Obtaining a Financial Services License in Hong Kong

Hong Kong is a well-established financial service world-class hub. According to the Global Financial Centres Index (GFCI), it ranks in the 5th position globally, and it is the 3rd largest in the Asia Pacific region. 

Its simplified systems and ease of business have attracted companies from all over the world due to its robust financial system. Nevertheless, to engage in providing financial services in Hong Kong, there are requirements such as having a financial services license, and, although there is an exceptional list of cases mentioned in the law, it is quite a short and limited list. 

In this article, we will take a look at the requirements to obtain financial services licenses in Hong Kong, the cases that do not require having a license, and what are the penalties for not complying with the regulations. But first, we should go through a brief introduction to the regulatory system of Hong Kong. More details will come in the next section. 

The Hong Kong Regulatory System 

4 central authorities regulate financial services in Hong Kong and depending on the activity, one of them will intervene. Here we will enlist the authorities:  

• The Securities and Futures Commission (SFC)
• The Insurance Authority (IA)
• The Mandatory Provident Fund Schemes Authority (MPFA)
• Hong Kong Monetary Authority (HKMA)

Additionally, the banking services have an entirely separate restricted licensing system, such as those offered by banks and deposit-taking institutions. These are commonly known as authorized institutions. However, when one of these authorised institutions provides financial services, they are supervised directly by the Hong Kong Monetary Authority (HKMA). Now that we have gone through the basics of the regulatory system, in the next section we will go into the details about the financial service industry of Hong Kong.

Which Activities Require a Financial Services License?

Financial services are provided by institutions that facilitate transactions between companies and individuals using investments, loans, or deposits through banking, investment, or insurance activities. According to the Securities and Futures Commission of Hong Kong (SFC), the following list of financial activities require a license:

• Dealing in securities and futures contracts
• Advising on securities and futures contracts
• Advising on corporate finance
• Providing automated trading services
• Asset management
• Leveraged foreign exchange trading
• Securities margin financing
• Providing credit rating services

Moreover, if an individual wishes to engage in any of the above-mentioned activities on behalf of a corporation, he or she needs to obtain a representative's license, which is only available to corporations and no other Hong Kong business entities.

Furthermore, any overseas corporation or individual that wants to engage in any of the activities previously mentioned within Hong Kong, can apply for a temporary license.

However, there might be additional requirements and the license will only be granted for a finite period, which normally lasts between 3 and 6 months. For these cases, the companies must register with the Companies Registry (CR) as a Non-Hong Kong Company. For example, registering as a Branch of an international company.  

Which Activities Are Exempted?

In this section, we will go through the specific activities that do not require holding a financial services license to operate in Hong Kong. Here we enlist the activities:

• Engaging with professional investors: if you carry out securities and future dealing activities as the principal or agent, meaning not acting on behalf of a corporation or anyone else, there is no need to apply for a financial services license while engaging with companies or other individuals who hold licenses. The definition of professional investors can be found in chapter 571 of the Securities and Futures Ordinance (SFO) of Hong Kong, in schedule 1. 
• Group company advice: if you own the shares of a company or group, there is no need to apply for a license to provide financial advice solely to the company. 
• Essential to another regulated activity: if you already have a license for the regulated activity and providing advice on another regulated industry is essential for carrying out your business, you don't need to apply for an additional activity as long as it is for the sole purpose of the first activity that you hold a license for. 
• Professional advice perspective: certain professionals such as accountants, trust companies advisors or lawyers do not need to apply for a financial service license to provide advice as long as it is related to their main core industry. 
• Margin financing activities: the institutions and individuals who hold securities dealing licenses, do not need an additional license for engaging in margin financing activities for their clients. 
• Leveraged foreign exchange trading: the authorized institutions, that are directly regulated by the Hong Kong Monetary Authority (HKMA), don't need to apply for an additional license for foreign exchange trading.

Applying for a Financial Services License

The application process for the license will go through the Securities and Futures Commission (SFC). There are a few documents that need to be provided for the process such as the identity information from the directors, the passport for foreigners, or the identity card for Hong Kong permanent residents. Other documents and proofs that the authority (SFC) will look into are the following:

• The financial status of the applicant: the authority will review if there is any history of financial troubles, debts, or bankruptcy from the applicant. 
• Qualifications and experience: the applicant must have relevant and verifiable experience related to the activity to carry out. 
• Good standing and reputation: the applicant must not be blacklisted or have a tarnished reputation for malpractices.
• Compliance and risk management system: mechanisms to lower the liabilities and risk should be put in place within the company. 
• Minimum paid-up share capital: depending on the activity that the applicant wants to engage in, there could be some minimum capital and liquidity requirements. More details about this point can be found in Chapter 571N Securities and Futures (Financial Resources) Rules, in Schedule 1.
• Appointment of responsible officers: the company will need to nominate at least two individuals to occupy this role, in which they will be in charge of supervising the conduct of each activity. The individuals will need to hold a license for being a representative in the intended regulated activity. Additionally, the nominated individuals for the role must possess the know-how and qualifications to engage in the regulation of their business-regulated activities. 
• Business plan projection: a business plan needs to be presented in which the company plans to carry out the operations contemplating the expenses in the first six months. If there is no sufficient liquid capital to cover the expenses after obtaining the license, the applicant can provide a plan in which additional funding can be obtained and the sources. 
• Insurance requirement: for some of the intended regulated activities, for example, securities and futures or margin financing, the applicant must be insured for a certain amount to carry out the activity.  

The Application Process

Once all the documentation and requirements are fulfilled, the application process takes between 2 and 4 months, depending on the activity to carry out. After the application has been approved, the license will contain the following information:

• Full name of the individual or company.
• Registration number.
• The effective date of the license.
• The type of regulated activity.
• Conditions imposed (if any).
  

How Regulatory Compliance Are Enforced

Both the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA), have the power to enforce the regulations and make inspections of institutions and companies, as well as request the release of pertinent documents. If inspection results in a breach of the permitted regulated activity in the license, the authority will use disciplinary, civil, or criminal actions, depending on the gravity of the breach. Some of the consequences include the following:

• License revocation or suspension.
• Monetary penalties and fines.
• Directions to strengthen internal controls and risk mechanisms. 
• Court notifications for winding up orders, or void declarations of securities transactions.
• Criminal prosecutions for minor offenses or indictable offenses. Depending on the seriousness of the offenses, they will be prosecuted by different authorities. Minor offenses will be overseen by the SFC, while indictable ones by the Department of Justice. For example, maximum fines are up to 10 million Hong Kong dollars and 10 years of imprisonment. 
  

Conclusion 

As we have seen in this article, the majority of businesses that have the intention of providing financial services, or financial products, will be required to apply for a financial services license in Hong Kong. This requirement applies to Hong Kong-incorporated companies, as well as foreign companies that want to engage in trading activities in Hong Kong. Additionally, as we have reviewed, although there are exceptions to the rules for financial activities that require a license, there are very few exceptions with very punctual cases and activities. 

It is always important to highlight that, failing to comply with the requirements established by the Hong Kong authorities, can result in losing the financial services license, or even escalate to civil and criminal penalties. It is the responsibility of the directors and the company secretary to ensure that the activities carried out are within the compliance and local regulations of Hong Kong.

If you have a business in Hong Kong and want to learn how to get your business properly licensed, we have the guide you need.