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Regulatory framework

Regulatory authorities

What national authorities regulate the provision of financial products and services?

The Hong Kong system of financial regulation reflects a modified institutional approach, with different regulators largely responsible for the oversight of different types of financial institutions.

The two principal authorities responsible for the regulation of banking, securities and derivatives products and services are:

  • the Hong Kong Monetary Authority (HKMA), which regulates banks; and
  • the Securities and Futures Commission (SFC), which regulates securities, futures and other contract markets, as well as certain entities that participate in those markets.

There is, however, increasing overlap among and between regulators, particularly as banks expand the range of securities activities in which they are engaged.

See question 2 regarding the activities regulated by each authority.

What activities does each national financial services authority regulate?

The HKMA oversees all aspects of authorised banking institutions within its jurisdiction, including banks, restricted licence banks (eg, merchant banks) and other deposit-taking companies. It supervises these authorised institutions on a consolidated basis, with the aim of promoting the safety and stability of the banking system, including in respect of local and overseas branches and subsidiaries. The principal areas of HKMA supervision include capital adequacy and liquidity, exposure concentration, resolution and anti-money laundering and counter-terrorist financing (AML/CTF) obligations (eg, customer due diligence), with different requirements applicable to locally and foreign incorporated institutions.

The SFC is responsible for the licensing (or registration) and supervision of intermediaries and individuals, including broker-dealers, advisers and funds, engaged in a wide range of securities and futures activities, including:

  • dealing in securities;
  • dealing in futures contracts;
  • leveraged foreign exchange trading;
  • advising on securities;
  • advising on futures contracts;
  • advising on corporate finance;
  • providing automated trading services;
  • securities margin financing;
  • asset management; and
  • providing credit rating services.

The SFC is also responsible for overseeing market operators, including, among others, HKEx, which operates the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange, clearing houses and alternative trading platforms (eg, dark pools); overseeing takeovers and mergers of listed companies; and the regulation of investment products (including, from April 2019, investment products offered by intermediaries via online platforms).

Authorised institutions supervised by the HKMA must register with the SFC as to regulated securities activities undertaken in Hong Kong, but the HKMA is responsible for the day-to-day oversight of any such activities performed by these authorised institutions. The precise role and responsibilities of the HKMA in respect of the securities activities of authorised institutions are set out in a series of memoranda of understanding between the HKMA and the SFC. The Secretary for Financial Services also plays a coordinating role, and helps to set policy for the securities and futures markets generally.

What products does each national financial services authority regulate?

As described above, the HKMA exercises comprehensive supervisory oversight over all of the activities of authorised banking institutions, rather than regulating particular types of products.

The SFC regulates licensed (or registered) institutions on the basis of the activities in which they are engaged, for example, by imposing principles-based business conduct standards. These conduct standards are applicable to all licensed and registered institutions (and individual persons), and include expectations and requirements as to the suitability of products offered or sold to third-party customers.

Through its supervisory and rule-making authority over market operators, the SFC also regulates certain financial products, including securities and futures. It thus has indirect authority over the manner in which these products are transacted, for instance, on exchange or over the counter. In addition, the SFC directly authorises and regulates investment products, including, among others, closed-end funds, exchange traded funds, leveraged and inverse products, pooled retirement funds, unit trusts and mutual funds, structured investment products, real estate investment trusts, unlisted shares and debentures, and as of July 2018, open-ended fund companies. The SFC also now scrutinises and has imposed certain restrictions on intermediaries involved in the distribution of virtual asset funds (eg, digital currencies and crypto assets).

Authorisation regime

What is the registration or authorisation regime applicable to financial services firms and authorised individuals associated with those firms? When is registration or authorisation necessary, and how is it effected?

As to securities and futures activity, financial services firms must be licensed by the SFC before engaging in any of the regulated activities set out in question 2, subject to narrow statutory exemptions. Licensing is necessary when financial services firms carry out a regulated activity, as well as when they hold themselves out as doing so.

Licensing is also necessary if a financial services firm actively markets to the public in Hong Kong any service that would be a regulated activity if performed in Hong Kong. This is true whether the firm is marketing its services from Hong Kong or overseas, including when it does so through a third party. For instance, a US-based asset manager soliciting clients for its US-based services in Hong Kong would need to be licensed for asset management activity in Hong Kong, even if the solicitation was undertaken through its Hong Kong-licensed subsidiary.

