Jurisdiction - Hong Kong
Hong Kong – Deacons’ 5th Annual Investment Products And Regulatory Forum.

1 July, 2013


On 18 June 2013, more than 450 delegates from Hong Kong’s financial services industry attended the 5th Annual Forum, held at the Hong Kong Convention & Exhibition Centre.


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The brief overview of the day’s proceedings below includes a link to Ms. Julia Leung’s keynote address, synopses of the main panel sessions and links to any accompanying reference materials. The contact details of all speakers have also been provided, should you wish to contact them directly. As ever, we would welcome any feedback or comments you may have.


Key note address: Towards a Global Asset Management Centre


This year, it was an honour to have Ms. Julia Leung, Under Secretary for Financial Services and the Treasury, open the Forum with a keynote address, entitled: “Towards a Global Asset Management Centre”, examining the positioning of Hong Kong by the opportunities and challenges presented by China’s liberalisation process.


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A link to Julia’s speech is here.


UCITS in Greater China


The opening panel discussed distribution and regulatory issues impacting UCITS in Greater China.


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Moderated by Deacons’ partner Jeremy Lam, the panellists comprised Claude Kremer (partner of Luxembourg law firm Arendt & Medernach), Thomas McGowan (foreign legal consultant with Taiwanese law firm Russin & Vecchi LLC) and Taylor Hui (Deacons).


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Claude Kremer provided an overview of the evolution of UCITS and the panel discussed the distribution and regulatory challenges which have arisen in Asian markets arising from the perceived increased complexity of products and their use of financial derivative instruments. It was noted that we were now entering a period of regulatory and industry reflection in Europe as to the next stage of the development of UCITS with a focus on eligible assets, complexity, risk and use of derivatives. In light of growing regulatory cooperation and the continuing importance of UCITS within Greater China and the Asia region, regional regulatory views should play an important role in seeking to define the UCITS roadmap going forward.


Thomas McGowan provided an update of the regulatory environment in Taiwan and considered the different regulatory approach to domestic verses UCITS products. He discussed Taiwan’s eight point industry incentive plan aimed at transforming Taiwan into a financial fund management centre which was likely to see an increase in domestic platforms (focused on China investment) managed out of Taiwan.


Taylor and Jeremy provided an update on the Hong Kong regulatory environment with reference to the SFC‘s recent circular aimed at streamlining applications with the SFC in respect of certain scheme changes which can now be implemented without prior SFC review or approval on a post regulatory filing basis. The potential growth in Hong Kong domiciled funds was also considered in light of the mutual recognition initiative commenced by the SFC and the CSRC concerning the future cross border distribution of retail funds between Hong Kong and China. 


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As to the future of UCITS in Asia over the next five years, the results of a pre-forum survey completed by attendees were also reviewed: the results can be found here. In conclusion, global regulation and cooperation will continue to drive the future of UCITS which should remain an important offering within Asia, however, over time, we are likely to see the emergence of more domestic platforms across those Asian jurisdictions which aspire to position themselves as regional fund management hubs.


Focus on China


Moderated by Deacons’ partner Taylor Hui, the panellists comprised fellow partners Alwyn Li and Robert Woll.


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Robert provided an overview of the policy context for RMB liberalisation, noting the positive signals from the new Chinese leadership regarding the opening of the capital account and statements about establishing additional cross-border investment mechanisms.


The panellists discussed the likelihood that inflows would probably be encouraged before outflows and therefore we should expect to see expansion of the QFII and RQFII programmes. The recent opening of the insurance company QDII programme to allow investments into 45 countries including equities, bonds and funds, was welcomed by international fund managers.


Alwyn discussed the latest changes to the RQFII regulations and the developments in RQFII product trends, as well as the frequently asked questions on RQFII when clients are preparing for their applications.


