Third Country Regulatory Matrix - Hong Kong

Publication | May 2014

Who are the regulators?

Bank

The Hong Kong Monetary Authority (HKMA) regulates the banking industry in Hong Kong. More information on the HKMA.

It should also be noted that institutions authorised by the HKMA (AIs) as fully licensed banks, restricted licence banks, or deposit-taking companies, in respect of banking activities which carry on regulated activities in the securities industry (or hold themselves out as doing so) must be registered by the Securities and Futures Commission (SFC). In such a case, the primary regulator will be the HKMA as the frontline supervisor and otherwise the AI will be jointly regulated by the SFC and HKMA.1

Asset managerThe SFC regulates the securities and futures industry in Hong Kong, and in particular persons who carry on a business in and from Hong Kong in a “regulated activity”, of which there are currently 10 (and likely from 2015 two more introduced-relating to OTC derivatives) including an asset management regulated activity (Type 9). More information on the SFC.
Broker dealerPlease see the answer above in relation to an Asset manager. However, a broker dealer’s activity will constitute the regulated activity of “dealing in securities” (Type 1).

What is the primary domestic legislation governing the regulatory regime?

Bank

The main legislation governing the banking regulatory regime is the Banking Ordinance (Cap. 155 of the laws of Hong Kong) (BO). AIs are also expected to adhere to guidelines, guidance notes and supervisory policy manuals published by the HKMA. These documents are available on the HKMA website.

AIs may also be required to comply with the Securities and Futures Ordinance (Cap. 571 of the laws of Hong Kong) (SFO) and its subsidiary legislation if they carry out regulated activities in and from Hong Kong.

Asset manager

The SFO and its subsidiary legislation set out the regulatory and compliance requirements where certain regulated activities are carried out as a business in Hong Kong. Corporations and individuals licensed by the SFC are also expected to comply with guidelines, handbooks, codes and frequently asked questions published by the SFC. These documents are available on the SFC website.

Broker dealerPlease see the Asset manager answer above.

Is the regulatory regime principles-based or rules-based?

Bank

The regulatory regime is principles-based.

Asset managerThe regulatory regime is principles-based.
Broker dealerThe regulatory regime is principles-based.

1.The co-operation between the HKMA and SFC in supervising regulated activities of AIs is underpinned by a memorandum of understanding, which sets out the operational details in relation to their roles and responsibilities, which can be found at: http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/banking-policy-and-supervision/HKMA-SFC_MoU_eng.pdf

What is the scope of regulation i.e. what activities are covered by the regulatory regime?

Bank

Under sections 11 and 12 of the BO, a company which carries on, or proposes to carry on banking business or deposit-taking in Hong Kong, respectively, must be licensed as an AI. There are three types of AIs, namely: licensed bank, restricted licence bank and deposit-taking company.

For these purposes “banking business” is defined in section 2 of the BO as the business of receiving money from the public on current, deposit, savings or similar account, and/or paying or collecting cheques. A breach of section 11 or 12 of the BO may be a criminal offence for any person that breaches it and, if it is a company, every director and manager may also be liable. Breach is punishable on summary conviction by a fine and/or imprisonment for up to 6 months, and on conviction on indictment, by a maximum term of 5 years and/or a fine.

It is worth noting that under the BO, there are restrictions on the use of the word “bank” as well as on certain advertisements, invitations or documents in relation to taking deposits from the public. The Financial Secretary and the HKMA are empowered to grant various exemptions from the regulatory requirements.

Asset manager

Under section 114 of the SFO, a person carrying on the business of a regulated activity in Hong Kong (or that holds himself out as doing so) must be licensed by the SFC as a licensed corporation or a registered institution (where it is an AI). Part 1 of Schedule 5 of the SFO sets out the regulated activities2 which includes asset management, dealing in securities and advising on securities. A contravention of section 114 of the SFO, without reasonable excuse, may be a criminal offence and is punishable on summary conviction by imprisonment for up to 2 years and a fine, and on indictment by a maximum term of imprisonment of 7 years and a fine.

