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Focus: Financial Services – October 2005

Hong Kong licensing requirements

In brief: Partner Matthew Barnard (view CV) and Senior Associate Daniel Yeo report on a number of changes to the licensing regime under the Hong Kong Securities and Futures Ordinance that were recently announced by the Hong Kong Securities and Futures Commission.

 Announcement

After a consultation process, the Hong Kong Securities and Futures Commission (the SFC) recently released its policy conclusions relating to proposals to amend the licensing requirements under the Hong Kong Securities and Futures Ordinance (the SFO). The background and our comments in relation to the proposed amendments were set out in AAR Focus: Financial Services - March 2005.

These changes, which are expected to come into effect on 9 December 2005, are summarised below.

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Disposal of securities to non-professional investors

The SFO contains an exception as to what constitutes 'dealing in securities' for the act of acquiring, disposing, underwriting or subscribing for securities as principal. In its consultation paper, the SFC proposed to remove from this exception 'disposing' of securities as principal.

The SFC has decided not to make this proposed change at this time given the potential adverse consequences on trustees, shelf companies and share issues by private companies.

The SFC considers that further examination and review of these issues is required as a separate exercise.

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Licensing of real estate investment trust managers

Under the current licensing regime, management companies managing investment portfolios comprised of 'securities' or 'futures contracts' as defined under the SFO require an asset management licence. This may not apply to a manager of a Real Estate Investment Trust (REIT) because the manager may only be managing direct investments in real estate. The SFC has decided to extend the definition of 'asset management' to include 'real estate investment scheme management', ie providing a service of operating a collective investment scheme for another person where:

  • the property that is being managed under the scheme consists primarily of immovable property (ie real estate); and
  • the scheme is authorised for retail distribution in Hong Kong under the SFO.

This means that REITs that are not authorised for retail distribution in Hong Kong will not be required to obtain an asset management licence.

To obtain an asset management licence, the applicant must:

  • comply with the SFC's guidelines on competence and internal controls regarding the appointment of qualified personnel and risk management;
  • appoint at least two responsible officers to supervise the asset management activities directly, one of whom must be an executive director directly responsible for supervising the asset management activities;
  • ensure that all substantial shareholders (generally, those holding at least 10 per cent of voting shares) and senior officers of the manager meet relevant SFC suitability guidelines; and
  • meet relevant minimum capital requirements (generally, HK$5 million paid-up capital and HK$3 million liquid capital).

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No requirement for money brokers to obtain a securities dealing licence

Entities that carry on a money-broking business in Hong Kong are required to be approved by the Hong Kong Monetary Authority (the HKMA) under the Hong Kong Banking Ordinance.

Money broking includes negotiating, arranging or facilitating agreements with an authorised bank or deposit-taking institution for the making of deposits and the selling or buying of currencies.

Certain activities of money brokers may fall within the existing definition of 'dealing in securities' under the SFO, requiring the money broker to also obtain a securities dealing licence from the SFC. The SFC has decided to amend the definition of 'dealing in securities' to exclude HKMA-approved money brokers dealing on behalf of authorised banks or deposit-taking institutions. This constitutes a relaxation of the regulation in that industry.

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Fund managers may provide incidental advisory activities

Under the existing licensing regime, fund managers that provide portfolio management services for funds are required to hold an asset management licence. If they also advise their fund clients on the purchase or sale of securities or futures contracts (including the issue of research reports and specific dealing advice), they are also required to be licensed to undertake these activities. In response to industry comment, the SFC has agreed to amend the definition of 'advising on securities' and 'advising on futures contracts' to exclude a person licensed to conduct asset management activities where:

  • the person provides portfolio management services relating to 'securities' or 'futures contracts' under a collective investment scheme (such as an investment fund); and
  • the relevant advisory activities are carried out solely for the purposes of providing portfolio management services.

This will reduce the regulatory burden on fund managers because fund managers licensed to undertake the above asset management activities will not be required to become licensed to provide incidental advice on related securities or futures contracts.

For further information, please contact:

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