Hong Kong is a world hub for financial services: It was ranked 5th in the Global Financial Centres Index (GFCI) in 2020. In addition, Hong Kong’s stock market is the 3rd largest in Asia and 5th largest in the world.
In Hong Kong, the provision of financial services requires a license, unless one of the narrow exceptions specified by Hong Kong law applies. In thiguidede, we look at the requirements for financial services licenses in Hong Kong, the exceptions that apply, and what the penalties for non-compliance are.
The regulatory system in Hong Kong
Financial services in Hong Kong are regulated by one of the following bodies depending on the activity involved:
- The Securities and Futures Commission (SFC)
- The Insurance Authority
- The Mandatory Provident Fund Schemes Authority
There is also an entirely separate licensing and restricted licensing system for banking services, such as those offered by banks and deposit-taking institutions, collectively known as ‘authorized institutions’. Note, where the authorized institution itself carries out financial services, it is supervised by the Hong Kong Monetary Authority (HKMA), rather than the SFC.
What are regulated financial services in Hong Kong?
The following activities require a financial services license in Hong Kong:
- Dealing in securities and futures
- Advising on securities and futures
- Advising on corporate finance
- Automated trading services
- Asset management
- Leveraged foreign exchange trading
- Securities margin financing
- Providing credit rating services.
In addition, any individual carrying out those activities on behalf of a corporation needs a representative's license. Note, this licensing is only available to corporations, not other business forms such as sole proprietorships and partnerships.
An overseas corporation or individual carrying out a business within Hong Kong can apply for a temporary license to carry on that business in Hong Kong. However, additional requirements apply, and the license will only be granted for a finite period (3 to six months). Note, that corporation must still be registered with the Companies Registry as a non-Hong Kong company (i.e., a branch of an international corporation).
Who is exempted from the requirement to hold a financial services license?
The financial services license is not always required for:
- Those dealing with professional investors. If you deal only with professional investors, you do not need to be licensed for futures or dealing
- ‘In-group’ advising. There is an exemption for businesses that provide advisory services solely to their wholly-owned subsidiaries or holding companies.
- ‘Incidental to profession’ activities. Accountants, lawyers, and trust companies are exempt from licensing requirements as long as their advice relates to securities, futures, asset management, or corporate finance. is incidental to their core professional advice.
- Securities dealers or authorized institutions engaging in margin financing.
- Leveraged foreign exchange trading by authorized institutions.
What steps do I need to take to apply for a financial services license in Hong Kong?
The SFC will require a range of documentation, including identification information (such as the director's identification number). The SFC then applies rigorous ‘fit and proper person’ criteria before it will approve a financial services license. This means it will look into:
- The financial status of the applicant, including any solvency or bankruptcy issues
- Relevant qualifications and experience related to the functions that the corporation plans to carry out
- The ability to carry on the activity concerned competently, honestly, and fairly;
- The existence of a strong reputation for the business, character, reliability, and financial integrity
- The existence of robust compliance management and risk management frameworks within the company
- Depending on the activity in question, the applicant might be subject to minimum paid-up share capital and liquidity requirements, as set out in the Securities and Futures (Financial Resources) Rules
- The appointment of at least two ‘responsible officers’ to directly supervise the conduct of each regulated activity. At least one of the proposed responsible officers needs to be an ‘executive director of the company. Both must also hold a representative's license for the regulated activity in question. The proposed officers must collectively possess the ability, skills, knowledge, and experience, to effectively supervise the business’s regulated activities
- A projection of its operating expenses to be incurred in the first six months after licensing. If excess liquid capital is insufficient to cover projected expenses, the applicant will have to provide a plan demonstrating where additional funding can come from.
- Some applicants (such as those dealing in securities, futures, or margin financing, will be required to be insured for up to a set amount.
How long does it take for an application to be processed?
Between 2-4 months. Once your application is approved, you will be provided with a license that will indicate:
- Your name
- A registration number
- Effective date of the license
- The type of regulated activity to be engaged in
- Any conditions imposed.
How is compliance enforced?
The SFC and the HKMA (when dealing with authorized institutions), both have the power to carry out on-site inspections of firms and demand the release of certain documents. These investigations can lead to disciplinary, civil, or criminal action.
Where the company has breached the terms of its license, consequences may include:
- License revocation or suspension
- Directions to strengthen internal controls
- Petitioning the court for winding up orders, or to declare securities transactions void
- Criminal prosecution. More minor ‘summary’ offenses will be prosecuted by the SFC on its own, whereas the more serious ‘indictable offenses’ will be pursued by the Department of Justice. Maximum penalties include up to HK$10 million in fines, and up to ten years imprisonment.
For any business that wishes to carry out financial services, or deal in financial products, in Hong, a financial services license is usually required. This requirement applies both to locally-incorporated companies, and foreign companies that are registered and trading in Hong Kong. While there are exceptions to the licensing requirement, these are strictly limited.
A failure to comply with the financial services licensing requirements can result in losing a license, or civil and criminal penalties. It is the responsibility of the directors and the company secretary of all Hong Kong companies to ensure that these obligations are complied with.