For each regulated activity, there are a number of exemptions, which if applicable, will mean that the person will not require a licence to carry out the relevant activity in Hong Kong. The SFC may also grant licences subject to certain conditions, such as not holding client money, or that the licence-holder may only carry on the regulated activity in respect of “professional investors” as defined under the SFO and subsidiary legislation.

In addition, any individual performing functions relating to a regulated activity of a licensed corporation must be licensed by the SFC as a “licensed representative” accredited to the particular licensed corporation or corporate applicant. Generally, licensed representatives are required to be fit and proper, and competent in three basic elements: academic qualification, industry qualification and regulatory knowledge. Fitness and probity is considered in respect of their: 

  • financial status;
  • relevant education, qualifications and experience;
  • competence, honesty and fairness; and
  • reputation, character, reliability and financial integrity.

Competence in the necessary elements can be demonstrated by passing:

  • English or Chinese and Mathematics in the Hong Kong Certificate in Education Examination (or equivalent);
  • a “recognised industry qualification”; and
  • a “local regulatory framework paper”, respectively, although there are exemptions and alternative means of compensating where particular elements might be lacking.

Similarly, staff of AIs engaging in securities business and/or other regulated activities must be registered with the HKMA as a “relevant individual”. Relevant individuals must be fit and proper and meet the same competence requirements as licensed representatives.

Broker dealerPlease see the Asset manager answer above.

2. There are currently ten (soon to be 12) regulated activities under the SFO: dealing in securities (Type 1); dealing in futures contracts (Type 2); leveraged foreign exchange trading (Type 3); advising on securities (Type 4); advising on futures contracts (Type 5); advising on corporate finance (Type 6); providing automated trading services (Type 7); securities margin financing (Type 8); asset management (Type 9); and providing credit rating services (Type 10). It should be noted that AIs do not require registration with the SFC for leveraged foreign exchange trading and securities margin financing as these regulated activities are part of conventional banking business.

What is the most common form of business vehicle used by offshore groups wishing to conduct regulatory business in your jurisdiction?

BankCompany limited by shares.
Asset managerCompany limited by shares.
Broker dealerCompany limited by shares.

Must a local corporate entity be established?

Bank

Banks incorporated overseas may establish a branch in Hong Kong where a memorandum of understanding has been signed between the banking regulator of that country and the HKMA. In the absence of such an agreement, a Hong Kong incorporated company which is a subsidiary of the overseas bank should be established.

Where a representative office (as opposed to an AI) is set up, no local corporate entity is required to be established.

Asset manager

A person (other than a branch of an overseas-incorporated AI) wishing to carry on business in or from Hong Kong in a regulated activity will need to establish a Hong Kong subsidiary of another group company to carry on business in Hong Kong. This is not a legal requirement but imposed by current SFC policy.

Broker dealerPlease see the Asset manager answer above.

Are there any restrictions on who may be a controller / shareholder (direct or indirect) of a locally regulated entity?

Bank

The HKMA must approve each controller of an AI incorporated in Hong Kong and be satisfied that it knows the identity of each of its controllers. “Controller” includes individuals who, alone or with an associate, control over 50 per cent (majority shareholder controller) or between 10-49 per cent (minority shareholder controller) of the voting rights of the Al or its (in)direct parent. Additionally, individuals in accordance with whose directions or instructions the directors of the institution (or of another company of which it is a subsidiary) are accustomed to act are also considered controllers.

It should be noted that it is generally the HKMA’s policy that a person that intends to hold 50 per cent or more of the share capital of an AI incorporated in Hong Kong should be a well established bank or other supervised financial institution of good standing in the financial community with appropriate experience.

Controllers should submit clear and detailed indications of their intentions or plans for the AI so that the suitability of those plans and the capacity of the controller to fulfil them can be considered. Furthermore, they should submit a letter of comfort to the HKMA.

Asset manager

The SFC must approve a person (including a corporation) of a licensed corporation who proposes to become or to continue to be a “substantial shareholder”. Generally, a person (together with any associate) with at least a 10 per cent interest (or voting power) of the licensed corporation, or with at least a 35 per cent interest (or voting power) in another corporation which has at least 10 per cent voting power of the licensed corporation, will be considered a substantial shareholder.

