The concept of the Greater Bay Area (GBA) Wealth Management Connect had been developed into policy framework through multiple refinements in the past two years. It was first mentioned in the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area released in February 2019, as a means to "steadily expand the channels for Mainland and Hong Kong residents to invest in financial products in each other's market". Later in November 2019, following the plenary meeting of the Leading Group for the Development of the GBA, it was announced that the establishment of a cross-boundary wealth management connect scheme would be explored. In May this year, the Opinions on Financial Support for the Construction of the Guangdong-Hong Kong-Macao Greater Bay Area jointly issued by the People's Bank of China (PBoC) and other Mainland financial regulators reiterated that they would facilitate Mainland residents in the GBA to invest in financial products sold by banks in Hong Kong and Macao, and vice versa. Then at the end of June, the Hong Kong Monetary Authority, the PBoC and the Macao Monetary Authority jointly issued an announcement on Cross-boundary Wealth Management Connect Pilot Scheme revealing more details, such as the usage of designated investment accounts for the purchase of eligible investment products, the adoption of closed-loop through the bundling of designated remittance and investment accounts, and that cross-boundary remittances will be carried out in renminbi.

As with other market development initiatives, the policy designers of Wealth Management Connect may find themselves facing the perennial challenge of policy-making, namely to strike and maintain a fine balance among all stakeholders – including regulators, investors and financial institutions – in an ever-changing environment. With the Wealth Management Connect drawing closer, more implementation details continue to unveil. Nonetheless, until the scheme is launched, industry practitioners will continue to voice their opinions. Indeed, the Financial Services Development Council (FSDC) has made its own policy recommendations in a June 2020 report on enhancing financial connectivity in the GBA. Extending from the report, we wish to share more views in anticipation of Wealth Management Connect.

Consensus has been reached that the Wealth Management Connect should be launched under the guiding principle that investors' legal rights and interests are sufficiently protected. In this regard, reference is often made to the Mutual Recognition of Funds (MRF) regime as it shares certain commonalities with the Wealth Management Connect, with both of them being cross-boundary asset management-related mechanisms. Launched in 2015 following the Shanghai-Hong Kong Stock Connect, the MRF regime between the Mainland and Hong Kong was then another policy milestone of collaborative efforts by the regulators, which further broadened connectivity channels. As at the end of March 2020, 29 Hong Kong MRF funds had been approved as northbound funds, with the assets under management (AUM) attributable to Mainland investors totaling RMB 14.4 billion; 50 Mainland MRF funds had been authorised for distribution in Hong Kong by the Securities and Futures Commission (SFC), with the AUM attributable to Hong Kong investors standing at RMB 374 million.¹

Some market participants are of the view that there is room for further development of the regime. For example, some consider that certain requirements under the MRF regime may be limiting the expansion of the number of products and the AUM. These include: eligible funds must be established and operated in Hong Kong; the management company must be registered and operated in Hong Kong and must not delegate its investment management activities to entities in any other jurisdiction; and the value of the shares/units sold to Mainland investors must not be more than 50% of the fund’s total assets under management, among others.²

Nonetheless, the existing cross-boundary connectivity programmes were only possible with the solid foundation of cross-boundary regulatory cooperation frameworks serving as the backbone, which had been established through years of collaborative efforts covering a wide range of aspects such as investigatory assistance and exchange of information. As an example of regulatory ambiguity involving place of registration, there are cases where funds registered outside of the home jurisdiction are in violation of certain rules. This poses challenges to regulators in the home jurisdiction to take corresponding measures to provide an appropriate level of investor protection,³ often times due to a lack of cross-border enforcement arrangement.

In order to avoid such incidents from happening in Hong Kong, reference should be drawn from the MRF regime regarding product eligibility. Particularly, in the initial stage of the Wealth Management Connect, requiring eligible funds to be registered in Hong Kong (including open-ended fund companies, i.e. OFCs, that are incorporated in Hong Kong) is still the most practical solution. This will ensure that the Wealth Management Connect fully capitalises on the long-term regulatory cooperation frameworks between Hong Kong and Mainland regulators, with respect to product eligibility, investor suitability, business conducts, dispute handling and many other aspects of investor protection.

What is equally undeniable is that one of Hong Kong's long-standing core competencies as an asset management hub is the rich basket of financial products offered in our market. A core pillar of the uniqueness is the existing cross-boundary connectivity schemes: the Stock Connects currently offer more than 1,800 eligible stocks; the Bond Connect enables international institutional investors to participate in the Mainland's interbank bond market, accessing fixed income instruments including not only government bonds and municipal bonds, but also various types of asset-backed securities, certificates of deposit, financial bonds and corporate bonds; furthermore, there is the Qualified Domestic Institutional Investor (QDII) mechanism which prepares Mainland investors for the wider international financial markets. Admittedly, product eligibility should be tailored for suitable investors, but experience has shown that providing a wider variety of products is one of the key attributes driving a connectivity scheme to grow in scale.

