Developing capital markets are opening further to overseas firms and investors, subject to conditions. Various jurisdictions are competing as fund domiciles, with concerted efforts by some to address adverse findings by the global Financial Action Task Force (FATF). Within Europe, the fall-out from the UK's departure from the EU — “Brexit”— continues to occupy regulators. 

Regulators around the world continue to create new fund vehicles or amend existing products, to offer flexibility and compete for market share. Authorities are also aiming to bolster investment from professional investors, and in infrastructure and unlisted companies to assist economic recovery. Regulators are keen, though, to mitigate potential conduct risks and prevent harm.

See below for more detail on the key themes

Following developments captured in previous editions of this report, China continued to open its markets to foreign investors, by expanding the scope of existing regimes, and to support the position of Hong Kong (SAR), China as an international financial center. Most fund management firms operating in China are domestic players, but the number of overseas managers is also increasing. New wholly foreign-owned fund management companies were approved and given the go-ahead in 2023, which demonstrated the further opening-up of China’s asset management sector.

Further to the opening of the Chinese bond markets to Qualified Foreign Institutional Investors (QFIIs), there were additional developments in autumn 2022. For example, the China Securities Regulatory Commission (CSRC) revised provisions on settlement of domestic securities transactions by QFIIs and consulted on cross-border futures business. 

For managers of private funds (PFMs) new rules and guidance issued in May 2023 included changes for wholly-foreign-owned managers (WFO PFMs). Previously, the overseas shareholder of a WFO PFM investing in securities had to be a financial institution approved or licensed by the financial regulator of its home jurisdiction, and that regulatory authority must have agreed a memorandum of understanding (MoU) on securities regulatory cooperation with the CSRC. The new rules relaxed this approval and licensing requirement, but include higher requirements on PFMs' legal representatives and senior management personnel in charge of investment management.

The CSRC and the Securities and Futures Commission (SFC) continue to strengthen links between China mainland and Hong Kong (SAR), with expansion of “Stock Connect” and mirror regimes. ETF Stock Connect went live in summer 2022. Stock Connect has since been broadened to allow foreign companies primary-listed on the Hong Kong (SAR) stock exchange to be accessible by mainland investors via southbound1 trading, and additional companies listed on the Shanghai and Shenzhen stock exchanges can be traded by overseas investors via northbound trading.

The CSRC also supports the introduction of treasury bond futures in Hong Kong (SAR) and opening them to overseas investors. A joint working group completed a feasibility study on promoting trading of RMB-denominated securities and discussions are underway to explore the inclusion of RMB-denominated securities in southbound trading. And in May 2023, “Swap Connect” was officially launched. Initially, it will be available only for northbound trading.

Other jurisdictions are also opening their markets to foreign investors. For instance, foreign investors that meet certain criteria — including that their home country regulator is a signatory to IOSCO's2 multilateral MoU or to a bilateral MoU with the Indian regulator — can invest in Indian alternative investment funds (AIFs).

Saudi Arabia continues to open its capital markets to foreign investors. In March 2023, the Capital Market Authority (CMA) issued rules for foreign investment in securities listed in the local main market, debt instruments and investment funds. The rules define eligible foreign investors, required qualifications, investment restrictions, and other terms and conditions. The rules intend to facilitate foreign investment into the country, particularly to attract large global asset managers.

In October 2022, the rules of the Financial Market Entry Office of the Japan Financial Services Authority were amended to allow an applicant to submit written applications for registration and other subsequent documents in English, provided certain conditions are met:

  • The applicant will sell only interests in collective investment schemes managed by group companies of the applicant.
  • The Japanese clients of the applicant will be only professional investors.
  • The applicant is authorized to conduct businesses similar to investment advisory and agency.

From July 2023, the UK FCA3 offered a new pre-application support service (PASS) for overseas wholesale firms wishing to expand into the UK, certain UK-based firms planning to set up elsewhere, and those with innovative, complex, or high-risk business models.

Fintech and/or sustainable finance are seen by some jurisdictions as potential drivers of growth in their asset management and fund industries, including Luxembourg, Hong Kong (SAR), China, Singapore and Saudi Arabia, while other jurisdictions are considering a wider range of factors, including Ireland and the UK.