The SFC must be satisfied such substantial shareholders are “fit and proper”. The relevant considerations taken into account include their financial integrity, reputation, character and reliability.

Broker dealerPlease see the Asset manager answer above.

Briefly describe the regulator(s) key registration / authorisation requirements?

Bank

The BO sets out the minimum requirements that institutions must meet and continue to meet to be authorised as an AI. These include adequate: systems of control; accounting systems; personnel; and controllers, as well as adequate supervision and reciprocity if incorporated overseas. Of particular relevance to a bank will be the requirement that it can demonstrate that it has sufficient: capital; customer deposits; and financial resources and adequate provisions, liquidity and control over large exposures.

The HKMA must also be satisfied with the manner in which the business is to be conducted. In particular, the company should demonstrate that it has, and will continue to maintain, integrity, prudence, the appropriate degree of professional competence and a manner which is not (or likely to be) detrimental to the interests of depositors or potential depositors.

For institutions incorporated in Hong Kong, there are also disclosure requirements in relation to the state of its affairs and sections of its annual report. Where the institution is incorporated outside Hong Kong but of considerable size, adequate financial disclosure will also be expected although this is not a statutory requirement.

For AIs applying to be registered with the SFC to conduct a regulated activity, at least two relevant individuals must be approved by the HKMA as “executive officers” who will be directly supervising the conduct of each regulated activity. Executive officers are expected to meet the same competence requirements as ROs (see the Asset manager answer below).

Asset manager

The SFO together with subsidiary legislation sets out the minimum requirements to become and remain a licensed corporation. The key requirements include minimum capital requirements (depending on the type of regulated activity) and at least two individuals approved as Responsible Officers (ROs) to supervise each regulated activity.

ROs must demonstrate the appropriate ability, skills, knowledge and experience to properly manage and supervise the company's business of the relevant regulated activity. In particular, ROs must demonstrate competency in four key areas, namely: academic/industry qualification; industry experience; management experience; and regulatory knowledge. 

Accordingly, in addition to passing a recognised industry qualification and a local regulatory framework paper, ROs must have at least three years in the relevant industry over the last six years immediately prior to the application and have a minimum of two years’ proven management skill and experience.

Before granting a licence, the SFC must be satisfied that licensed individuals, directors and substantial shareholders of the applicant are fit and proper. The SFC will consider, inter alia, their: financial integrity; reputation; character; and reliability. Additionally, applicants must be competent and demonstrate that they have a proper business structure, good internal control systems and qualified personnel.

Broker dealerPlease see the Asset manager answer above.

What filing fees must be paid to the regulator(s)?

Bank

An application fee is payable to the HKMA and this must be paid within 14 days of the institution becoming authorised. For licensed banks the fee is HK$474,340, for restricted licence banks the fee is HK$384,270, and for deposit-taking companies the fee is HK$113,020.

For fees in respect of an A1 applying to conduct a regulated activity see the Asset manager answer below.

Asset managerThe application fee payable by an applicant to be licensed as a licensed corporation is HK$4,740. The application fee for individuals that request to be licensed as an RO is HK$4,740, and the fee for those who are to be licensed as a licensed representative is HK$1,7903. With regard to substantial shareholder applicants, the fee is HK$3,000. These figures are on a per regulated activity basis.
Broker dealerPlease see the Asset manager answer above.

How long does it take to get registered / authorised by the regulator?

BankExperience has shown that the authorisation application processing time can take approximately 6-12 months for a locally incorporated AI and 6 months for a branch of an overseas bank. Ultimately, however, the processing time will depend on the characteristics of each application. Discussion should be initiated with the HKMA ideally as soon as an application is contemplated with relative certainty and in any case before the application is actually submitted. The HKMA actively encourages this.
Asset manager

The SFC states that the application process should usually take approximately:

  • 15 weeks (for a corporate application);
  • 10 weeks (for an RO application); and
  • 8 weeks (for a licensed representative application). 

