From 2 October 2024, trustees and custodians of collective investment schemes (CIS) operating in Hong Kong and authorised by the Securities and Futures Commission (SFC) for retail distribution must be licenced or registered to carry on the new Type 13 regulated activity (RA13) of “providing depository services for a relevant CIS” (Depositaries). Nineteen Depositories have been licenced or registered for RA13 at this stage.
Updates to the Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct) and the Guidelines on Competence (the Guidelines) came into effect on 2 October 2024, following the publication of consultation conclusions by the SFC in March 2023. Amendments to the Securities and Futures Ordinance (SFO) together with subsidiary legislation also became effective on the same day. A new FAQ webpage is available on the SFC’s website.
The scope of RA13
The new RA13 is triggered by (i) the custody and safekeeping of relevant CIS property; and (ii) the oversight of the relevant CIS to ensure that it is operated in accordance with its scheme documents, other than when such services are provided as a delegate or subdelegate of another depository.
A “relevant CIS” is a collective investment scheme authorised under section 104 of the SFO, though depository services provided in respect of mandatory provident fund schemes (or constituent funds thereof) and approved pooled retirement funds (PRFs) that are offered only to one or more of professional investors, employers as defined by the Mandatory Provident Fund Schemes Ordinance (Cap. 485), and occupational retirement schemes are expressly excluded from the definition.
Changes to the Code of Conduct
The new Schedule 11 to the Code of Conduct sets out additional business conduct requirements that apply to Depositaries. Depositaries should implement policies and procedures to ensure they meet these requirements, though the SFC acknowledges that there can be no one-size-fits-all approach, and that the operations of the Depositary, the nature and volume of transactions undertaken and the nature of the relevant CIS property will help to determine what is appropriate.
These additional requirements relate to internal controls, delegation, operations and monitoring (including as to subscriptions and redemption, valuation and NAV calculations, distributions, asset segregation and safeguarding). There is little that is unexpected or unusual in the updated Code of Conduct and we anticipate that many of the obligations will already be contractually incumbent on Depositaries.
These changes enhance the existing regulatory regime, which has been described by the SFC as “patchy”, to bring Hong Kong in line with the approach for supervising trustees and custodians in other major financial centres, thereby increasing protection for investors.