Under Hong Kong's Securities and Futures (Financial Resources) Rules (FRR), the assets and liabilities of licensed companies are treated separately on a gross basis and may not be set-off against each other, subject to certain exceptions. Under section 11(3) of the FRR, set-off is permissible if (a) the amounts do not arise from the carrying on of a regulated activity and (b) the licensed corporation has a legally enforceable right to set-off such amounts against each other. This first limb becomes a problem where a Hong Kong licensed company wants to set-off amounts due to a group company for operating and other expenses paid by the group company on behalf of the Hong Kong company against fees due to the Hong Kong company for investment advisory or asset management services.
By contrast, under the Hong Kong Financial Reporting Standards, the proviso set out at (a) above is not required for set-off. Provided the agreement between the two companies makes it clear that only the net amount is payable, the amounts can be set-off from an accounting perspective. This difference in treatment of set-off can lead to inaccuracies in the FRR returns of group corporations, requiring a notification to the SFC of a breach of the FRR.
Where a licensed entity may have inadvertently committed a breach of the FRR, the entity should investigate immediately and notify the SFC. Delays may result in disciplinary action.