In our experience the process may be longer or indeed shorter.

Broker dealerPlease see the Asset manager answer above. However, it is likely to take longer for a broker dealer with no restrictive conditions.

3. If the individual applicant is already a licensed representative in respect of the regulated activity concerned, the amount is HK$2,950.

What are the principal regulatory documents required?

Bank

To become authorised by the HKMA, an institution should submit a cover letter together with supporting documents. The HKMA provides detailed information on application documents required in its Guide to Authorization.

Broadly, the required supporting documents include: 

  • a business plan; 
  • financial projections; 
  • organisation charts; 
  • board resolutions;
  • articles of association; 
  • audited annual reports; 
  • details on internal control systems; 
  • questionnaires on the prospective chief executive; and 
  • information on controllers. 

Additional documents will be required depending on the type of applicant - whether the application is for a branch authorisation by a bank incorporated outside Hong Kong or authorisation of a locally incorporated institution. For example, branch authorisation applications will require letters from the relevant supervisory authority confirming consent for the parent bank to establish an authorised subsidiary in Hong Kong.

It should also be noted that an application from an existing AI to upgrade its authorisation will be treated as a new application.

Asset manager

To become licensed by the SFC, applicants should submit the prescribed forms which may be obtained from the SFC website together with supporting documents.

In the case of applications to become a licensed corporation, the forms to be submitted are: 

  • Form 1 (Application for Licence – Corporation); 
  • Form 6 (Notification - Associated Entity) (if applicable);
  • Supplement 1 (Contact Information and Record Keeping Address for Corporation);
  • Supplement 2 (Information on Corporate Substantial Shareholder) (if applicable);
  • Supplement 3 (Statement of Personal Information);
  • Supplement 4 (Information on Corporate Director) (if applicable);
  • Supplement 5 (Basic information on Associated Entity) (if applicable); 
  • Supplement 6 (Bank Accounts); 
  • Supplement 7 (Financial Resources); 
  • Supplement 8 (Business Plan and Proposed Business Activities); and 
  • Supplement 13 (Information on Associated Entity). Supplementary documents which should accompany the forms include a regulatory business plan, draft client agreement and draft compliance documentation.

In the case of individuals applying to be licensed representatives the relevant forms are: 

  • Form 3 (Application for Licence – Representative); 
  • Supplement 9 (Licence Record) (if applicable); and 
  • Supplement 12 (Directorships and Other Business Interests) (if applicable). For applications to be ROs, the above forms as for a licensed representative together with a Supplement 10 (Duties and Experience of a Responsible Officer) should be submitted to the SFC.
Broker dealer

Please see the Asset manager answer above.

From a regulatory perspective are there minimum onshore personnel requirements?

BankThe AI must appoint a chief executive and one alternate chief executive who are resident in Hong Kong in respect of the business in Hong Kong, i.e. they do not need to have such role for the bank or business interest.
Asset managerAs mentioned above, a licensed corporation must have at least two ROs in relation to each regulated activity. Ideally ROs should be located in Hong Kong, however, as long as one RO for each regulated activity is a resident in Hong Kong and at all times there is one who is available and contactable by the licensed corporation and the SFC, this is generally sufficient for the purposes of the SFC’s requirements.
Broker dealerFor Type 1 (dealing in securities) regulated activity, a licensed corporation must have both ROs resident onshore with the requirement that at least one RO is available and contactable by the licensed corporation and the SFC at all times.

Are any approvals required for off shore management / directors / shareholders and if so at what threshold of ownership?

Bank

The HKMA must approve and know the identity of all controllers of an AI. As mentioned above, the relevant thresholds are over 50 per cent (majority shareholder controller) or between 10-49 per cent (minority shareholder controller) of the voting rights of the AI or of another company of which it is a subsidiary. Additionally, individuals in accordance with whose directions or instructions the directors of the institution (or of another company of which it is a subsidiary) are accustomed to act are also considered controllers. The HKMA must be satisfied that controllers are fit and proper, and will consider the financial status, competence, soundness of judgement and diligence required.

