Year in Review – Hong Kong Law in 2016

Hong Kong Financial Institutions Resolution Regime: The Financial Institutions (Resolution) Ordinance was passed into law on 22 June. The Ordinance establishes a regime for the orderly resolution of financial institutions in the banking sector and systemically important financial institutions in the insurance and securities and futures sectors, as well as certain financial market infrastructures in Hong Kong. In addition, the resolution regime seeks to provide the relevant resolution authorities with administrative powers in order to mitigate the risks posed by the non-viability of an in-scope institution to the stability and effective working of Hong Kong’s financial system. The Ordinance is very much framework legislation and the regime is not yet in operation; it will commence on a date to be appointed pending the passing of critical subsidiary legislation. Read more…

Tax treatment of qualifying Regulatory Capital Security (監管資本證券): The Inland Revenue Ordinance was amended on 3 June and came into effect on the same day. The changes include, among others, (i) treating the issue of a qualifying Regulatory Capital Security (監管資本證券) (RCS) by a financial institution as a debt security and (ii) treating any sum payable by such financial institution in respect of a qualifying RCS as an interest payment (other than a repayment of the paid-up amount of the qualifying RCS), in each case for Hong Kong profits tax purposes. The Stamp Duty Ordinance was also amended and came into effect on 3 June and provides that no stamp duty will be payable on the transfer of a qualifying RCS.

Finalisation of Discrimination Law Review: In March, the Equal Opportunities Commission published its Discrimination Law Review in which it made 73 recommendations to the Government for changes to Hong Kong’s existing anti-discrimination laws (the Sex Discrimination Ordinance, the Family Status Discrimination Ordinance, the Disability Discrimination Ordinance and the Race Discrimination Ordinance). The Commission identified 27 of the recommendations as being “higher priority” issues for reform. The focus of the recommendations was on providing stronger protection for minority groups, ensuring consistency across the four laws, and simplifying and modernising the laws.

IPO cornerstone investments and placing allocation: In January, the Hong Kong Stock Exchange relaxed the restrictions on connected clients of an IPO placing broker/distributor and existing shareholders making cornerstone investments or participating in the placing tranche of an IPO. The conditions applicable to allocations to certain connected clients have been aligned, and existing shareholders have greater flexibility to participate in IPOs. Read more

SFC and SEHK joint consultation on listing regulation: In June, the Securities and Futures Commission (“SFC”) and the Hong Kong Stock Exchange published a joint consultation paper on listing regulation. The stated objectives of the consultation proposals are “enhancing the co-ordination and cooperation when developing new policy in listing regulation and regulatory decision-making”, “clearer reporting structure for decision-making” and to “simplify the process for IPO applications”. Read more

Big-name banks face increase scrutiny over Hong Kong IPOs: Hong Kong’s securities regulator has become more willing to take action against the big-name banks. In the past the SFC has taken actions against local houses and mainland firms operating in Hong Kong, it has rarely probed the IPO work of big foreign investment banks. In recent years, the SFC has gone after bigger names over some recent listings.

Market Misconduct Tribunal found listed company and senior officers in breach of the inside information disclosure regime: Since the codification of the inside information disclosure regime in the Securities and Futures Ordinance on 1 January 2013, this was the first time the tribunal made a finding of breaches of the disclosure obligations imposed on listed companies. AcrossAsia Limited, its former chairman and chief executive officer admitted that they had been late in disclosing inside information about a petition filed by AcrossAsia’s subsidiary and major creditor against AcrossAsia and a related summons. The two officers also admitted that they had been negligent which resulted in AcrossAsia’s breach of the disclosure requirement. Read more…

First year of enforcing the Competition Ordinance: The Competition Commission had a busy first year enforcing the Competition Ordinance. Since the law came into force on 14 December 2015, the Commission has confirmed that a number of investigations are ongoing and that its statutory investigative powers have been exercised in the process, including employee interviews, information requests and also, perhaps most notably, the execution of at least six search warrants during the summer months. The Commission also used soft enforcement powers, for instance by scrutinising the practices of trade associations and engaging with professional and industry bodies suspected of engaging in problematic conduct. The Commission further continued educating the public and promoting the Ordinance, notably by promoting a “Fighting Bid-rigging Cartels” publicity campaign. Finally, the Commission concluded a market study in the building maintenance space, and commenced, in September, a public consultation on its proposal to issue a Block Exemption Order in relation to the liner shipping business. Read more…