Further to the introduction of variable capital companies (VCCs) in Singapore in 2020, over 800 such vehicles have been launched and the MAS4 has extended the VCC grant scheme to January 2025, to help offset the costs for general partners setting up their first VCCs. The Chinese authorities have collaborated with their Singaporean counterparts to establish “ETF Link” to give more choice to Singaporean investors.

On home ground, the Chinese authorities also continue to support and promote opportunities to grow Hong Kong (SAR) as an international financial center and an asset management hub. The SFC's strategy has four prongs: onshoring of funds, “Connects” with the mainland, new fund products (ESG-related, virtual assets-focused and RMB-denominated), and technology (especially, artificial intelligence and machine learning). The new regulation of fund depositaries — see Chapter 6 — is part of the effort to support the onshoring of funds.

There are also initiatives to foster the Hong Kong REIT5 market, including:

  • Enhancements to the REIT Code to provide REIT managers with additional investment flexibility.
  • Clarification that Hong Kong REITs can invest in infrastructure.
  • Giving Hong Kong REIT issuers a one-off reward of RMB 1 million for listing high-quality Qianhai infrastructure projects on the Hong Kong Stock Exchange.
  • A proposal to include Hong Kong REITs as eligible securities under the Stock Connect regime.
  • Future possibility of allowing REITs to be structured in a corporate form.

Saudi Arabia's “Vision 2030” is creating a conducive environment for start-ups and venture capital funds, leading to an uptick in the use of convertible instruments.

The Irish Department of Finance's review of the asset management and funds services sector (see Chapter 1) includes peer reviews of other EU jurisdictions and international comparisons, which will inform the future development of the Dublin International Financial Sector. Meanwhile, the UK government's review of the funds industry, which considered what gaps there might be in the UK's already extensive funds landscape, has moved to the detailed proposal stage (see below).

The Malaysian securities commission is considering revamping the capital markets and securities act. The goal is to modernize the law and make Malaysia more competitive. However, funds are leaving Labuan financial center due to an eight-fold increase in the tax rate if they do not meet certain substance requirements.

As noted in Chapter 7, concerns about substance in the context of anti-money laundering (AML) are a priority for some other jurisdictions. FATF reviews — and, particularly, entering the “grey” list (subject to increased monitoring) — continue to be a driver for regulators. For example, access to the South African market via offshore centers has been tightened and the government has adopted a “tough” approach.

Meanwhile, to compete with Hong Kong (SAR), China and Singapore as hedge fund and wealth management domiciles, the Cayman Islands will set up an office in one of the two cities, to help investors to set up and manage Cayman-domiciled funds.

In January 2023, the Securities and Commodity Authority (SCA) issued new regulations regarding the promotion of foreign funds in the UAE and the establishment of UAE-domiciled funds. A public offering of foreign funds is no longer permitted and overseas funds (including UCITS6) can no longer be registered with the SCA for public offering. Overseas funds may be marketed in the UAE only on a private placement basis to professional investors and must be registered with the SCA.

EU regulators have noted an increase in the provision of cross-border services to retail clients in recent years, due to the digitalization of financial services and impacts of the pandemic. ESMA7 therefore reviewed the 2017 technical standards under MiFID II8 and consulted in November 2022 on new information requirements for firms at the passporting stage. The additional requirements relate to:

  • The means of marketing and language arrangements for dealing with client complaints.
  • The member states in which the firm will actively use the passport.
  • The categories of clients that are to be targeted.
  • The firm's internal organizational arrangements relating to cross-border activities.

ESMA is expected to publish a final report and submission of draft technical standards to the European Commission for endorsement by the end of 2023.

Meanwhile, issues are arising with the EU directive on the cross-border distribution of funds, which entered into force in August 2021. The aim of the directive was to harmonize national marketing requirements and remove unnecessary bureaucracy. In some areas, the directive has achieved the intended results, but it has also given rise to additional burdens for firms, which must give one month's notice of any changes to a fund and provide documents in multiple languages. This is creating delays when launching new share classes for existing funds. 

The impacts of Brexit continue to occupy regulatory time. In December 2022, ESMA issued a review of the supervisory approaches adopted by national regulators when authorizing relocating firms. It questioned whether adequate activities had been relocated into the EU and whether relocated firms were genuinely autonomous and independent. It suggested that substance and governance in EU firms needed to be enhanced, with delegation and outsourcing being a key focus. ESMA recommended further work to address the report's findings and recommendations, and to enhance supervisory convergence among national regulators. 

