1.       Overview

Hong Kong’s financial services industry has seen unprecedented growth in recent years. As a result, Hong Kong has become a key financial services center in Asia. In Hong Kong, financial services are being regulated where intermediary required a valid license to perform such services. The regulated activities include securities dealing; futures dealing; leveraged foreign exchange trading; advising on corporate finance, securities and futures; securities margin financing; providing automated trading services; and asset management.

The Securities and Futures Ordinance (“SFO”) governs the securities and futures markets, establishing regulations for intermediaries, offers of investment products and general conduct in these markets.

2.       Types of Financial Service Licences

The SFO regulates 10 types of regulated activity. Generally, no person may carry on a business (or to hold itself out as carrying on a business) in a regulated activity unless, the person is a corporation licensed or registered by the Securities and Futures Commission (“SFC”) for that regulated activity.

A person can be licensed or registered for more than one regulated activity. The more commonly encountered regulated activities are described below.

(1)     Type 1 (Dealing in Securities)

Dealing in securities means making or offering to make an agreement with another person, or inducing or attempting to induce another person to enter into or to offer to enter into an agreement:

(a)	for or with a view to acquiring, disposing of, subscribing for or underwriting securities; or
(b)	the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities, by the person.

There are a number of applicable exemptions from Type 1 regulated activity, including the principal dealing exemption. Under this exemption, a person is not regarded as dealing in securities if he acquires, disposes of, subscribes for or underwrites securities as principal, or deals as principal with a person who is a professional investor.

Brokers and dealers in shares and other equities will generally carry out Type 1 regulated activity.

(2)     Type 2 (Dealing in Futures Contracts)

Dealing in futures contracts means, whether as principal or agent providing below services:

(a)	making or offering to make an agreement with another person to enter into, or to acquire or dispose of, a futures contract;
(b)	inducing or attempting to induce another person to enter into, or to offer to enter into, a futures contract; or
(c)	inducing or attempting to induce another person to acquire or dispose of a futures contract, by the person.

Under the SFO, a futures contract is defined as a contract or an option on a contract made under the rules and conventions of a futures market. Thus, dealing in futures contracts generally refers to dealing in an exchange-traded futures contract.

Brokers in commodities and futures will generally carry out Type 2 regulated activity.

(3)     Type 3 (Leveraged Foreign Exchange Trading)

Leveraged foreign exchange trading means the act of entering into, offering to enter into or inducing or attempting to induce a person to enter into a contract the effect of which is that one party agrees or undertakes to:

(a)	make an adjustment between himself and another person according to whether a currency is worth more or less, as the case may be, in relation to another currency;
(b)	pay an amount of money or to deliver a quantity of any commodity determined or to be determined by reference to the change in value of a currency in relation to another currency; or
(c)	deliver to another person at an agreed future time an agreed amount of currency at an agreed price.

Leveraged foreign exchange trading includes (i) the provision of financial accommodation to facilitate such an act, and (ii) entering into, offering to enter into or inducing or attempting to induce a person to enter into an arrangement with another person, on a discretionary basis or otherwise, to enter into such an act.

The definition of leveraged foreign exchange trading is very broad and potentially includes all types of currency transactions. Currency dealers who facilitate client trading on margin are generally carrying on Type 3 regulated activity.

 

(4)      Types 4 and 5 (Advising on Securities and Futures Contracts)

Advising on securities and advising on futures contracts mean, subject to prescribed exemptions:

(a)	giving advice on whether, which, the time at which, or the terms or conditions on which, securities or futures contracts should be acquired or disposed of; or
(b)	issuing analyses or reports, for the purposes of facilitating the recipients of the analyses or reports to make decisions on whether, which, the time at which, or the terms or conditions on which, securities or futures contracts should be acquired or disposed of.

The SFO exempts from Type 4 and 5 regulated activities advice given by a company its wholly owned subsidiaries, its holding company (provided the holding company owns the entire issued share capital of the company) and wholly owned subsidiaries of such a holding company.

Financial planners and investment research firms will generally be carrying out Type 4 or 5 regulated activity. Certain asset management groups, including private equity firms, and corporate finance advisers may also be carrying out Type 4 regulated activity.