Contract law on penalty clauses diverges from UK developments: In the decision of Brio Electronic Commerce Limited v Tradelink Electronic Commerce Limited [2016] 2 HKLRD 1449, the Hong Kong Court of Appeal upheld a liquidated damages clause on the basis that it was a “genuine pre-estimate of loss”, thereby upholding the century-old Dunlop test on penalties that had been overruled by the Supreme Court in the UK following Cavendish Square Holding VB v Talal El Makdess; ParkingEye Limited v Beavis [2015] UKSC 67. Despite the divergence from the latest UK position, the Court of Appeal did indicate through its analysis of case authorities its support for a broader, commercial approach, which parties entering into commercial contracts in Hong Kong should bear in mind in the future.

Delay causes Hong Kong Court to deny anti-suit injunction in breach of agreed jurisdiction clause: The Court of Appeal decision in Sea Powerful II Special Maritime Enterprises (ENE) v Bank of China Ltd [2016] 3 HKLRD 352, upholding the Court of First Instance decision ([2016] 1 HKLRD 1032), demonstrates the need to act promptly when seeking an anti-suit injunction in relation to proceedings commenced in a foreign court in breach of an agreement to arbitrate. The Court of Appeal drew a distinction between forum non conveniens anti-suit injunctions and contractual anti-suit injunctions, and held that the lower court did not exercise its discretion erroneously by refusing to grant anti-suit relief on the basis of the plaintiff’s deliberate, inordinate and culpable delay. Delay in seeking injunctive relief, therefore, may result in the substantive claim being resolved in foreign courts, in breach of the parties’ arbitration agreement.

Another milestone in mutual market access – the Shenzhen-Hong Kong Stock Connect: The Shenzhen-Hong Kong Stock Connect was formally launched in November, following the in-principle approval of the programme by the CSRC and the SFC in August. The Shenzhen-Hong Kong Stock Connect extends the current arrangements of the Shanghai-Hong Kong Stock Connect by linking up the stock exchanges in Hong Kong and Shenzhen. The Shenzhen-Hong Kong Stock Connect is subject to existing laws and regulations as well as trading and clearing models under the Shanghai-Hong Kong Stock Connect. Trading through Shenzhen-Hong Kong Stock Connect commenced on 5 December. Read more

Mandatory reporting and clearing of OTC derivatives: Phase 1 of mandatory clearing came into effect in September. Prescribed persons have an obligation, after they have crossed the applicable clearing thresholds, to clear certain types of plain vanilla interest rate swaps through a designated central counterparty when they trade with another prescribed person or a financial services provider. The rules for mandatory reporting have been expanded (effective July 2017) to cover a wider product scope (all OTC derivative products that fall within the five key asset classes: interest rate, FX, equity, credit and commodity) and a wider set of reportable information (includes daily valuation transaction information). Read more

Margin requirements and other risk mitigation standards for non-centrally cleared derivatives: Following the conclusion of public consultation, the Hong Kong Monetary Authority published in December the rules on margin requirements and other risk mitigation standards for non-centrally cleared derivatives. Starting from 1 March 2017, authorised institutions have to exchange initial margin and variation margin when they trade with covered entities in non-centrally cleared derivatives, if certain thresholds have been crossed. A six months’ transition period is provided for under the rules (from 1 March 2017 to 31 August 2017) to give market participants the much needed time to prepare for the new regulatory requirements. Read more…

Professional investor and client agreement requirements made more stringent: Amendments to the professional investor regime under the SFC Code of Conduct came into effect on 25 March. Under the revised rules, the suitability requirement and other requirements under the Code that have a significant bearing on investor protection may not be waived when intermediaries are serving individual professional investors.