Asset manager

As mentioned above, the SFC must be satisfied that ROs and substantial shareholders of the applicant are fit and proper. The SFC will consider, inter alia, their: financial integrity; reputation; character; and reliability.

For these purposes, a person (together with any associate) with at least a 10 per cent interest (or voting power) of the licensed corporation, or with at least a 35 per cent interest (or voting power) in another entity which has at least 10 per cent voting power of the licensed corporation, will generally be considered a substantial shareholder.

Broker dealerPlease see the Asset manager answer above.

Are there any exchange control or currency regulations?

BankHong Kong does not operate any foreign currency controls.
Asset managerHong Kong does not operate any foreign currency controls.
Broker dealerHong Kong does not operate any foreign currency controls.

What capital requirements must be satisfied?

Bank

The minimum aggregate amount of paid up share capital and the balance of the share premium account required is:

  • HK$300 million for a fully licensed bank;
  • HK$100 million for a restricted licence bank; and
  • HK$25 million for a deposit-taking company.

Additionally, a fully licensed bank must have total customer deposits of at least HK$3 bn, excluding certain deposits and total net assets of at least HK$4 bn. These amounts may be in HK dollars or an equivalent in any other approved currency. There are no total customer deposit requirements for a restricted licence bank or a deposit-taking company. Notwithstanding this, the HKMA must be satisfied that any AI applicant has and will continue to have adequate financial resources once it is authorised.

The Banking (Amendment) Ordinance 2012 (BAO) introduced into the BO various financial requirements covering capital ratios, buffers and liquidity ratios introduced by Basel III.

Asset manager

The capital requirements for licensed corporations are set out in the Securities and Futures (Financial Resources) Rules (FRRs). The minimum capital requirements vary depending on the types of regulated activities for which a corporation is licensed. For Type 9 (asset management) regulated activity, on the basis that the licensed corporation does not hold client assets there will be no minimum paid-up share capital requirement and a minimum required liquid capital of the higher of a monetary floor of HK$100,000 or a “variable required liquid capital” (as defined in the FRRs).

For a Type 4 (advising on securities) licence, which a non-discretionary fund manager will need, on the basis that the licensed corporation does not hold client assets there will be no minimum paid-up share capital requirement and a minimum required liquid capital of the higher of a monetary floor of HK$100,000 or a “variable required liquid capital” (as defined in the FRRs).

Broker dealerUnder the FRRs, the capital requirements for a Type 1 (dealing in securities) licence are a minimum paid-up share capital of HK$10,000,000 if it provides securities margin financing or HK$5,000,000 in any other case. The minimum required liquid capital is the higher of a monetary floor of HK$500,000 if it is an approved introducing agent or a trader, HK$3,000,000 in any other case, or a “variable required liquid capital” (as defined in the FRRs).

Briefly describe some of the key ongoing regulatory obligations?

Bank

The minimum authorisation criteria under the BO (Schedule 7) are continuing in nature and apply to AIs not only at the time of authorisation but also on an ongoing basis. Accordingly an AI should continue to maintain, amongst other things, adequate:

  • financial resources;
  • liquidity provisions;
  • accounting systems;
  • disclosure; and
  • continue to carry on its business with integrity, prudence and competence.

In addition to the above, AIs are subject to various requirements relating to the lodging of their audited annual accounts, auditor reports and other information with the HKMA. An AI will also need to observe its implied duty of confidentiality to its clients as well as the provisions of the Personal Data (Privacy) Ordinance. All fully licensed banks in Hong Kong will also be members of the statutory deposit protection scheme and will be required to fulfil the ongoing obligations under the Deposit Protection Scheme Ordinance.

Banks are also required to comply with the Anti Money Laundering and Counter Terrorist Financing (Financial Institutions) Ordinance (AMLO) which imposes statutory customer due diligence requirements on financial institutions.