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As Hong Kong based asset managers can now apply for RQFII licences and quotas, and given that under the mutual recognition scheme, Hong Kong domiciled funds must be operated from Hong Kong, it is worthwhile for clients to consider whether there is a business case to expand their operations in Hong Kong. Please find below links to the relevant articles:



Taylor emphasised the importance of the first-mover advantage in establishing both a brand name and a credible distribution network in China for distributing HK domiciled funds under the mutual recognition between HK and China. Since foreign banks will be permitted to distribute funds in China, it would be worth taking the initiative to form partnerships with these banks, with fund management companies to issue QDII fund products.


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The panel also addressed the evolution of private equity funds in China. Robert described the four main types of private equity funds in the Chinese market: (1) offshore dollar-based funds raising capital from international investors; (2) foreign-invested venture capital enterprises (FIVCEs); (3) purely domestic limited liability partnership funds: and (4) Qualified Foreign Limited Partnerships (QFLPs), i.e., RMB-denominated funds with foreign GPs, which were the subject of various pilot programmes in Shanghai, Beijing, Chongqing and Tianjin from 2009-2012. Robert discussed the regulatory uncertainty that has put a chill on QFLPs, in particular the National Development and Reform Commission’s April 2012 denial of “national treatment” — which would have been the key benefit of QFLPs as it would have exempted them from complying with the PRC’s foreign investment regulatory regime with respect to their portfolio investments. Market participants hope that the CSRC will clarify the situation as it takes on more authority over the PE industry. While the near-term prospects for private equity in China remain thoroughly uncertain, in large part this is due to the backlog of existing portfolio investments and lack of exit opportunities. Robert noted that in the long run the development of domestic capital markets will be crucial to ensuring the sustainability of private equity in China.


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SFC inspections and IRD investigations


The last panel discussed HK regulatory inspections and tax authority investigations.


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Moderated by Deacons’ partner Jane McBride, the panellists comprised Scott Carnachan (Deacons consultant) and Darren Bowdern (KPMG tax partner). Jane recommended re-reading the SFC‘s Business Activities and Control Practices Survey as the questions provide helpful insight into what the SFC is expecting licensed corporations to be doing.


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She also mentioned selling and distribution practices, portfolio management and trading processes, unlicensed activities and capital requirements as current SFC hot topics and added that, moving forward, electronic trading, customer due diligence and corporate governance are likely to be added.


Scott provided an overview of the new electronic trading rules and said that the rules will lead to more formality around what intermediaries do to document, test and use internal systems, third party systems and related controls. He emphasised that the definitions of “electronic trading” and “electronic trading systems” are broad; they extend beyond algorithmic trading and could include order management systems. With regard to corporate governance, Scott said that the SFC had not provided much guidance until the SFC Survey which listed a number of areas for consideration at board level.


In terms of being ready for an SFC inspection, Jane emphasised the importance of preparing well for the opening meeting and of briefing key staff and gave various other practical and useful hints for managing inspections.


Darren said that the IRD had targeted the funds sector for audit in 2012 and that there are 30 to 35 funds currently subject to audit.


He said that it is clear that the typical cost plus basis of remunerating a Hong Kong advisor is not being accepted in the absence of strong documentation to support the pricing and added that at the offshore level, consideration should be given to functions such as the role of the offshore management board, officers and investment professionals based outside of Hong Kong, the operation of investment committees and the capital raising functions. Where adjustments are made, the IRD typically also looks to impose penalties. The IRD is also reviewing the taxation of Carried Interest and Performance to the concern of the industry. Going forward, therefore, he recommended that funds should review their operational structures to ensure that they can withstand the scrutiny of an IRD routine enquiry, audit or investigation.


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Please find below links to reference materials:



Deacons would like to express their gratitude to all guest speakers for their contribution to this event. They would also like to thank those who attended on the day for their support and active participation, particularly those who shared their views with us in the pre-forum survey. A link to the survey results is here.



For further information, please contact:


Jane McBride, Partner, Deacons

[email protected] 


Deacons Regulatory & Compliance Practice Profile in Hong Kong




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