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Author: Susan Gordon
Service Area: Financial Services
Date: June 2011
Country: Hong Kong

 

Overview of Licensing Regime in Hong Kong and the SFC Application Procedures

Overview of Licensing Regime

The SFC is responsible for administering the securities and futures markets in Hong Kong, including the licensing of market participants and the regulation of offers of securities.

Under the SFO, each licensed corporation needs only one licence to carry on the different types of regulated activity for which it is licensed (except for companies engaged in securities margin financing, which may only undertake that single activity). The ten types of regulated activity under the SFO are:

1 - Dealing in Securities
2 - Dealing in Futures Contracts
3 - Leveraged Foreign Exchange Trading
4 - Advising on Securities
5 - Advising on Futures Contracts
6 - Advising on Corporate Finance
7 - Providing Automated Trading Services
8 - Securities Margin Financing

9 - Asset Management
10 - Providing Credit Rating Services

Definitions of the above regulated activities can be found in Schedule 5 of the SFO or can be accessed via the link: <link>

A corporation may be licensed for one or more regulated activity provided there is adequate segregation of the different functions undertaken by that corporation, no conflicts of interest arise and there is no other regulatory requirement preventing a licensee from undertaking multiple roles (for example, although the SFO allows one licence for multiple regulated activities, Hong Kong stock exchange and futures exchange participants are currently required to carry on only one business; and under the Code on Unit Trusts and Mutual Funds fund managers of authorised unit trusts or mutual funds - i.e. funds authorised for sale to the public by the SFC - must be engaged primarily in the business of fund management).

For the purpose of obtaining a SFC licence, the corporation will need to appoint at least two responsible officers to supervise each regulated activity it is licensed to carry on, and at least one of the responsible officers must be a director who actively participates in or is responsible for directly supervising the regulated activity for which the corporation is licensed (known as an Executive Director). Every Executive Director who is an individual must be approved by the SFC as a responsible officer, although the same persons may be designated as responsible officers for different activities, so long as they are found to be fit and proper and have sufficient authority within the corporation to carry out each such activity. In addition there should not be any conflict of interest or confidentiality issues arising from a responsible officer's multiple functions. At least one of the relevant responsible officers should always be available to supervise each activity, which means that at least one responsible officer must be resident in Hong Kong. Where the licensed corporation is a retail stock or futures broker, at least two responsible officers will need to be resident in Hong Kong.

Any individual who carries on a regulated activity on behalf of the corporation will be required to be licensed as a representative accredited to the corporation. The individual will need to satisfy the SFC that he or she is a fit and proper person to be licensed and that grant of the licence will not prejudice the interests of the investing public. A licensed representative may be accredited to more than one licensed corporation.

When applying for a licence, an application for approval of the premises to be used by the corporation for keeping records or documents required under the SFO will also need to be lodged.

The SFC will refuse to grant a licence to carry on a regulated activity unless the applicant satisfies the SFC that:

  • it is a fit and proper person to be licensed;

  • it will be able, if licensed to comply with the financial resources rules; and

  • where required under the SFO and subsidiary legislation, it is insured in accordance with rules made by the SFC.

The insurance requirement is currently only applicable to companies licensed by the SFC for certain regulated activities (types 1 or 2), which are also exchange participants.

Further details of the Fit and Proper Guidelines, Competence Requirements and the Financial Resources Rules are set out in the Appendix 1.
 

SFC Application Procedures

Application Forms

Copies of the SFC's prescribed forms are also available on the SFC's website at:
http://www.sfc.hk/sfc/html/EN/forms/licensing/licapp/licapp.html


In addition to completion of the relevant application forms, various information will need to be provided to the SFC at the time of making the application.

Business Plan and supporting documents

The SFC requires a number of documents to be provided to them, in support of the licensing application. Of particular importance is the business plan setting out in detail the proposed regulated activities by types to be undertaken. The SFC will then consider the activities and the suitability of the regulated activities to be included in the licence.

The SFC also requires a large amount of information in relation to the structure of the corporation, its directors and its shareholders, and as such, all the directors (both active and non-active directors, including the alternate directors) of the corporation will need to complete SFC application forms.

It is also the SFC's standard practice to require individual shareholders and executive directors of the intermediate and ultimate holding companies to complete and submit application forms. A group structure organisational chart (showing the relationship between the corporation, the ultimate holding company and the applicant) and a copy of the latest audited financial statements for each of the immediate and ultimate holding company and/or the group financial statements are also required.

The SFC will wish to review the applicant’s compliance manual and the operational flowchart.

Responsible Officers, Executive Directors and Representatives

In addition to the corporation being licensed, as indicated above all staff undertaking regulated activities must have their own licence which is ancillary to that of the corporation (in the capacity as either responsible officer - one of whom must be an executive director - or representative). Each individual within the corporation who is applying to be licensed will need to satisfy the SFC's competence requirements (see Appendix 1). The basic qualifications of the individual required by the SFC will differ according to the capacity in which he is seeking to be registered.

Besides the responsible officers, any individual who carries on a regulated activity on behalf of company will be required to be licensed as a representative accredited to the company. The individual will need to satisfy the SFC that he or she is a fit and proper person to be licensed and that grant of the licence will not prejudice the interests of the investing public. A licensed representative may be accredited to more than one licensed corporation.

 

Appendix 1

Fit and Proper Guidelines, Competence Requirements and the Financial Resources Rules

Fit and Proper Guidelines

The Fit and Proper Guidelines outline the matters that the SFC will consider in determining whether or not a person is fit and proper to be licensed. The Fit and Proper Guidelines should be read in conjunction with the SFC's Guidelines on Competence and Guidelines on Continuous Professional Training.