Asset manager

Key ongoing requirements for a licensed corporation include remaining fit and proper and complying with all relevant legislation as well as SFC guidance and codes. It must notify the SFC of specific events and, where relevant, seek prior approval for certain changes (see below). It must also submit, in a timely manner‚ audited accounts, annual returns and financial resources returns as well as pay annual fees. Licensed corporations are also responsible for designing and implementing continuous professional training (CPT) programmes and keeping records in relation to them.

Similar to Banks, licensed corporations must comply with duties of confidentiality owed to their client as well as the PDPO.

Likewise, as with Banks they must comply with the AMLO and observe related SFC Guidance.

Broker dealerPlease see the Asset manager answer above. Please also note that for Type 1 (dealing in securities) regulated activity, a licensed corporation is required to take out and maintain insurance against specific risks, unless it is not an exchange participant and does not hold client assets.

What are the key regulatory reporting requirements?

Bank

An AI has a duty to report a prospective inability to meet its obligations to the HKMA and provide the HKMA with information of a material nature.

It should be noted that under, Hong Kong anti money laundering and terrorist financing legislative (including the AMLO) AIs are expected to report suspicious transactions to the Joint Financial Intelligence Unit.

Please also refer to Asset manager answer in respect of reporting pursuant to Part XV SFO.

Asset manager

Under the Securities and Futures (Licensing and Registration) Rules, licensed corporations must apply for prior approval for certain changes. These include additions or reductions of regulated activities, a change in business premises or a modification/waiver of a licence condition. They must also notify the SFC on the occurrence of specific events including:

  • any material breach or non-compliance with any law, rules, regulations and codes administrated or issued by the SFC;
  • changes in share capital, shareholding structure or business plan; and
  • changes in directors or licensed representatives.

There are also reporting requirements under the FRRs. In particular, a licensed corporation must notify the SFC as soon as reasonably practicable and in any event within one business day of becoming aware of its liquid capital falling below 120 per cent of its required liquid capital. Please note that for a Type 9 (asset management) regulated activity, routine reports must be prepared on a bi-annual basis.

Licensed corporations may also need to disclose certain interests (or deemed interests) under Part XV of the SFO in relation to substantial shareholdings in companies listed on the Stock Exchange of Hong Kong. The Securities and Futures (Short Position Reporting) Rules provide for reporting of short positions on a net basis and, similarly, pursuant to the Securities and Futures (Contracts Limits and Reportable Positions) Rules, a licensed corporation holding or controlling a reportable position must notify the “recognised exchange company” of that position.

The suspicious transaction reporting requirements under the AMLO also apply to licensed corporations.

Broker dealerPlease see the Asset manager answer above. However, please note that broker dealers must prepare reports under the FRR on a monthly basis in relation to their Type 1 (dealing in securities) regulated activity.

Will authorisation allow a locally regulated business to distribute financial products in other jurisdictions?

Bank

Yes. Authorisation will not prevent a locally regulated business from distributing financial products overseas. However, such a locally regulated business will be subject to the law of the relevant overseas jurisdiction.

Asset managerYes. Authorisation will not prevent a locally regulated business from distributing financial products overseas. However, such a locally regulated business will be subject to the law of the relevant overseas jurisdiction.
Broker dealerYes. Authorisation will not prevent a locally regulated business from distributing financial products overseas. However, such a locally regulated business will be subject to the law of the relevant overseas jurisdiction.

Is e-commerce (i.e. electronic signatures and distance selling) regulated?

Bank

The Electronic Transactions Ordinance (ETO) provides the legal framework for the conduct of e-business in Hong Kong. Generally, the ETO: (i) accords electronic record and electronic signatures the same legal status as that of their paper-based counterparts; and (ii) established a voluntary recognition scheme for certification authorities to enhance public confidence in electronic transactions.

Where a transaction does not involve Government entities, a signature required by law can be satisfied by any form of electronic signature so long as it is reliable, appropriate and agreed by the recipient. For transactions involving Government entities, a signature required by the law can be satisfied by digital signature supported by a recognised digital certificate issued by a certification authority recognised under the ETO.

Asset managerPlease see the answer above.
Broker dealerPlease see the answer above.

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