Last Friday, the Securities and Futures Commission (SFC) launched a consultation on proposals to regulate depositaries (trustees and custodians) of SFC-authorised collective investment schemes (CISs) which are offered to the public in Hong Kong. Responses are required to be submitted by 31 December 2019.
Rationale behind the proposals
Currently, when a CIS applies for authorisation, the SFC requires the appointment of a depositary acceptable to the SFC. Depositaries are not licensed by or registered with the SFC and the SFC does not have direct powers to supervise or take disciplinary action against them.
Since the global financial crisis, regulatory authorities in major overseas markets have reformed their safe custody regimes for CISs in order to better protect scheme assets and safeguard investors’ interests. The International Organisation of Securities Commissions updated its standards and recommendations for physical and legal integrity of scheme assets in November 2015.
The SFC has indicated that they have encountered a number of cases involving deficiencies in the internal control systems of trustees and custodians in recent years. While it was able to seek redress so that investors did not suffer material losses, it was not able to discipline or take other enforcement action against such trustees and custodians.
The proposed regime
The proposed regime covers depositories of SFC-authorised unit trusts, mutual funds, open-ended fund companies, real estate investment trusts and pooled retirement funds, but excludes mandatory provident fund products. Such depositories will be licensed by or registered with the SFC under a new type 13 regulated activity – acting as a depository (trustee/custodian) of an SFC-authorised CIS.
Depositaries of relevant CISs will be subject to the supervision of the SFC or (in the case of registered institutions) the HKMA.
Amendments to SFC codes and guidelines have been proposed, including a new schedule 11 to the SFC’s main code of conduct (which is set out in appendix B of the consultation paper). Consequential amendments to various subsidiary legislation under the Securities and Futures Ordinance may also be required (a preliminary list is set out in appendix C of the consultation paper). The SFC will issue a second consultation with indicative drafts of the amendments to the subsidiary legislation (if any) after it concludes the current consultation.
The SFC has indicated that a period of around 12 to 18 months will be provided to depositories (and their relevant staff members) who will be subject to the new regime to complete the licensing or registration process prior to the implementation of the new regime.