In determining whether an applicant is fit and proper, the SFC will have regard to the applicant's:

  • financial status or solvency;

  • the education or other qualifications or experience having regard to the functions to be performed;

  • ability to perform functions competently, honestly and fairly; and

  • reputation, character, financial integrity and reliability.

In considering whether the corporate applicant itself is fit and proper, the SFC must consider the above in relation to both the corporation and the officers of the corporation. The SFC is also empowered to examine any information in respect of the substantial shareholders and officers of the applicant and other related corporations.

The SFC is unlikely to find any applicant to be a fit and proper person if he or she has been found to have acted fraudulently or dishonestly, been convicted of certain criminal offences, been involved in managing a business that has been involuntarily wound up or is insolvent.

Competence Requirements

Generally, individuals applying for licences (i.e. responsible offices or representatives of licensed corporations) will not satisfy the Fit and Proper Criteria unless they can demonstrate that they are competent to perform their functions efficiently and effectively. Details of the competence requirements are set out in the SFC's Guidelines on Competence.

Individual applicants who seek to be licensed under the SFO may demonstrate competence by meeting certain recognised industry qualifications (certain Hong Kong and overseas qualifications are acceptable - we can provide a list if necessary) and by passing a local regulatory framework paper.
 

Test of Competence for Responsible Officers

In assessing the competence of a responsible officer, the SFC will consider whether the applicant possesses appropriate ability, skills, knowledge and experience to properly manage and supervise the corporate applicant's proposed activities. An applicant applying to be a responsible officer will normally be expected to meet one of the following options:

 

Option 1

Option 2

Option 3

Educational qualification Degree in financial discipline or equivalent or Recognised industry qualification Pass in Chinese or English, and in Mathematics in HKCEE or equivalent

-

Local regulatory framework paper Pass Pass Pass
Relevant industry experience At least 3 yrs over past 6 yrs At least 5 years over past 8 yrs At least 8 yrs over past 11 yrs
Management skill & experience

2 yrs 2 yrs 2 yrs

 

Test of Competence for Representatives

In assessing the competence of a person applying to be a representative (other than a director), the SFC requires that an applicant have a basic understanding of the market in which they are to work, as well as the laws and regulatory requirements applicable to the industry. This can normally be demonstrated by fulfilling one of the following options:

 

Option 1

Option 2

Option 3

Option 4

Option 5

Academic qualification Pass in Chinese or English and in Mathematics in HKCEE or equivalent Pass in Chinese or English and Mathematics in HKCEE or equivalent Degree in designated fields or professional qualifications - -
Relevant industry qualification (specific to functions to be performed) Pass - - - Pass
Local regulatory framework paper Pass Pass Pass Pass Pass
Relevant industry experience - At least 2 yrs over 5 yrs
-

At least 5 yrs over past 8 yrs At least 2 yrs over past 5 yrs

 

Exemptions

The SFC will consider granting an exemption from the recognised industry qualifications where the applicant has attained a certain level of academic achievement or possesses sufficient relevant working experience.

Under exceptional circumstances, the SFC may consider granting an exemption from the local regulatory framework paper where the applicant has attained a certain level of academic achievement or possesses sufficient relevant working experience.

Capital and other Financial Requirements

The capital and other financial requirements applicable to persons licensed under the SFO are set out in the Financial Resources Rules (FRRs).

All licensed corporations are required to maintain a minimum paid-up share capital (subject to some limited exceptions) and a minimum liquid capital. A summary of the paid-up share capital requirements and liquid capital requirements under the FRRs are as follows:

(a)

For dealing in securities (Type 1) or dealing in futures contracts (Type 2):

(i)

paid-up share capital of HK$5 million, unless securities margin financing is provided by the corporation, in which case HK$10 million is required;

(ii)

liquid capital of HK$3 million, except where the corporation is an approved introducing agent or trader or (for futures dealers) futures non-clearing dealer or trader, in which case HK$500,000 is required. *

(b)

For advising on securities (Type 4), advising on futures contracts (Type 5), advising on corporate finance (Type 6#) and asset management (Type 9):

(i)

paid-up share capital of HK$5 million, unless the corporation does not hold client assets, in which case there is no minimum paid-up share capital requirement;

(ii)

liquid capital of HK$3 million, unless the corporation does not hold client assets, in which case HK$100,000 is required. *

(c)

For providing automated trading services (Type 7):

(i)

paid-up share capital of HK$5 million;

(ii)

liquid capital of HK$3 million.*

(d)

For securities margin financing (Type 8):

(i)

paid-up share capital of HK$10 million;

(ii)

liquid capital of HK$3 million. *

(e)

For leveraged foreign exchange trading (Type 3):

(i)

paid-up share capital of HK$30 million, except where the corporation is an approved introducing agent in which case HK$5 million is required;

(ii)

liquid capital of the higher of HK$15 million or where the corporation is an approved introducing agent, HK$3 million, and the sum of 5% of total liabilities and 1.5% of aggregate gross positions for all foreign currencies apart from positions with a recognised counterparty.

* In the case of liquid capital, the required minimum is the higher of the above stated minimum sum or 5% of liabilities. A licensed entity must notify the SFC if its liquid capital falls below 120% of the required minimum. Accordingly, the licensed entity is effectively required to maintain a 20% "buffer" over and above the required minimum.

# Paid-up share capital of HK$10 million applies if a licensed corporation acts as a sponsor.

The minimum liquid capital and paid-up capital for a corporation licensed for more than one regulated activity will be the highest monetary requirement of its different regulated activities. There is no need to add the liquid capital or paid-up capital requirement for each applicable regulated activity just because a corporation may conduct more than one regulated activity.

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.