ESMA's findings also informed the review of AIFMD9. Asset managers closely followed developments regarding third-country access to the EU, given that delegation is important to third-country asset management centers, as well as for EU fund managers. There were differences in opinion between policymakers over whether proposed amendments on delegation went far enough, including on how much information firms should have to provide on their delegation arrangements and what role ESMA should play in reviewing them. More substantive proposed restrictions on delegation practices, including an “equivalence” assessment of the third country's regulatory regime, were dropped. However, third-country asset managers will have to provide enhanced reporting to EU regulators. Also, there will be quarterly notification by national regulators to ESMA on material changes to delegation arrangements.

A proposal to prevent funds domiciled in countries on the EU's tax avoidance blacklist from accessing individual EU member states via national private placement regimes seems likely to be rejected by national regulators.

Around the world, new and amended fund vehicles are offering greater flexibility, enabling jurisdictions to compete for market share. The primary focus is on professional investors, digital assets and private assets, but funds for retail investors are also evolving in some jurisdictions.

As part of a wider drive to achieve convergence in the approach of EU national regulators, ESMA is reviewing whether UCITS currently have indirect exposure to asset classes that the funds cannot invest in directly. It will consider whether direct or indirect exposures to such assets might be appropriate, or whether it considers the risk too high for retail investors. The types of investment considered in the review could include financial indices, certain kinds of derivatives, leveraged loans, emission allowances, commodities, crypto assets and unlisted equities.

Also in the retail space, but with a different driver, Australian firms have been launching new products since the “retirement income covenant” became law in July 2022. The covenant is intended to broaden the focus of superannuation schemes from the accumulation phase to the decumulation/retirement phase. Previously, life insurers were focused on longevity but are now looking to partner with asset managers to offer decumulation-phase products.

The new fund regime in Brazil allows for the creation of fund share classes and permits retail funds to invest up to 100 percent offshore through UCITS. There are also detailed annexes for a range of funds investing in different types of assets or sectors. 

New fund structures are emerging for professional investors. In Switzerland, the planned Limited Qualified Investor Fund (L-QIF) regime, which resembles the Luxembourg RAIF10 regime, will allow for the inclusion of various alternative assets and a rapid time-to-market. It is expected to become available for fund launches in the first quarter of 2024.

Following the introduction in Jersey in September 2022 of limited liability companies (LLCs), Guernsey has consulted and new legislation is pending. Jersey LLCs can be formed as a company or partnership, have limited liability, and offer flexibility in organizational arrangements and in profit and loss allocation. 

And following success with the notified AIF regime in Malta, the regulator launched a second consultation in May 2023 on a proposed framework for notified professional investor funds. The framework is intended to combine the existing professional investor fund regime with the positive elements of notification (not licensing), and is expected to result in a cost-effective solution, given that it will leverage the regulated status of fund service providers and the qualified status of the target investors.

There is also a focus on funds open to both professional and semi-professional/sophisticated investors. In May 2023, the UK government consulted on a new fund structure — the Reserved Investor Fund. It would take the form of a contractual scheme that is not authorized by the regulator (although managers of such funds will be) and that could have lower costs and more flexibility than the existing authorized contractual scheme. The fund would be able to be promoted to professional and sophisticated investors, with an unconstrained investment strategy. 

A wider drive to “democratize” investment in private assets is growing, with jurisdictions such as Spain and Italy considering whether certain products should be made available to retail investors. In Japan, a self-regulatory committee has been established to consider the inclusion of unlisted stocks as eligible assets for investment trusts. 

Investment in infrastructure assets is in focus in Europe. The UK regulator has permitted retail investors, additional defined contribution pension schemes and self-invested personal pensions to invest in LTAFs11 (accompanied by investor protection rules — such as risk warnings and summaries, and the need for an appropriateness test).

