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New regulations to shake-up Hong Kong’s IAM industry

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New regulations to shake-up Hong Kong’s IAM industry

Beginning 17 November, a new Fund Manager Code of Conduct (FMCC) is set to take effect in Hong Kong, bringing sweeping changes to how independent asset managers (IAMs) handle client assets.

The key areas of enhancements under the new FMCC relate to securities lending and repurchase agreements, custody of fund assets, liquidity risk management, and disclosure of leverage by fund managers.

The revised FMCC was first floated in a consultation proposal by Hong Kong’s Securities and Futures Commission (SFC) in last November, and the regulator said that changes will become effective in 12 months.

Broadly, IAMs that have in-house funds will be expected to disclose their expected maximum level of leverage to the SFC, said Daniel Tang, partner at law firm Withers.

They will also have to maintain clear and sufficient collateral valuation and management policies, he told Citywire Asia.

In addition, IAMs will need to exercise due care in appointing proper custodians and maintaining appropriate liquidity management policies for their open-ended and closed-ended funds.

The FMCC will be implemented three months after a new Code of Conduct for licenced and registered corporations, which is also applicable to IAMs, came into effect in August.

The new Code of Conduct introduces regulation for discretionary portfolio managers and restricts the use of the term ‘independent’ by intermediaries.

Several IAMs hold client assets in discretionary portfolios, and the new regulation requires discretionary account managers to disclose the maximum percentage of monetary benefits receivable by them and their associates based on the type of investment product.

Where the monetary benefits are not quantifiable, discretionary account managers also have to disclose the existence and nature of such benefits.

In addition, if the discretionary account manager takes no market risk and makes a trading profit for buying and selling investment products on behalf of clients, the manager is required to disclose the maximum percentage of the trading profit, said Michael Wong, partner at law firm Dechert.

Perhaps the most pertinent regulation of all is that IAMs will no longer be able to use the term ‘independent’ if they stand to benefit, monetary or otherwise, from any party that would likely cause them to favour a particular product or product issuer.

These benefits can be in the form of retrocessions and rebates, for example, or any other non-monetary benefits that can cause conflicts of interests with investors.

‘The bar, being set at "likely", is not very high and asset managers should therefore take due precaution,’ Tang said.

An IAM will also need to provide clear disclosure to investors before or at the point of transaction on whether or not it is independent.

‘Although there is not an outright ban, fund managers and intermediaries must now disclose such retrocessions and commissions and, accordingly, refrain from using the label of "independent" if they receive incentives,’ Tang added.

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