On March 31, 2020, the Shanghai Guidebook for Overseas Asset Management Institutions (“Guidebook”) was published. The Guidebook was jointly compiled by Asset Management Association of China (“AMAC”) and Shanghai Asset Management Association with the supervision and support of Shanghai Financial Work Bureau and ShanghaiSecurities Regulatory Bureau. To be noted, the Guidebook was issued right before April 1, 2020 when China lifted the limitations on the ratio of foreign shareholding in securities and fund management firms. These moves have shown China’s determination to promote a further opening up of its financial sector.
The Guidebook was compiled with the aim of providing overseas asset management institutions with information regarding the preparatory work and application procedures for conducting asset management business in Shanghai. The scope of the Guidebook includes a comprehensive range of practical issues including an overview of fund management in China and Shanghai, different fund types, laws and regulations applicable to different fund types, application and approval processes for products and institutions, fund service providers, fund distribution, relevant tax policies, etc.
Shanghai has been standing at the forefront of the opening up and innovation of China’s financial sector. The top 10 global asset management companies have all chosen Shanghai as the business destination. As of March 2020, among the 25 wholly foreign-owned enterprise private fund management (“WFOE PFM”) companies which have registered with AMAC, 24 of them are domiciled in Shanghai. In addition, 4 of the world’s top 10 equity investment management institutions in terms of “Asset Under Management” including TPG, Carlyle, Blackstone, and Warburg Pincus have successfully established an RMB Fund Enterprise as a limited partnership under the Qualified Foreign Limited Partners (“QFLP”) pilot program. Among the top 20 asset management institutions in the world, 10 have successfully obtained the Qualified Domestic Limited Partner (“QDLP”) pilot qualification and another 8 are actively following up on application matters.
Shanghai has been the birthplace for almost every significant moment of China’s fund industry, including the birth of China’s first batch of fund companies, first batch of Sino-foreign equity joint venture fund management companies, first Qualified Domestic Institutional Investor (“QDII”) fund, etc. Shanghai is now attracting globally renowned asset management institutions to set up here by further innovating its system, opening up its foreign investment policies and increasing its service support system for multi-level financial services.
Whilst overseas asset management institutions are heading for China, China’s asset management industry is also actively looking for foreign markets. As long-standing desirable fund domiciles, Luxembourg, Ireland and the United Kingdom are taken as examples in this article to give Chinese asset management companies some insights.
As the largest European fund domicile and the second largest fund center in the world, Luxembourgprovides a stable and advantageous environment for fund domiciliation. Since the decline of its steel industry in the late 20th Century, Luxembourg has transformed itself into a global financial and banking center. The legal and regulatory framework in Luxembourg is constantly being improved to offer desirable tools for investment managers to structure their investments. In addition, various EU regulations facilitating the movement of capital across EU borders such as the EU Parent Subsidiary Directive (“90/435/EEC” and “2003/123/EC”), the Interest and Royalties Directive (“2003/49/EC”), and the VAT Directive (“2006/112/EC”) have contributed to Luxembourg being the jurisdiction of choice for many global funds investing in the EU. Whilst the UK has provided competition in the past, for example many funds also considered the benefits of establishing themselves within London, Jersey and Guernsey etc., fund managers ought to assess the impact of Brexit and the degree to which it enhances Luxembourg’s position as the prime cross-border hub for funds as a choice to develop the distribution activities across the EU market and as a gateway to Asian markets.
Luxembourg is the world’s acknowledged leader in Undertakings for Collective Investment in Transferable Securities (“UCITS”) funds. UCITS funds were created in December 1985 by a Directive of the European Union. The ﬁrst UCITS European directive set out a common set of rules for the cross-border distribution of collective investment schemes via the European Passport. UCITS were designed with the retail consumer in mind, ensuring appropriate levels of protection for investors. The last major amendment to the UCITS framework was in 2016 when UCITS V was transposed into Luxembourg law. One of the main objectives of that reform was to further enhance investor protection.
While Luxembourg is best known for its expertise in UCITS funds, it has developed parallel expertise in alternative investment funds. It has bespoke structures for all the main alternative asset classes and investment strategies. The main regulated and supervised investment vehicles in Luxembourg including UCITS, Undertakings for Collective Investment (“Part II UCI”), Investment Company in Risk Capital (“SICAR”), Specialized Investment Fund (“SIF”) and Reserved Alternative Investment Fund (“RAIF”). Each of these vehicles has its own unique legal and regulatory requirements.
