SFC-Authorised Funds in Hong Kong: Mutual Recognition with Mainland China and Key Approval Requirements

Introduction

For investment funds seeking access to Hong Kong's retail investor base, Securities and Futures Commission (SFC) authorisation is the gateway. Unlike funds marketed solely to professional investors — which may qualify for exemptions from the full authorisation process — funds offered to retail investors in Hong Kong must be authorised by the SFC under the Securities and Futures Ordinance (SFO). SFC authorisation involves a rigorous review of the fund's structure, governance, investment policies, service providers, and disclosure documents, designed to ensure that retail investors are adequately protected.

In addition to the domestic authorisation framework, Hong Kong has developed a network of fund distribution arrangements with other jurisdictions that allow funds authorised in those jurisdictions to be offered to Hong Kong investors, and vice versa. The most significant of these arrangements is the Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme, which has opened the large retail investor markets of both Hong Kong and mainland China to qualifying funds authorised in either jurisdiction.

This article provides an overview of the SFC's fund authorisation framework, the key requirements applicable to SFC-authorised retail funds, the MRF scheme and its operation, and the practical considerations for fund managers seeking SFC authorisation or MRF eligibility.

The SFC's Fund Authorisation Framework

Under the SFO, a collective investment scheme (CIS) offered to the Hong Kong public must either be authorised by the SFC or qualify for an exemption from the authorisation requirement. The most significant exemption is the "professional investors only" exemption, which allows funds to be marketed to professional investors (broadly, institutional investors and individuals with portfolios of at least HK$8 million) without SFC authorisation. Funds marketed to retail investors must be SFC-authorised.

The SFC has issued the Code on Unit Trusts and Mutual Funds (the UT Code) and various product codes (covering ETFs, hedge funds, structured products, and other specific product types), which set out the detailed requirements that funds must meet to obtain and maintain SFC authorisation.

Eligible Structures

SFC authorisation is available for funds constituted in Hong Kong as unit trusts, OFCs (open-ended fund companies), or limited partnership funds, and for funds constituted offshore that meet the relevant requirements. Offshore funds commonly authorised by the SFC include Cayman Islands unit trusts, Luxembourg SICAVs (under UCITS), and Irish common contractual funds. The SFC generally requires offshore funds to be domiciled in jurisdictions with regulatory frameworks and legal systems that meet its standards.

Key Requirements for SFC Authorisation

The UT Code and product codes set out the key requirements that a fund must meet, including:

• Management company: The fund's management company must be licensed by the SFC (or a recognised overseas regulator) and have the relevant expertise and resources to manage the fund.
• Trustee/custodian: The fund must appoint an independent trustee or custodian that meets the SFC's requirements for safekeeping of assets.
• Investment restrictions: The fund must comply with diversification requirements, investment limits (such as the 10% single issuer limit), and restrictions on leverage and the use of derivatives.
• Disclosure: The fund must prepare and maintain a prospectus, a product key facts statement (KFS), and annual and semi-annual reports meeting the SFC's disclosure requirements.
• Pricing and dealing: The fund must have a fair valuation process and dealing procedures that comply with the SFC's requirements.

The Authorisation Process

The process for obtaining SFC authorisation involves submitting an application to the SFC accompanied by the fund's constitutional documents (trust deed or articles), the proposed prospectus and KFS, service provider agreements, and the fee. The SFC reviews the application and may raise queries or require amendments to the documentation before granting authorisation. The timeline for authorisation varies depending on the fund type and complexity but typically takes several months for a new fund.

The Mainland-Hong Kong Mutual Recognition of Funds Scheme

The Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme, launched in July 2015, allows qualifying funds authorised in Hong Kong to be offered to retail investors in mainland China, and vice versa. The scheme represents a significant milestone in the financial integration of Hong Kong and mainland China, providing fund managers with access to the world's largest retail investor market.

Eligibility for MRF (Hong Kong-domiciled funds)

Hong Kong-domiciled funds applying for MRF recognition in mainland China must meet a range of eligibility criteria, including: the fund must be authorised by the SFC and domiciled in Hong Kong; the fund's total assets under management must be at least HK$1 billion; no more than 50% of the fund's assets may be invested in the other jurisdiction (i.e., less than 50% of the fund's assets may be in mainland China investments at the time of the application); and the fund must have been authorised for at least one year. In addition, the management company must meet regulatory requirements set by the China Securities Regulatory Commission (CSRC), including registering as a Qualified Foreign Investor (QFI) in mainland China.

Sales Quota and Investor Restrictions

Under the MRF scheme, Hong Kong-authorised funds sold in mainland China are subject to a sales quota — the proportion of a fund's assets that can be held by mainland investors is capped at a specified percentage. The mainland distribution of MRF funds is conducted through authorised mainland distributors and is subject to the CSRC's regulatory requirements applicable to fund distribution in China.

MRF (Mainland-domiciled funds)

Mainland-domiciled funds recognised under MRF for sale in Hong Kong must be authorised by the CSRC, meet specific investment and size requirements, and be registered with the SFC before being distributed to Hong Kong retail investors. The Hong Kong distribution of these funds is subject to the SFC's product key facts statement requirements and other retail investor protection measures.

Expanded MRF Scope

The MRF scheme was expanded in 2023 and 2024 to cover additional product types, including ETFs and long-term investment savings products. The expanded scope reflects the ongoing deepening of the financial connectivity between Hong Kong and mainland China, and additional types of qualifying products are expected to be added over time.

Other Fund Distribution Arrangements

In addition to the MRF scheme, Hong Kong has fund distribution arrangements with a number of other jurisdictions, including the ASEAN Collective Investment Scheme framework (which facilitates the cross-border offering of qualifying funds between Singapore, Thailand, Malaysia, and Australia) and bilateral arrangements with specific jurisdictions. These arrangements reflect Hong Kong's ambition to be the fund distribution hub for the Asia-Pacific region.

Ongoing Compliance for SFC-Authorised Funds

SFC authorisation is not a one-time event. Authorised funds must maintain ongoing compliance with the UT Code and applicable product codes, including submitting post-authorisation notifications for material changes to the fund's structure or service providers, filing annual and semi-annual reports, and paying annual authorisation fees. Material changes — such as changes to the investment objectives, management company, or fee structure — typically require SFC approval in advance.

Conclusion

SFC authorisation is an important regulatory milestone for fund managers seeking to access Hong Kong's retail investor market, and the MRF scheme provides a pathway for SFC-authorised funds to reach the enormous retail investor base in mainland China. The authorisation process is rigorous and requires careful preparation of the fund's documentation and compliance framework, but the commercial opportunity it unlocks is significant.

For fund managers considering SFC authorisation or MRF eligibility, engaging experienced Hong Kong fund regulatory counsel at an early stage is essential to navigating the process efficiently and ensuring that the fund's structure, documentation, and governance framework meet all applicable requirements.