts into OFCs provided that relevant requirements for establishing an OFC are met and that such restructuring could be done in accordance with the constitutive documents of the unit trust. For SFC-authorised funds that are in unit trust form, their past performance and track records could be preserved if they were to restructure to OFCs.

Upon re-domiciliation, an OFC will be able to enjoy profits tax exemption subject to meeting certain conditions. The SFC’s proposal to introduce a re-domiciliation mechanism will take immediate effect upon completion of the legislative process.

Exemption from significant controllers register requirements

Given the open-ended nature of OFCs (though a “closed-ended” fund may use an OFC structure through imposing redemption restrictions), the SFC noted the difficulties of requiring OFCs to keep an significant controllers register (SCR) and considered that OFCs are very different from closed-ended conventional companies on which the SCR requirements are imposed. The SFC has proposed to align the AML/CFT requirements applicable to OFCs with those recently implemented for LPFs, requiring OFCs to appoint a responsible person to carry out AML/CFT functions. The SFC is also conducting a further consultation on the customer due diligence (CDD) requirements to be imposed on OFCs.

With the enhanced Hong Kong OFC regime, we believe that this alternative fund structure will become more appealing to fund managers seeking to establish or offer an investment fund in Hong Kong.

For further information regarding the set up of a Hong Kong open-ended fund company structure, the enhanced features or potential re-domiciliation from an existing fund structure, please contact Vivien Teu, Managing Partner (Email: vivien.teu@vteu.co), Sarah He, Associate (Email: sarah.he@vteu.co) or any lawyer who is your usual contact at our firm.

For our previous publication on Hong Kong open-ended fund company structure: http://www.vteu.co/2018/07/30/hong-kong-open-ended-fund-company-comes-into-effect/