Ireland has also been a leading domicile for internationally distributed investment funds, covering the widest range of fund types. International fund promoters are attracted to Ireland due to its open, transparent and well-regulated investment environment, a strong emphasis on investor protection, an efficient tax structure, and its innovative business culture.
Authorized investment funds in Ireland are established as either UCITS or non-UCITS (Alternative Investment Funds, “AIFs”). The ﬂexibility of UCITS is evident in that they may be set up as a single fund or as an umbrella fund that is comprised of several ring-fenced sub-funds, each with a different investment objective and policy. Exchange Traded Fund (“ETF”) is typically established as UCITS with a broad and unique operating model offering investors the ability to diversify over an entire sector or market segment in a single investment. Since the launch of the first European ETF in 2000, Ireland has been the number one European domicile for ETF issuers. A MMF is an open ended mutual fund that invests in highly liquid short-term financial instruments, which is also usually established in Ireland as UCITS.
The Alternative Investment Fund Managers Directive (“AIFMD”), implemented in July 2013, has transformed the EU regulatory landscape in the alternatives space. All AIFs are covered by AIFMD which has introduced new organizational, operational, transparency and conduct of business requirements on AIFMs and the funds they manage. Ireland was the first jurisdiction to provide a regulated framework for AIFs and remains at the forefront of developments with the implementation of AIFMD. There are two main types of AIF in Ireland, the Qualifying Investor AIF (“QIAIF”) and the Retail Investor AIF (“RIAIF”). QIAIF is a regulated investment fund suitable for well-informed and professional investors. As the QIAIF is not subject to any investment or borrowing restrictions, it can be used for the widest range of investment purposes. The RIAIF has replaced the previous non-UCITS retail regime with a more flexible framework. The updated RIAIF framework allows for the creation of an investment fund which is subject to less investment and eligible asset restrictions than the UCITS regime but is more restrictive than the QIAIF regime. Consequently, the RIAIF could provide an attractive alternative for managers who need to set up a more highly regulated fund but whose investment strategies do not easily fit within UCITS.
The UK remains one of the world’s prominent centers for portfolio management on behalf of investors around the world. Whilst the UK exited the EU on January 31, 2020, it is currently in a transition arrangement with the EU which will last until December 31, 2020 or possibly longer. Brexit is likely to have a disadvantageous impact on the future of the UK-based asset and fund management industry in the short term, although the extent of that impact and also the long term effects remain to be seen.
A collective investment scheme (“CIS”) is an investment fund used for collective investment by investors. Investors’ money is invested on a pooled basis by an investment manager in return for a fee. Section 235 of the Financial Services and Markets Act 2000 (“FSMA 2000”) defines a CIS as: “any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income”. Essentially, a CIS is a vehicle in which profits or income is shared through collective investment. There are different types of CIS which are classified as regulated schemes, recognized schemes and unregulated schemes.
Under the UK legal framework, regulated CIS are those that may be promoted to the public, namely authorized funds which are constituted in the UK and recognized schemes which are constituted outside the UK and recognized by the Financial Conduct Authority (“FCA”). Investment funds that are structured as CIS must be authorized or recognized by FCA to be promoted to retail investors in the UK. Firstly, an authorized CIS must be established in the UK and take one of the following legal forms: authorized contractual scheme (“ACS”), authorized unit trust (“AUT”) or investment company with variable capital (“ICVC”). Further, it must also be classified, based on a marketing strategy, as one of the following: undertaking for collective investment in transferable securities scheme (“UCITS”), non-UCITS retail scheme (“NURS”), qualified investor scheme (“QIS”). Secondly, a fund that is established outside the UK must be recognized by FCA in order to be promoted to retail investors in the UK. A recognized fund may also be called a ‘recognized CIS’ or ‘overseas scheme’. Thirdly, if a collective investment scheme is not authorized or recognized, it is considered as an unregulated collective investment scheme (“UCIS”). Unregulated collective investment schemes are not subject to the same restrictions in terms of their investment powers and how they are run.
China’s fund industry has been consistently promoting international cooperation with an open mind. The opening up of China’s asset management industry is a two-way process. On one hand, China is constantly expanding the opening up of its financial sector and actively optimizing its capital market system and structure. On the other hand, Chinese asset management companies are positively exploring overseas opportunities to provide services to a wider range of international clients.