Singapore versus Hong Kong: Comparison Between Different Fund Management Regimes
Introduction
Since the advent of the global financial crisis, Asia’s two competing international financial centers- Hong Kong and Singapore, have spruced up their regulations governing fund management, effectively streamlining processes without compromising on the quality of the personnel and businesses involved.
Fund Management Regulation
In Hong Kong, since the enactment of the Securities and Futures Ordinance (“SFO”) in 2003, the Securities & Futures Commission (“SFC”) has looked at the regulations surrounding fund managers with more scrutiny, ensuring greater responsibility of the individuals in charge. One example of this is via the recent introduction of the Manager-in-charge (“MIC”) regime, used to clarify the accountability of the senior management of licensed firms and promote greater awareness of their obligations under Hong Kong’s regulations.
In Singapore, the Monetary Authority of Singapore (“MAS”) has followed suit, introducing the Registered Fund Management Company to take over the previously common Exempt Fund Manager-type structure in 2012, which effectively caused most small fund houses to either consolidate, close shop, or abide by the new requirements that allowed for them to run more efficiently for their client’s benefit. The recently released Individual Accountability consultation paper that may turn into a guideline, notice or regulation in the coming months, also echoes similar sentiments from the MIC regime mentioned above.
Both regulators, have, in effect, allowed for a greater confidence-building exercise for prospective investors that intend on utilizing Fund Management Companies (“FMC”) housed in these countries, creating a spillover effect and bringing in more interest in the region as a whole
The comparison between the licensing requirements of both Hong Kong & Singapore’s fund management companies are as follows:
Singapore
In Singapore, for an FMC to operate, it may do so under the guise of a Registered Fund Management Company(“RFMC”), as earlier mentioned, or a Licensed Fund Management Company (“LFMC”), the latter of which is split into Accredited Investors (“A/I”) or Retail Investor-types .
Hong Kong
For an FMC to operate in Hong Kong, they need to acquire a Type 9 (Asset Management) license. In comparison to Singapore, Hong Kong does not differentiate between the different classes of fund managers and there is only one license which is the Type 9 (Asset Management) license.
The base capital requirements here would differ depending on whether the HK-based FMC would be offering its services to A/I Investors (sophisticated investors) and/or providing custodial services i.e. holding clients’ assets.
Notable Differences
We look at some of the notable differences to the FMC regime in Singapore and Hong Kong as follows:
Base Capital Requirements
Base capital requirements are looked at as a means for regulators to mitigate the risks that fund management houses pose to their investors and the financial industry as a whole, using these amounts to be pledged or set aside at the initial set up stage as a way to demonstrate their seriousness to conduct their business.
The base capital imposed by MAS for both RFMCs and A/I LFMCs would be S$250,000, unless while in comparison to Hong Kong, the minimum base capital is HK$120,000, unless client assets are held by the FMC in which case they are subject to an additional minimum paid-up share capital of HK$5 million. However, most Hong Kong-based FMCs appoint 3rd party custodians or Financial Institutions to house client assets, therefore circumventing the paid-up capital requirement.
If intending to deal with retail clients, a Singapore LFMC would have to maintain a minimum of S$500,000 as its base capital without any cumulative investment scheme (“CIS”) involvement, or $1 million if fund management of a retail investment scheme is expected. In contrast, a retail FMC in Hong Kong must have a paid share capital of not less than HK$1 million[1], although there have been recent proposals to increase this figure to HK$ 10 million.
Competency Requirements
In Singapore, RFMCs and A/I LFMCs are required to have 2 Directors, one of which needs to be Executive[2] who will effectively manage the business, subject to them having 5 years’ relevant experience, normally looked at as experience relevant to their job scope, role, title and/or duties. There need to be 2 appointed representatives that will be conducting the regulated activities of the FMC, which may also be the 2 Directors aforementioned (subject to them satisfying the ‘relevant experience ‘criteria) or separate individuals, as the case may be.