(5)      Type 6 License (Advising on Corporate Finance)

Advising on corporate finance means, subject to prescribed exemptions, giving advice:

(a)	concerning compliance with or in respect of the Listing Rules of the Stock Exchange of Hong Kong or the Codes on Takeovers and Mergers and Share Repurchases; or
(b)	concerning (i) any offer to dispose of securities to the public, (ii) any offer to acquire securities from the public, or (iii) acceptance of any offer referred to in items (i) or (ii), but only in so far as the advice is given generally to holders of securities or a class of securities; or
(c)	to a listed corporation or public company or a subsidiary of the corporation or company, or to its officers or shareholders, concerning corporate restructuring in respect of securities (including the issue, cancellation or variation of any rights attaching to any securities).

Corporate finance advisers of investment banks will generally be carrying out Type 6 regulated activity. Specialized sub-regimes apply to corporate finance advisers who carry out activities as sponsors to listings on the Stock Exchange of Hong Kong or as financial advisers in respect of takeovers of public companies.

(6)     Type 9 License (Asset Management)

Asset management is defined as real estate investment scheme management or securities and futures contract management. The latter means providing a service of managing a portfolio of securities or futures contracts for another person.

Managers of hedge funds, public funds, and REITs are generally regarded as carrying out Type 9 regulated activity. Private equity firms may be carrying out Type 9 regulated activity depending on their structure.

3.       Exemptions from Holding a License

The following exemptions apply:

(1)	Incidental Exemption
	You are exempt from licensing requirements for certain regulated activities if they are incidental to another regulated activity for which you are already licensed. For instance, assume that you are a stockbroker licensed for dealing in securities and as part of your investment advisory services, you offer securities or corporate finance advice to your clients. In this case, you are exempt from applying for a separate license for “advising on securities or advising on corporate finance as these activities are incidental to your securities dealing business.
(2)	Securities Dealer or Margin Financier Exemption
	If you are an individual or corporation and hold a license for dealing in securities, you need not be separately licensed for carrying out securities margin financing activities for your clients. Authorized financial institutions, irrespective of whether they are registered for dealing in securities or not, are not required to be registered to carry out securities margin financing activities.
(3)	Dealing with Professional Investor Exemption
	You are not required to be licensed for futures or securities dealing activity if you act as principal and deal only with professional investors (as defined in Part 1 of Schedule 1of the SFO).
(4)	Advising Group Company Exemption
	You are exempt from the licensing requirement if you provide investment advisory services solely to your wholly owned subsidiaries or to your holding company that holds all your issued shares or to other wholly owned subsidiaries of the holding company.
(5	Professional Exemption
	Accountants, lawyers and trust companies that offer advice on securities, futures contracts, asset management or corporate finance are exempt from the licensing requirement provided the advice given is incidental to their professional practice. The exemption also applies to journalists and broadcasters who offer investment advice through publications or television/radio broadcasts.
(6)	Leveraged Foreign Exchange Trading Exemption
	Authorized financial institutions are not required to register in Type 3 in order to carry out leveraged foreign exchange trading.

4.       License Application Procedure

(1)      Conditions for Application for Financial Service Licence

The following pre-requisites apply before you can proceed with the license application filing in Hong Kong:

(a)	The applicant must satisfy the Fit and Proper Criteria set out by the SFC. The SFC will examine the fitness and propriety of the person (if the applicant is an individual); the corporation and any of its officers, employees and shareholders (if the application is made by a corporation); or the institution, its shareholders, directors, chief executive, managers and executive officers (if the application is made by an authorized financial institution). The SFC will consider the applicant’s: (i) Financial status or solvency; (ii) Educational or other qualifications or experience in relation to the nature of the functions to be performed; (iii) Ability to carry on the regulated activity competently, honestly and fairly, and his/her reputation, character, reliability and financial integrity.
(b)	The applicant must demonstrate that it has strong internal compliance systems and must satisfy the SFC Compliance Guidelines. In this regard, the applicant must ensure that it has a proper business, structure, good internal control systems and qualified personnel to effectively handle the business.
(c)	If a corporation makes the application, it must be a company that has been incorporated in Hong Kong or an overseas company registered with the Companies Registry of Hong Kong. Note that a sole proprietorship or a partnership structure cannot be used for this purpose. To learn about how to register a private limited company in Hong Kong, refer to our Hong Kong Company Incorporation Guide and Hong Kong Company Maintenance and Compliance Guide. For foreign company registration, please refer to Non-Hong Kong Company Registration and Maintenance Guide.
(d)	If a corporation or an authorized financial institution makes the application, it must employ at least two responsible officers in respect of each regulated activity for which the corporation or institution is seeking to be licensed. The same individual can be appointed to be a responsible officer for more than one regulated activity provided he is found to be fit and proper and that there is no conflict in the roles assumed. At least one of the proposed responsible officers must be an executive director of the corporation or institution. Both of the responsible officers must hold a representative s license for the relevant regulated activity. The SFC will examine if the proposed officers possess appropriate ability, skills, knowledge and experience to effectively manage and supervise the corporation s business of regulated activities.
(e)	Depending on the type of regulated activity, the applicant must maintain a minimum paid-up share capital and liquid capital as prescribed by the Securities and Futures (Financial Resources) Rules. If there is an application for more than one type of regulated activity, the minimum paid-up share capital and liquid capital that is to be maintained shall be the highest amount required amongst the various regulated activities for which the application is being submitted.
(f)	If the applicant is applying for a license to deal in securities, future contracts or securities margin financing, the applicant must take out and maintain insurance against specific risks for a specified amount. The SFC will approve a master policy of insurance suitable for the applicant based on various factors. Applicants who are not exchange participants and who do not hold client assets are exempt from this requirement.

