June 17, 2024

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Snapshot: the regulatory framework for economic companies compliance in Hong Kong

Regulatory framework

Regulatory authorities

What countrywide authorities control the provision of fiscal products and services?

The Hong Kong system of fiscal regulation has a modified institutional strategy, with a assortment of regulators.

The two principal authorities dependable for the regulation of banking, and securities and derivatives solutions and expert services are:

  • the Hong Kong Monetary Authority (HKMA), which regulates financial institutions and
  • the Securities and Futures Commission (SFC), which regulates securities, futures and other deal markets, as very well as intermediaries that participate in these markets.

 

The HKMA and the SFC operate MOUs to deal with their overlapping jurisdiction. The Insurance plan Authority (IA) separately regulates the insurance policies business.

What routines does each and every countrywide economic products and services authority regulate?

The HKMA regulates authorised banking institutions working in Hong Kong, together with banks, limited licence financial institutions (eg, merchant banks) and other deposit-taking organizations. It supervises these authorised institutions (AIs) on a consolidated basis, with the intention of promoting the security and stability of the banking method, including in regard of neighborhood and abroad branches and subsidiaries. The principal regions of HKMA supervision include capital adequacy and liquidity, publicity concentration, resolution, and anti-cash laundering and counter-financing of terrorism (AML/CFT) obligations.

The SFC is accountable for the licensing (or registration) and supervision of intermediaries and people – which include broker-dealers, advisers and resources – engaged in a huge array of securities and futures actions, like:

  • dealing in securities
  • dealing in futures contracts
  • leveraged foreign trade buying and selling
  • advising on securities
  • advising on futures contracts
  • advising on corporate finance
  • furnishing automatic trading products and services
  • securities margin funding
  • asset management and
  • giving credit history rating products and services.

 

The SFC is also liable for overseeing current market operators, like, amongst other individuals:

  • Hong Kong Exchanges and Clearing Limited, which operates:
    • the Inventory Trade of Hong Kong (SEHK)
    • the Hong Kong Futures Exchange
    • clearing properties and
    • different buying and selling platforms (eg, darkish pools)
  • overseeing takeovers, mergers and privatisations of detailed organizations and
  • the regulation of investment products (which include, from April 2019, investment products offered by intermediaries by means of on line platforms).

 

AIs must sign up regulated securities things to do undertaken in Hong Kong with the SFC, but the HKMA remains responsible for the day-to-working day oversight of any these kinds of functions.

The Secretary for Economic Expert services also performs a coordinating part, and assists to set plan for the securities and futures markets typically.

What solutions does every countrywide economical services authority control?

The HKMA workout routines extensive supervisory oversight above the pursuits of AIs, not regulating individual goods.

The SFC regulates certified (or registered) institutions on the foundation of the pursuits in which they are engaged for case in point, by imposing principles-based mostly small business perform benchmarks. These conduct requirements are applicable to all certified and registered establishments (and people), and incorporate anticipations and prerequisites as to the suitability of products and solutions provided or bought to 3rd-social gathering shoppers.

The SFC also regulates certain financial goods, together with securities and futures. The SFC specifically authorises and regulates expenditure merchandise, including:

  • closed-stop resources
  • trade-traded resources
  • leveraged and inverse products and solutions
  • pooled retirement money
  • device trusts and mutual resources
  • structured financial commitment products
  • genuine estate investment decision trusts
  • unlisted shares and debentures and
  • open-finished fund businesses.

Authorisation regime

What is the registration or authorisation routine applicable to financial providers firms and authorised men and women linked with all those corporations? When is registration or authorisation needed, and how is it effected?

Economical services firms carrying on a regulated activity in Hong Kong, or advertising and marketing to the Hong Kong public, should be accredited by the SFC. A licence must be attained (or a pertinent exemption discovered) for just about every type of regulated action.

Licensing for actively advertising to the Hong Kong general public is essential whether the agency is advertising and marketing its expert services from Hong Kong or abroad. For instance, a US-primarily based asset manager soliciting clients for its US-centered products and services in Hong Kong would need to have to be accredited for asset management action in Hong Kong, even if the solicitation was undertaken by way of its Hong Kong licensed subsidiary.

Folks representatives have to also be accredited by the SFC ahead of performing a regulated exercise on behalf of their accredited company (LC). In addition, any govt administrators (ie, senior managers) supervising an LC’s regulated activities must also be licensed as ‘responsible officers’ (RO).

Momentary licences are out there to both equally corporations and individuals who intend to undertake regulated action in Hong Kong on a short-phrase basis only. It is the SFC’s expectation that these types of licences will be received before any regulated activity is undertaken, even if only a one particular-working day company conference in Hong Kong, for instance.

