Hong Kong plans a retail funds platform

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Authored by: Alwyn Li and Adrian Leung

Introduction

On 4 December 2023, the Hong Kong Investment Funds Association (HKIFA) arranged a briefing session together with the Government’s Financial Services and the Treasury Bureau (FSTB), the Stock Exchange of Hong Kong Limited (HKEX), the Securities and Futures Commission (SFC) and various market participants regarding a proposed Integrated Fund Platform (IFP). The IFP is part of the Chief Executive’s 2023 Policy Address, which aims to expand fund distribution, enhance market efficiency and lower transaction costs (see §72(iii)).

Overview of the IFP and its proposed features

The IFP will cover the full distribution cycle and value chain for retail funds in Hong Kong. It will be developed and operated by the HKEX, supported by the FSTB as the policy bureau and the SFC as the regulator. It is anticipated that the platform will be launched by the end of 2024, and the first phase will focus on the B2B (business-to-business) front-to-back distribution lifecycle and will operate inside Hong Kong only. The IFP may eventually expand to cover a B2C (business-to-consumer) model, as well as customers based in the Greater Bay Area. Joining the IFP is entirely voluntary, and distributors are free to keep their existing distribution channels.

The IFP builds on an independent market infrastructure and will be equipped with product admission and distribution capabilities as well as order routing. It will also facilitate the clearing, settlement and payment for different transactions.

The proposed IFP comprises three parts: (i) Communication Hub, (ii) Business Platform, and (iii) Information Portal.

(i) Communication Hub

The IFP will provide an additional communication channel by introducing a centralised network where communications can be exchanged between different platform users so that market efficiency can be increased.

(ii) Business Platform

For basic functions, the IFP will deal with subscription, redemption, and calculation of proceeds, etc. For instance, equity brokers can sell funds directly by connecting to clients via the IFP. The HKEX has yet to decide on the exact functions to be provided, but it is actively considering the provision of nominee services, especially for smaller distributors.

(iii) Information Portal

The IFP will become a central source of information accessible to the public in order to promote transparency. However, the HKEX has not decided on the precise nature and extent of information to be made available.

Future developments and the way forward

To realise the vision for the IFP – i.e. to add diversity and vibrancy into the funds market in Hong Kong, the HKEX is engineering several features into the platform to raise its competitiveness and lower the entry barrier.

Firstly, the HKEX is exploring the feasibility of standardising the distribution process by compiling master template agreements. This aims to shorten the time required on negotiations, which is a pain point in the current regime.

Secondly, by introducing an additional distribution channel, the HKEX expects the IFP to level the playing field for smaller distributors, which are often less favoured in the market as compared to bigger institutions (e.g. banks and insurance companies) due to their orders being smaller in terms of value and size.

Thirdly, the HKEX observed that the majority of equity brokers already have type 1 and/or type 4 SFC licences, but they limit their offerings to equity. As such, the HKEX is actively looking into allowing the brokers to also distribute funds or link the settlement proceeds in the cash market with funds in the IFP. However, the HKEX expressed that it does not intend to co-mingle accounts established under the IFP with the existing accounts that deal with equities. That being said, whilst the IFP would be operated by a separate entity under the HKEX involving a different ecosystem of accounts, certain costs can be shared across entities, e.g., the KYC procedures do not have to be repeated, thereby driving down the overall costs involved.

Fourthly, the interface of the Information Portal will be investor-friendly, with plans to display standardised sets of information beyond the net asset value and assets under management. There are proposals to develop a ‘smart sorting’ functionality for investors to compare different fund products easily, so as to facilitate cost-effective and comprehensive investment decisions.

Looking forward, the HKEX expressed its eagerness to explore the development and roll-out of the IFP with industry experts and participants.

Key Contacts

Alwyn Li

Partner | Financial Services

Email or call +852 2825 9627