Year to come – Hong Kong Law in 2017

Competition Ordinance: 2017 will mark the second year of enforcement of the Competition Ordinance. While the regime is still young, the Competition Commission is likely to press ahead with the investigations that are pending at the end of 2016, leading to certain settlements or to proceedings before the Competition Tribunal. New cases may also be initiated, following either complaints or leniency applications. Some points of law which are not clear under the Ordinance may even be tested before the Tribunal, especially in relation to procedure in the context of ongoing investigations. The public is likely to continue to exercise pressure on the Commission regarding certain sectors, in particular consumer-facing industries. The Commission is expected to issue the Block Exemption Order regarding the liner shipping sector, and may engage in new market studies. As the Commission has already demonstrated its intention to be an active enforcer, it is now more than ever critical for businesses to be compliance-focused, with complete buy-in from top management and adequate steps taken to minimise the risk of any breach.

Insolvency law reform: In June 2016, the Companies (Winding Up and Miscellaneous Provisions) (Amendment) Ordinance was gazetted. The Ordinance will come into effective on 13 February 2017 (except Division 7 of Part 8). The changes are intended to modernise the corporate insolvency regime in Hong Kong as well as improve creditor protection. Key amendments will include the introduction of a power to set aside transactions at an undervalue, introduction of new standalone unfair preferences provisions, clarification on the meaning of “associate” for the purposes of voidable transactions and new provisions on the powers and duties of liquidators and provisional liquidators. Read more…

New SFC “Manager in Charge” regime: On 16 December 2016, the SFC issued a Circular and two Annexes aimed at augmenting the accountability of senior management of licensed corporations and introducing a new “Managers in Charge” regime (the “MICR”). The Circular is accompanied by 41 FAQs.  While the SFC has been informally consulting on the MICR in recent weeks, the Circular and FAQs are the first public statements of its intentions. The MICR is intended to identify and notify to the SFC the most senior management of an intermediary’s business and will capture the board of directors, responsible officers and any individuals appointed as a manager in charge of a number of “Core Functions”, which include both front line and mid/back-office functions. Read more…

Changes to Fund Manager Code of Conduct: The SFC is currently consulting on changes to its Fund Manager Code of Conduct. The changes are focussed on enhancing the regulation of asset managers and aspects of point-of-sale transparency (including the rules on disclosure of monetary benefits). The industry has until 22 February 2017 to respond to the consultation and final rules are expected later in the year. Read more…

Client agreements to contain contractual suitability clause and must not derogate from Code obligations: Further to the SFC’s consultation and conclusions on the assessment of suitability, 8 June 2017 is the final date by which all intermediaries must have included a clause in their client agreements which states that the intermediary must ensure that a financial product is reasonably suitable for a client if it solicits the sale of or recommends the product to the client. In addition, client agreements must not, after this date, contain terms which are inconsistent with the intermediary’s obligations under the Code. Intermediaries have been working throughout 2016 on ensuring their agreements are ready for the June deadline.

Law Reform Commission releases Final Report recommending third party funding for arbitration be permitted under Hong Kong law: On 12 October 2016, the Law Reform Commission released its final report recommending that the law should be amended to clearly permit third party funding of arbitration and associated proceedings under the Arbitration Ordinance (Cap. 609), with appropriate financial and ethical safeguards in place. Among others, the report recommends that the Ordinance be amended to specify the non-applicability of the common law principles of maintenance and champerty to third party funding of arbitration and associated proceedings; and the development of clear standards and a Code of Practice for third party arbitration funders in Hong Kong. The proposed reforms, if implemented, would enhance Hong Kong’s competitiveness as an international arbitration centre.

Department of Justice releases consultation paper on the Hague Convention of the Recognition and Enforcement of Foreign Judgments: The Department of Justice released a consultation paper in early October 2016 on the 2016 Preliminary Draft Convention on the Recognition and Enforcement of Foreign Judgments, which is modelled on and complements the 2005 Hague Convention on Choice of Court Agreements. The Draft Convention sets out the criteria for the courts of one member state to recognise and enforce judgments in civil and commercial matters rendered by the courts of other member states. If widely accepted across different jurisdictions and if Hong Kong becomes a signatory, it would provide judgment creditors with a potentially more popular mechanism for enforcing their judgments outside of Hong Kong than the current limited scheme under the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap. 319).