Individuals must also be licensed before performing a regulated activity on behalf of their licensed corporation. In addition, any executive directors (ie, senior managers) in charge of a licensed corporation’s regulated activities must also be licensed as ‘responsible officers’.

Temporary licences are available to both firms and individuals if they will undertake regulated activity only on a short-term basis, and it is the SFC’s expectation that such licences will be obtained before any regulated activity is undertaken, even in the case of day-long business meetings in Hong Kong, for instance.

To receive a licence, a firm or individual must apply to the SFC. Different requirements apply to each type of regulated activity, but at a minimum, the application process ordinarily requires the submission of extensive materials, including detailed business plans, biographies of senior employees, directors and officers and other corporate and individual records. All licensed persons - firms or individuals - must also, at a minimum, demonstrate that they are ‘fit and proper’, in connection with which the SFC evaluates the applicant’s financials status, qualifications, competence, honesty, fairness, reputation and character. Licensed firms must also comply with additional requirements, including financial resources rules (eg, rules relating to minimum paid-up share capital and liquid capital) and insurance rules. The application process for temporary licences is less complex, especially for individuals.

Banking organisations are subject to similar authorisation requirements, albeit overseen by the HKMA rather than the SFC. Authorisation is required when banking activities are undertaken in Hong Kong, and also when they are marketed to customers in Hong Kong. As noted in question 2, Hong Kong has a three-tier banking system that includes banks, restricted licence banks and deposit-taking companies. Different regulations, including different authorisation requirements, apply to locally incorporated banking organisations than to the Hong Kong branches of overseas banks. Otherwise, the application requirements are similar to those applicable to financial services firms licensed by the SFC, and banking entities seeking to engage in securities and futures activities in Hong Kong must also be licensed by the SFC.

The HKMA is also expected to issue the first batch of licences to virtual banks (ie, banks that deliver retail banking services primarily, if not entirely, through the internet or other electronic channels rather than physical branches) in 2019. Virtual banks will be subject to the same set of supervisory principles and key requirements as conventional banks, although some of the requirements may be adapted to suit this new business model.

Legislation

What statute or other legal basis is the source of each regulatory authority’s jurisdiction?

The importance of financial services to Hong Kong as an international financial centre is recognised in its Basic Law, which also gives the government the authority to ‘formulate monetary and financial policies, safeguard the free operation of financial business and financial markets, and regulate and supervise them in accordance with the law’.

Otherwise, the jurisdiction of both the HKMA and the SFC is proscribed by statute: the Banking Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance in the case of the HKMA, and the Securities and Futures Ordinance in the case of the SFC.

These ordinances set out the supervisory, examination and enforcement powers of the HKMA and SFC, respectively, in addition to conferring upon each regulator the authority to promulgate more particularised subsidiary legislation (ie, rulemaking with the force of law) and non-binding guidance in respect of defined topics (eg, product suitability).

What principal laws and financial service authority rules apply to the activities of financial services firms and their associated persons?

The principal statutes applicable to institutions authorised by the HKMA are the Banking Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AML/CTF Ordinance).

The Banking Ordinance sets out the requirements for authorisation of financial services firms seeking to provide banking services, the HKMA’s powers of direction and examination, restrictions on the ownership and management of authorised institutions, and liquidity and capital requirements, among others. It also authorises the promulgation by the HKMA of subsidiary legislation addressing a range of topics, from capital and liquidity requirements to disclosure rules, in more particularity.

The AML/CTF Ordinance sets out the obligations of authorised institutions in respect of customer due diligence, ‘know your customer’ requirements and suspicious transaction reporting.

In addition to the Banking Ordinance, AML/CTF Ordinance and associated subsidiary legislation, institutions authorised by the HKMA must also comply with the minimum expectations and standards set out in the HKMA’s Supervisory Policy Manual. The Supervisory Policy Manual codifies the HKMA’s supervisory policies and practices, some of which reflect requirements under the Banking or AML/CTF Ordinances, and others of which are best practices. Among the regulatory topics it addresses are corporate governance; internal controls; capital adequacy; credit, interest rate, operational and liquidity risk management; securities activities; and money laundering.

