NEWS
Nov-11-2009 Changes to the regulatory landscape for retail structured investment products
By Debby Davidson
In September 2009, the Securities and Futures Commission of Hong Kong (“SFC”) sought to enhance and fine-tune the regulatory regime relating to all unlisted, retail structured investment products. It set out its with the proposals set out in its Consultation Paper on Proposals to Enhance Protection for the Investing Public (“Consultation Paper”).
It would be wrong to view the Consultation Paper as merely a reaction to the Lehman Minibond Saga. Rather, the Consultation Paper should be viewed as an attempt to enhance the regulation of intermediaries’ conduct, and tighten disclosure standards, whilst also providing a more level playing field between UCTIS III schemes and non-UCITS schemes with respect to their investment in financial derivative instruments (“FDIs”).
As tThe Consultation Paper and appendices are several hundred pages long, so this article simply highlights some of the key concepts that the SFC proposesd by the SFC.
Key Proposals
Overarching general principles applicable to all structured products: The Consultation Paper introduces, for the first time, a single Handbook for Unit Trusts and Mutual Funds, Investment Linked Assurance Schemes and Unlisted Structure Products (“Handbook”), which will be applicable to all unlisted retail structured investment products. The intention is that the same general rules and standards would apply to the offering and advertising of mostthe majority of structured products in Hong Kong1.
Mandatory Key Fact Statements: Going forward, “key fact statements” mustshould be prepared for all retail investment products. An illustrative template wais included in the Consultation Paper. The key fact statement must include the name of the manager;, a description of the investment strategy, key risks, and asset allocation, and details of all fees and charges. The intention is to standardisze the key fact statement so that investors can easily compare different investment products easily.
Level Playing Field between UCTIS III schemes and non-UCITS schemes: The Handbook contains, as appendices, revisions to the existing Code on Unit Trusts and Mutual Funds (“UT Code”). Under the revised UT Code, non-UCITS schemes (e.g. funds domiciled in the Cayman Islands, Hong Kong or Singapore) will be permitted to use financial derivative instruments (“FDIs”) for investment purposes, subject to an exposure limit of 100% of their net asset value. The requirements are intentionally consistent with the SFC’s current practice in processing UCITS III schemes, and aims to provide non-UCITS schemes with the sameequivalent flexibility toas that enjoyed by UCITS III schemes under EU regulation.
The consultation period will ends on 31 December 2009.
1Certain products are excluded from the Handbook, including REITs, listed structured products, mandatory provident fund schemes and pooled retirement funds.