While maintaining a sufficient level of investor protection, it is equally important for regulators to consider how to fully leverage Hong Kong's advantages in product diversification, not least in response to the industry's enthusiasm for the Wealth Management Connect. It is highly anticipated that economies of scale can be achieved to present a strong commercial case for market participants; most importantly, the Wealth Management Connect is well positioned to become the next growth engine for Hong Kong's financial services industry. With this, a general consensus is that eligible investment products allowed at the initial stage should be relatively low-risk and simple, such as funds authorised by the SFC and rated as low or medium risks by distributing banks; the products should be diversified in terms of asset classes and risk levels.

After the Wealth Management Connect has been launched and operated smoothly for a certain period of time – and when the regulators and other stakeholders have accumulated sufficient operational experience – it would be worthwhile to consider further leveraging the advantages of Hong Kong's asset management industry to facilitate its growth. One of the differentiating features of the Hong Kong fund industry is the richer choice of Undertakings for Collective Investment in Transferable Securities (UCITS) funds. As an initial step, consideration can be given to permitting Fund of Funds (FoF) to be included in the Wealth Management Connect. In particular, the FoFs that are domiciled in Hong Kong, authorised by the SFC, and investing in SFC-authorised UCITS funds. These requirements will make sure the fund domicile requirements are satisfied at the product level, while providing investors with access to the UCITS funds market, thus enriching the product range of the Wealth Management Connect and, at the same time, enabling relevant regulators and investors to familiarise themselves with the rules and practices of the international markets in a gradual and progressive manner. All of these will lay a solid foundation for potential expansion of the range of eligible products in the future. For example, when conditions become permissible, the inclusion of SFC-authorised UCITS funds, or even private wealth management products for high net worth and sophisticated investors based on the new limited partnership fund (LPF) regime, can be considered.

The approval of cross-listing of ETFs by the securities regulators of Hong Kong and the Mainland on 28 August marked another addition to the product choices for cross-boundary investors. In fact, non-leveraged market index-tracking ETFs are characterised by their cost-effective and risk diversification features and, as such, can be considered for inclusion in the first batch of eligible products. As banks will serve as the entry point for investors to access Wealth Management Connect products, starting with the unlisted units of such ETFs, or the unlisted ETF feeder funds, will ensure that the transactions can be completed at the bank level during the initial stage of the scheme.

Compared with existing connectivity programmes such as the Stock Connects and Bond Connect, the nature of wealth management requires practitioners' closer interaction with clients in order to know the clients better, particularly in terms of their investment preferences and risk profiles. As such, allowing cross-boundary sales of products should be explored, taking the institutional advantage of the Wealth Management Connect. This would entail allowing for Hong Kong practitioners to carry out business activities in Guangdong and Macao, and vice versa.

In this regard, reference can be made to the Mainland and Hong Kong Closer Economic Partnership Arrangement in streamlining entry requirements for professionals to enter the others' market, and providing more convenient qualification recognition examinations and procedures for wealth management practitioners. As a step forward, consideration can be given to a product-based licensing approach in the future, where a special Wealth Management Connect licence can be granted to practitioners, so that practitioners holding such licence can conduct business activities in cities where Wealth Management Connect eligible products are sold (i.e. in Hong Kong, Macao, and the nine Mainland cities in the GBA). By doing so, Hong Kong practitioners would be granted enhanced access to the GBA market, while Hong Kong investors interested in Mainland and Macao products would be able to gain deeper understanding of their investment options in those areas.

Wealth Management Connect can be used to explore the possibility of mutual recognition of professional qualifications in the GBA, leveraging an institutional advantage that was not available at the time of the launch of the Stock Connects and Bond Connect. This would require regulators to further deepen cross-boundary regulatory cooperation by adopting a GBA mindset; similarly, practitioners should stand ready to embrace opportunities presented by the expanded potential market and welcome healthy competition.

Last but not least, the landscape of Hong Kong's asset management industry is constantly reshaping thanks to the joint efforts of the Government and the industry, leading to an increasing number of available product types, a wider reach to more local, international and Mainland investors with different experiences, and more diversified investment strategies and preferences. Just as the Wealth Management Connect is on the horizon, Hong Kong is marching steadily towards its vision of becoming the world’s premier asset management centre.