The review of EU long-term investment funds (ELTIFs), which were introduced in 2015 but saw only low take-up, resulted in wide-ranging amendments to the regulation, which will take effect from January 2024. The amendments ease existing restrictions and are intended to make ELTIFs more attractive to set up and invest in, and to increase investment in long-term projects: 

  • Expanding the scope of eligible assets and adding flexibility — for example, by reducing the minimum threshold for eligible assets from 70 percent to 55 percent of the fund's net asset value (NAV).
  • The possibility of redemptions before the end of the ELTIF lifecycle under certain conditions.
  • Increased access to retail investors by removing the EUR 10k minimum investment threshold, the 10 percent exposure limit relating to a retail investor's total investment portfolio, and the duplicated suitability assessment if one is already performed under MiFID.

ESMA subsequently consulted on technical standards to underpin the new rules, including redemption arrangements, the "matching policy" for exiting and potential investors, cost disclosures and other adjustments. The French regulator has called for ELTIFs to offer at least quarterly redemption (“liquidity windows”) to avoid first-mover advantages that could create run dynamics. Given difficulties in valuing real estate and infrastructure assets, there are also concerns about the prospect of substantial corrections in the NAVs of ELITFs and other types of private asset funds (see Chapter 3).

A new law has been introduced as part of the drive to modernize and increase the attractiveness of the Luxembourg investment funds' legislative framework, as well as to promote investments in alternative assets. The law introduces various changes, including to the definition of a “well-informed” investor to bring it into line with certain EU definitions, with the minimum investment threshold reduced from EUR 125,000 to EUR 100,000. Also, funds authorized as ELTIFs are now exempted from the “taxe d'abonnement”.

In contrast, investment funds in Saudi Arabia are for the first time required to register with the local zakat (religious tax) authority and provide necessary information, through annual information returns, to the authorities around its zakat base. New corporate tax provisions are being introduced in the UAE, but given that most funds and asset managers are domiciled in UAE free zones, it is not expected that the proposed taxes will have a significant impact on the industry.

Other types of asset classes are being introduced into funds. The CSRC has launched a pilot real estate private equity fund to support the stable and healthy development of the Chinese real estate market. Indian AIFs can now invest in credit default swaps. And as part of the EU's review of AIFMD, new rules for loan origination funds are under consideration. The details are being negotiated against a backdrop of concerns about systemic risk (specifically, leverage and contagion risks). Features under discussion include:  

  • Definition: AIFs that grant loans as the original lender, whereby the notional values of originated loans exceeds 60 percent of the fund's NAV.
  • 5 percent of notional value as risk retention.
  • Open-ended structures permitted, provided they have sound liquidity management, based on criteria to be defined by ESMA.
  • No leverage limit.

On a final, “virtual” note, and as mentioned in Chapter 5, a few jurisdictions have permitted funds to invest in crypto-assets:

  • Canada allowed some ETFs to have exposure to crypto-derivatives and subsequently permitted spot-crypto funds.
  • Hong Kong (SAR), China has approved some virtual asset futures ETFs. 
  • In Brazil, recoverable tokens are regarded as investible assets by funds. Funds can now invest directly in crypto-assets — previously, exposure to crypto-assets was allowed only through investment in crypto-asset ETFs. Funds for retail investors can invest at most 10 percent of their portfolio in crypto-assets, but the exposure via crypto-asset ETFs can be 100 percent of the portfolio. 
  • From April 2023, Irish qualifying investor AIFs have been able to invest in virtual assets.
  • The Luxembourg regulator has updated its guidance on whether funds may or may not invest in virtual assets, any authorizations required, and specific considerations such as on anti-money laundering.
  • The UK regulator is considering whether portfolio assets could be tokenized, and will consider whether to permit funds to invest in crypto-assets.

Actions for firms:

  • Factor opening markets and access possibilities into the business and product strategy.

  • Monitor the outcomes of jurisdictions' reviews of fund regimes.

  • Consider launching new products to take advantage of the evolving range of fund vehicles.

  • Implement a robust approach to crypto-assets in terms of investment eligibility and risk management.

Key topics captured within the report

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Southbound trading: investors in China mainland can access certain securities in Hong Kong (SAR). Northbound trading: Hong Kong (SAR) and international investors can access certain Chinese securities. 

2International Organization of Securities Commissions 

3Financial Conduct Authority 

4Monetary Authority of Singapore 

5Real estate investment trust

6EU undertaking for collective investment in transferable securities

7European Securities and Markets Authority

8EU Markets in Financial Instruments Directive 

9EU Alternative Investment Fund Managers Directive

10Reserved Alternative Investment Fund

11 Long-Term Asset Fund