(2)     Submission of Application

Once you have decided to apply for a license, completed application forms along with supporting documents and a non-refundable application fee must be submitted either by post or in person to the SFC. A successful application is usually processed within 2-4 months. The SFC will issue a written notification of the approval and a license or certificate of registration will be mailed to you thereafter. Note that any incomplete or incorrect submission will result in delayed processing. The license or certificate of registration will indicate:

(a)	Your name;
(b)	Your Central Entity number;
(c)	Effective date of your license or registration;
(d)	Types of regulated activity that you are licensed or registered to conduct;
(e)	The conditions imposed on your license or registration, if any;
(f)	In the case of licensed representatives, the licensed corporations that you are accredited for as a principal.

(3)      Display of Licence Certificate

The license must be displayed on the office premises at all times. If you have more than one place of business, a certified copy of your license must be exhibited in a prominent place at each of your other places of business. All licensed or registered individuals, corporations and authorized financial institutions should pay annual license fees within one month after each anniversary date of their licenses or registrations.

5.       Rejected Applications

If you have met the necessary requirements, submitted all the necessary documents and provided accurate information in your application, there is no reason for the SFC to reject you. If however, you fail to meet the statutory requirements, the SFC has the right to reject your application. However, before rejecting your application, the SFC will give you an opportunity to provide an explanation for your case. If your application is still rejected, you can file an appeal within 21 days of your application being rejected with the Securities and Futures Appeals Tribunal. The review process can take up to several weeks.

6.       Management

For the purpose of obtaining a SFC license, a corporation must appoint at least 2 responsible officers (ROs) approved by the SFC to directly supervise the conduct of each regulated activity. Generally, it is desirable to have at least 3 ROs as if there are only 2 ROs and one resigns, the statutory requirement for 2 ROs may be breached.

At least one of the ROs must be an executive director of the licensed corporation. At the same time, every executive director who actively participates in, or is responsible for directly supervising the corporations SFO regulated activity must be approved as an RO but otherwise, there is no requirement for ROs to be directors.

At least one of the ROs should always be available to supervise the regulated activity for which he has been approved as an RO. In practice, this means that at least one RO must be resident in Hong Kong.

The SFO states that the SFC shall refuse to approve an applicant as an RO unless he satisfies it that he is a fit and proper person to be so approved (see above) and that he has sufficient authority within the licensed corporation. Generally, the SFC requires that an RO have:

(1)	appropriate academic (e.g. MBA) or industry qualifications (e.g. lawyer, accountant or CFA);
(2)	at least 2 years management experience;
(3)	sufficient regulatory knowledge; and
(4)	a minimum of 3 years or more of industry experience in the past 6 years in the regulated activity for which approval as an RO is sought.

7.       Regulatory Capital

Every licensed corporation must comply with minimum requirements as to paid-up share capital and liquid capital.

As a baseline, the minimum amount of paid-up share capital is HK$5 million and the minimum amount of liquid capital is HK$3 million. However, certain regulated activities (e.g. leveraged foreign exchange trading and securities margin financing) carry higher paid-up share capital requirements.

Certain licensed corporations (e.g. asset managers) which do not hold client assets may qualify for no minimum paid-up capital requirements and minimum liquid capital requirements of HK$100,000.

8.       Investment Offers

Quite apart from licensing and registration requirements, any offer of any securities or regulated investment agreement to the public may, subject to prescribed exemptions, be subject to authorization requirements by the SFC. For example, asset managers licensed by the SFC who wish to establish an open-ended investment fund to the public in Hong Kong may be required to seek authorization of the SFC both for the fund itself and the marketing materials for the fund.

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