SFC revamps rules for fast-track fund approvals
Hong Kong’s regulator is promising fund promoters a shorter time to market under a new two-speed fund authorisation programme.
The Securities and Futures Commission (SFC) is calling the pilot scheme for fund applications a “revamped process” and is stressing that investor protection won't be compromised under the rules.
The scheme is due to come into effect on November 9 for a six-month period, after which refinements may be made before the initiatives are adopted as policy.
From next month, new fund applications will be split into two streams: standard and non-standard. Standard applications will be fast-tracked with the aim that SFC authorisation will be given on average between one to two months from the take-up date of the application.
Non-standard applications will be processed with the aim that SFC authorisation will be given on average within two to three months from the take-up date of the application.
Since January 2014, when the SFC reduced the time lapse on new fund applications to six months, the average processing time for new fund applications has decreased by 38% to less than four-and-a-half months, according to SFC data, while the number of funds authorised by the SFC last year increased by more than a third.
But this is still too long for many fund promoters who want to launch products in response to market opportunities. There is room to streamline the process further, agrees the regulator’s executive director of investment products, Julia Leung.
In particular, the revamped process holds fund promoters to stricter rules on ensuring their fund application is submitted in good order.
"An authorisation process that is more efficient and focuses more on key risks can meet fund providers’ wish to reduce the time-to-market of their funds," she said. "To achieve this we need applicants to provide proper and quality submissions at the time of application and throughout the application process in a timely manner.”
Stewart Aldcroft, managing director at Citi Securities and Fund Services, observes that the delay on fund applications is not always the fault of the regulator. “A lot of the time, applications submitted to the SFC are in pretty bad shape, so fund groups are often their own worst enemy.”
Under the new process, a fund application would be processed as ‘standard’ if the fund is a sub-fund of an existing SFC-authorised umbrella fund and it does not use financial derivative instruments extensively for investment purposes.
ETF providers have been putting a lot of pressure on regulators to improve conditions for their funds. And while ETF providers are catered for within the new rules, it is not in a manner likely to appease them.
ETFs will be treated as regular funds, says the SFC, as long as they are physical ETFs or unlisted index funds tracking an index that is adopted by other existing SFC-authorised funds, or a ‘plain vanilla’ index.
That offers little in the way of opportunity for those ETF promoters who are trying to offer something new and different. It excludes, for example, smart beta, any value-based index and equal-weighted equity indices.
While the regulatory process at the front-end is being liberalised, the SFC says it is not going soft on investor protection. Under the pilot scheme, the SFC will conduct a “post-vetting’ procedure to ensure applicable authorisation conditions are complied with”.
The post-vetting procedure is set up to make it easy for companies who supply the right paperwork and have all their prospectus and key facts statements (KFS) in order. If the SFC subsequently discovers an authorised firm has failed to produce any of the required KFS sheets, the penalties could be significantly higher than would normally be the case.
The SFC says it "will keep in view the possible introduction of any demerit/deterrent measures, such as a moratorium period during which an applicant [in breach of the rules] will not be allowed to submit new fund applications for a period of time".
This lighter touch on regulation with the threat of much greater penalties for offenders is a good thing, according to Aldcroft. “A lot of people will welcome this,” he said. “They are treating the fund companies like grown-ups. It seems to be the right way forward.”
However, one to two months for fund approvals is a huge advance from the current four-to-six-month wait. Does the SFC have the resources to deliver on this objective?
Aldcroft says: “We don’t know and never will, because the SFC doesn’t give any indication of how large this department is within the team. What we hope and assume is that the SFC is intent on upgrading its staff.”
The SFC declined to comment on whether an upgrade of resources was taking place.
The revamped process will not apply to fund applications under mutual recognition of funds (MRF) for the time being. "It is our current intention to assess the applicability of the Revamped Process for MRF Applications after expiry of the Pilot Period," stated the SFC.
A Guide on Practices and Procedures for Application for Authorisation of Unit Trusts and Mutual Funds is available here.
Additionally there is a set of Frequently Asked Questions on Application Procedures for Authorisation of Unit Trusts and Mutual Funds under the Revamped Process.