For Hong Kong, 2 Responsible Officer (RO) s are needed to provide supervision of the conduct of the FMC, where a minimum of 1 is to be an Executive. These ROs need to be accredited licensed representatives, where each RO is generally required to possess at least 3 years of relevant industry experience over the 6 immediately prior years before the date of the application. Additional requirements are imposed on an RO that does not possess recognized academic or industry qualifications. When dealing with retail clients, a Singapore-based LFMC needs to have 3 Directors, of which the CEO is to possess relevant experience of a minimum of 10 years, including a substantial amount of retail experience. For a retail fund manager of FMCs regulated by the SFC, there is an additional SFC requirement that the licensed FMC has not less than 2 key personnel (who can be the ROs) each of whom must have not less than 5 years of fund management experience in respect of regulated/public funds at a reputable financial institution.
Use of Custodians
The MAS expects FMCs based out of Singapore to manage client assets out of independent custodised accounts, utilizing 3rd parties for the provision of such services. This allows for less commingling of funds and allows for better accountability of clients’ assets. Hong Kong’s SFC is a little more relaxed on this front, allowing for FMCs themselves to hold clients’ monies, but as aforementioned, doing so would require additional share capitalization, which in effect allows for a similar outcome leaning towards more prime broker/private bank/3rd party custodian usage.
Accountability of Senior Managers
As mentioned earlier on in this article, the new MIC regime requires Hong Kong FMCs to nominate a Manager in Charge of its core functions (e.g. Compliance, Overall Management, Finance & Accounting, Information Technology, etc.) Individuals may be nominated for more than one function, however, this is done with the intention of ensuring the accountability of clearly identified individuals providing oversight for their area of responsibility. In Singapore, the existing legislation makes it difficult to circumvent accountability in similar scenarios, however, the clear codification of such laws has yet to exist. It is to this effect that the new Individual Accountability guidelines are being proposed in order to cause a shift in conduct and ethics of FMCs, starting from senior managers at the top.
Application Process, Costs & Timelines
Process
In Singapore, RFMCs and LFMCs submit their application online using the Corporate e-Lodgement system –effectively an online portal the MAS use to manage all regulated FMCs in Singapore on an ongoing basis. In Hong Kong, most applications lodged by prospective fund managers are done over the SFC Online Portal, although the option to submit this in hard copy is also available.
Costs
RFMCs don’t pay an upfront fee at the point of application, whereas LFMCs are required to pay S$1,000 for the license application and an additional S$200 per representative. The annual fee for RFMCs is S$1000 and for LFMCs, $4000. The Hong Kong SFC’s annual fees for FMCs would be determined on a per regulated activity and per licensed representative basis (the latter is similar to the LFMC-model of appointing authorized representatives in Singapore). A small FMC with a Type 9 (asset management) license that has the minimum requirement of 2 ROs and 1 Licensed Representative, the application fee and annual fees would each cost approximately HK$ 16,010.
Timelines
The MAS normally take approximately 4 months for processing of the application of an RFMC or A/I LFMC, although sometimes this may be quicker depending on the strength of the application pack. In some instances, this may take longer when additional queries are raised by the MAS during their deliberation of the application process.
In comparison, the SFC stipulate a 15-week period from the date of submission of the application documents – though this, too, may vary based on similar conditions as mentioned above. A more realistic timeline would be 20 weeks from acceptance of the application documents from the SFC.
For both jurisdictions, most applicants would take approximately 1 month, separate from the abovementioned timelines, to complete the required forms and prepare the additional supporting documents.
Conclusion
Both jurisdictions and regulators therein are primed for setting up an FMC.
Regulatory Compliance Services provider
Argus (now Waystone Compliance) provides the full spectrum of services to assist Fund Management Companies with their compliance. Argus (now Waystone Compliance) assists you with the incorporation of your Singapore Fund Management Company and opted fund structure (Onshore / offshore), and helps you to obtain your MAS registration or license and maintain its ongoing compliance. Our dedicated regulatory compliance team comes with extensive knowledge, diverse experience and ability to react fast. This enables clients to rely on us in this manner so much so that we are an extension of their team. We can help the client in the following:
- Setting up your business– We will incorporate the appropriate structure
- License Application – We analyze your business type and help you put a regulated business plan together with your license application. We check all relevant documentation to be provided to the MAS prior to submission of your license Application
- Policy and procedure –We ensure that your policies and procedures are adequately set up to complement your business strategy.
- Risk Management & Corporate Governance –We set up your Risk Management Framework & Compliance Monitoring Plan to ensure that the implemented policies and procedures are executed accordingly.
- Ongoing Compliance – Our team will be at your fingertips to ensure that any queries or questions relating to your compliance technicalities are resolved.