Lifting the Veil

The more things stay the same, the more they change. In November, the Hong Kong financial regulator published its proposed revisions to the Fund Managers Code of Conduct [1] (FMCC) - a full year after its consultation opened. At first flush, one might wonder whether it was worth the wait.

Read Global Regulatory Outlook 2018 

For many firms, the FMCC merely codifies existing conduct. The main result will be an increase in paperwork, with firms having to document existing policies and practices on leverage, liquidity risk management, custodial arrangements, collateral and so on. Firms have until November 2018, when the new code takes effect, to get them implemented (although work will be required throughout the year to make any required changes, including additional disclosures where required, in offering documentation).

Nevertheless, the code is important for a number of reasons. First, it clarifies the standards the Securities and Futures Commission (SFC) expects of all firms, including both local firms and nonlocal firms, with the latter including those sponsored from mainland China, amongst which standards can be less consistent. The new standards are likely to inform the “front-loaded regulation” announced earlier in the year by SFC Chief Executive Ashley Alder,2 who promised “earlier, more targeted intervention” to enable the regulator to “get ahead” of issues. It also is likely to be no coincidence that the amendments and clarifications contained in the FMCC follow closely on the heels of 2017’s Manager-In-Charge of Core Functions, or MIC regime, which seeks to pinpoint responsibility and accountability for actions and controls.

We can probably therefore expect the regulator to come down hard on miscreants to set an example to others and to act as a general deterrent to the market.

The second reason the code is important, however, is particular to alternatives managers and could bring longer-term fundamental change in Hong Kong and elsewhere.

Lifting the Veil - Global Regulatory Outlook 2018

Sections of the FMCC apply only to the fund manager “responsible for the overall operation of a fund.” It proposes funds undertake fact-based reviews to identify who this is, but under the guidance it seems likely it would include many Hong Kong advisers of offshore funds.

This arguably makes logical sense. In such cases, it is the Hong Kong adviser who holds the beauty parade for the service providers and partners; it selects the administrator; and it chooses the custodian(s), for instance. The contract may be with the Cayman manager, but it is the adviser in Hong Kong pulling the strings. The SFC’s approach has no legal basis, however. In law, responsibility for appointment rests offshore.

Nevertheless, the move isn’t without consequences.

For a start, it puts pressure on Hong Kong advisers to increase oversight of appointments such as prime brokers—checking not only that they’re creditworthy but also that they are sticking to correct processes. More crucially, perhaps, it inevitably invites others to likewise hold managers here accountable. Disgruntled investors who in the past have only been able to take action against the offshore entity may soon be considering including onshore advisers in any legal action. And where litigants go, regulators in Hong Kong—and perhaps elsewhere—may follow.

The consequences are yet to really be seen, but the SFC has opened the door. Time will tell where it leads.

 

Sources:
1 https://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=17CP7
2 https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR96

Lifting the Veil 2018-04-19T00:00:00.0000000 /insights/publications/compliance-and-regulatory-consulting/global-regulatory-outlook-2018/lifting-the-veil /-/media/assets/images/publications/thumbnails/global-regulatory-outlook/gro-lifting-the-veil-thumbnail.ashx publication {DA6CC51B-740E-439A-B283-2BBFB5326BAA} {DE05ECA4-1852-4BEF-A4E1-491CB497F9CB} {EBC1AB28-1393-493C-AF32-19B3B0B6E171} {1C3CB363-1B9A-40E2-AF19-5C433260F861} {E1E71CC6-CE33-46BD-A6CF-B547EF2D052C} {4FD55120-2DD8-4DB5-8DAA-3D9212C2436D} {4984481D-079C-4B42-B985-EA34752D3CD5} {E8669D15-7AE5-41D4-BE77-6C5E07C03F38} {36EE33A2-B269-45FC-8D7C-A5B66255C61E} {19B96101-31A4-4C6D-9597-A39E0C9E24C8} {910B8B61-AD72-44CF-87C2-BFA5FE119417} {742DB722-E4B5-4E18-A540-4BFA6F8D6843} {AB22E3A7-0FD2-43A7-91E0-C3590E9141B9} {5AA4BE28-97DD-427B-A8CA-7B3BF3B5E4BF} {C9A6FAA4-0FA0-40A8-B4D2-2A0DDD29F14D} {F9A927B5-B65A-4F14-B590-DD46B5DC907A} {063D2ACD-1006-4DAD-8E9F-A8084C7358F8} {2361D727-0847-4B20-B8E9-68E7DBA5C7DC} {B062D54C-1425-4A04-8F9F-95EA14068E6D} {5BF06FE7-E88C-4627-A701-3E042F076F1F} {65648E61-ED08-40DF-AEE6-DB90ABD49289} {C8894F56-FF6C-4DEA-AB91-58D66A7F0624} {B7CF2537-1DBA-485F-A14F-8BD1524F1A8B} {95D7F66C-11BB-4E7D-B07C-48874A321F98}

Related Services

Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

By Jurisdiction

Regionally targeted assistance for asset managers in compliance program development, implementation and maintenance

By Jurisdiction
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

U.S. Regulation

Comprehensive support for asset managers registering in the U.S.

U.S. Regulation
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

EU Regulation

Comprehensive compliance and regulatory support for EU firms.

EU Regulation
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

UK Regulation

Comprehensive compliance and regulatory support for FCA authorized firms.

UK Regulation
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Irish Regulation

Comprehensive support for asset managers registering in Ireland.

Irish Regulation
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Hong Kong Regulation

Comprehensive SFC licensing support.

Hong Kong Regulation
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Singapore Regulation

Comprehensive MAS licensing support.

Singapore Regulation
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Channel Islands Services

Range of regulatory and compliance consulting services for firms registered in the Channel Islands.

Channel Islands Services
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Global Advice and Consulting

Assistance to develop, implement, and manage global compliance and regulatory consulting programs.

Global Advice and Consulting
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Compliance Due Diligence

Regulatory operational due diligence for asset managers.

Compliance Due Diligence
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Cybersecurity Services

Cybersecurity support for asset managers.

Cybersecurity Services
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Financial Crime Prevention

Guidance on preventing financial crime.

Financial Crime Prevention
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Hosted Regulatory Solution

FCA hosted regulatory solution for UK and EU asset managers.

Hosted Regulatory Solution
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Market Services

Assistance with markets, transaction reporting and surveillance.

Market Services
Duff & Phelps Compliance and Regulatory Consulting

Compliance and Regulatory Consulting

Regulatory Enforcement

Compliance support during an enforcement investigation.

Regulatory Enforcement
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Valuation and consulting for financial reporting, federal, state and local tax, investment and risk management purposes.

Valuation Advisory
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Alternative Asset Advisory

Transparent valuations of illiquid investments and complex securities and liquidity solutions through secondary market transactions.

Alternative Asset Advisory
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Portfolio Valuation

Alternative investment valuation for private equity and hedge funds.

Portfolio Valuation
Duff & Phelps Disputes

Governance, Risk, Investigations and Disputes

Combined Duff & Phelps and Kroll disputes, investigations, cyber, business intelligence, cross-border restructuring and other advisory.

Governance, Risk, Investigations and Disputes
Duff & Phelps Disputes

Governance, Risk, Investigations and Disputes

Securities Litigation

Assistance with complex securities litigation.

Securities Litigation