Licence programs are built to the SFC. Unique specifications use to every style of controlled activity, but at a minimum amount, the software method ordinarily involves the submission of extensive resources, like in depth small business plans biographies of senior personnel and other company and specific data. All licensed individuals – corporations or men and women – need to display ‘fit and properness’, involving an evaluation by the SFC of the applicant’s fiscal status, qualifications, competence, honesty, fairness, status and character. Accredited companies must also comply with added requirements, which include on economical methods (eg, principles relating to least paid out-up share funds and liquid cash) and insurance. The software course of action for non permanent licences is considerably less sophisticated, specifically for persons.

Banking organisations are issue to authorisation by the HKMA when banking activities are carried out in Hong Kong and/or promoted to prospects in Hong Kong. Domestically integrated banking organisations are subject to diverse necessities than all those utilized to Hong Kong branches of overseas financial institutions.

The HKMA has also issued licences to digital banks (ie, banks that provide retail banking solutions mostly, if not totally, by means of the internet or other electronic channels alternatively than actual physical branches). As at 31 December 2022, there are a whole of 8 licensed virtual banking companies. Virtual financial institutions are issue to the exact supervisory rules and important prerequisites as common banking companies, matter to adaptation to go well with their business model.

Laws

What statute or other authorized basis is the supply of just about every regulatory authority’s jurisdiction?

The value of economical solutions to Hong Kong as an global financial centre is recognised in its Standard Law, which also offers the governing administration the authority to ‘formulate monetary and economic insurance policies, safeguard the cost-free operation of money business and money markets, and control and supervise them in accordance with the law’.

The jurisdiction of the two the HKMA and the SFC is proscribed by statute: the Banking Ordinance (Cap 155) (BO), and the Securities and Futures Ordinance (Cap 571) (SFO) respectively.

What principal legislation and financial provider authority guidelines utilize to the actions of economic services corporations and their affiliated folks?

HKMA

The principal statute applicable to establishments authorised by the HKMA is the BO.

The BO sets out, among the other factors, the specifications for the authorisation of economic solutions firms trying to get to supply banking products and services the HKMA’s powers of way and assessment limitations on the possession and management of AIs and liquidity and money requirements. It also authorises the promulgation by the HKMA of subsidiary laws.

In addition to the BO and related legislation, establishments authorised by the HKMA have to also comply with the bare minimum standards set out in the HKMA’s Supervisory Plan Guide. The Supervisory Coverage Handbook codifies the HKMA’s supervisory procedures and methods. Amid the regulatory topics it addresses are company governance internal controls money adequacy credit rating, fascination level, operational and liquidity possibility administration securities routines and AML/CFT.

 SFC

The principal statute applicable to entities and individuals licensed or controlled by the SFC is the SFO. The SFO sets out, between other things, the licensing demands for entities that carry out regulated action in Hong Kong history-preserving, reporting and disclosure demands and civil, prison and disciplinary enforcement regimes in regard of market place misconduct. The SFO also confers on the SFC the authority to promulgate subsidiary laws, of which there are a incredibly substantial quantity, together with a wide variety of codes of perform, recommendations and circulars with varying degrees of legal usefulness.

The Anti-Money Laundering and Counter-Terrorist Funding Ordinance (Cap 615) (AMLO) sets out AML necessities applicable to financial establishments in Hong Kong, which includes KYC, shopper due diligence and document-trying to keep, with the specific regulators issuing assistance and responsible for supervision and enforcement.

Scope of regulation

What are the principal spots of regulation for every style of controlled financial companies service provider and products?

Establishments authorised by the HKMA are supervised on a consolidated basis. The principal regions of regulation and supervision are registration basic safety and soundness money and liquidity internal controls and governance company conduct hazard administration (which includes AML/CFT) record-retaining and reporting and disclosure. Pursuant to a memorandum of knowing in between the HKMA and the SFC, the HKMA is also responsible for supervising the securities functions of AIs on a working day-to-day basis, with the SFC principally responsible for enforcement action in respect of misconduct arising from this kind of activities.

The SFC, not like the HKMA, only regulates specified, albeit comprehensively defined, securities and futures activities as established out under the SFO. The SFC regulates, inter alia, licensing requirements organization conduct (ie, the standard of care afforded prospects) market carry out inside controls, governance and supervision (including AML/CFT) the treatment method of client securities and monies history-trying to keep, reporting and disclosure obligations the timing and format of agreement notes and a variety of activity limits.

More demands

What more prerequisites apply to economical providers corporations and authorised folks, this kind of as those imposed by self-regulatory bodies, specified qualified bodies or other economic companies organisations?

The SFC is dependable for licensing sector operators, most notably the SEHK, the Hong Kong Futures Trade and their associated clearing entities. These sector operators act as self-regulatory bodies, but also as frontline regulators. Any individual searching for to trade or distinct via their facilities need to comply with the policies, regulations and procedures promulgated by every single operator (and permitted by the SFC). In the circumstance of the SEHK, for instance, these guidelines govern admissible order styles and dimensions buying and selling hrs closing mechanisms trade reporting buying and selling misconduct maximum allowable position and ton measurements the investing motor and short selling limitations, among the other subject areas. The SEHK is also the frontline regulator in respect of listing and listing purposes.