The principal statute applicable to entities and persons licensed or regulated by the SFC is the Securities and Futures Ordinance (SFO). The SFO sets out the licensing requirements for entities conducting regulated activity in Hong Kong; record-keeping, reporting and disclosure requirements; and civil, criminal and disciplinary enforcement regimes in respect of market misconduct, in addition to conferring upon the SFC the authority to promulgate subsidiary legislation addressing a wide range of topics from the treatment of client monies and securities, professional investors, and short positions, to contract limits, price stabilisation and investor compensation.

In the case of both the HKMA and SFC, the regulatory requirements reflected in statutes, subsidiary legislation and other binding policy statements are supplemented by a variety of codes of conduct, guidelines and circulars with varying degrees of legal effectiveness.

Scope of regulation

What are the main areas of regulation for each type of regulated financial services provider and product?

Institutions authorised by the HKMA are supervised on a consolidated basis. The main areas of regulation and supervision are registration; safety and soundness; capital and liquidity; internal controls and governance; business conduct; risk management; and record-keeping, reporting and disclosure. Pursuant to a memorandum of understanding between the HKMA and SFC, the HKMA is also responsible for supervising the securities activities of HKMA-authorised institutions on a day-to-day basis, with the SFC principally responsible for enforcement action in respect of misconduct arising from such activities.

The SFC, unlike the HKMA, only regulates certain defined securities and futures activities (see question 2). In respect of these activities, it regulates, inter alia, licensing requirements; business conduct (ie, the standard of care afforded customers); market conduct; internal controls, governance and supervision; the treatment of client securities and monies; record-keeping, reporting and disclosure obligations; the timing and format of contract notes; and various activity restrictions.

Additional requirements

What additional requirements apply to financial services firms and authorised persons, such as those imposed by self-regulatory bodies, designated professional bodies or other financial services organisations?

The SFC is responsible for licensing market operators, most notably the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange and their associated clearing entities. These market operators act as self-regulatory bodies, but also as frontline regulators. Any person seeking to trade or clear through their facilities must comply with the policies, rules and procedures promulgated by each operator (and approved by the SFC). In the case of the Stock Exchange of Hong Kong, for instance, these rules govern admissible order types and sizes; trading hours; closing mechanisms; trade reporting; trading misconduct; maximum allowable position and lot sizes; the trading engine; and short selling restrictions, among other topics. Importantly, the Stock Exchange of Hong Kong is also the frontline regulator in respect of listing and listing applications.

In many cases, the rules promulgated by the market operators parallel those promulgated and enforced by the SFC. In practice, the SFC thus acts as the principal enforcement authority for the market operators.

Enforcement

Investigatory powers

What powers do national financial services authorities have to examine and investigate compliance? What enforcement powers do they have for compliance breaches? How is compliance examined and enforced in practice?

Both the HKMA and the SFC have the power to conduct on-site inspections and examinations of the financial services firms they regulate, and to compel the production of certain documents. Both regulators also conduct off-site surveillance - the HKMA of the financial condition of the institutions it authorises, and the SFC of market conditions and trading activity.

In connection with these powers of inspection and surveillance, both regulators are also given the authority to conduct investigations, which can lead to disciplinary, civil or criminal enforcement actions, as detailed in question 10.

Disciplinary powers

What are the powers of national financial services authorities to discipline or punish infractions? Which other bodies are responsible for criminal enforcement relating to compliance violations?

Both the HKMA and the SFC are authorised to take disciplinary or civil enforcement action (subject to the approval of the Department of Justice) in connection with regulatory breaches. A wide range of sanctions is available even in the disciplinary context, including licence revocation or suspension, fines and public reprimands, among others. In many cases, the HKMA and the SFC also require the entities or persons responsible for regulatory violations to strengthen and enhance internal controls and governance. In the civil context, the SFC can also petition the court for winding-up or bankruptcy orders, restoration orders, declarations that securities transactions are void, or for receivership. In addition, the courts and relevant tribunals can require disgorgement, impose financial penalties and enforce activity restrictions and prohibitions on future conduct.

The HKMA and SFC can also seek criminal prosecution in connection with certain regulatory breaches. The SFC can prosecute ‘summary offences’ on its own, but must refer any indictable offences to the Department of Justice. The HKMA must refer all potential offences to the Department of Justice for prosecution. The maximum penalties ordinarily available for financial services offences are fines of up to HK$10 million, and a term of imprisonment of up to 10 years.

Tribunals

What tribunals adjudicate criminal and civil financial services infractions?

Hong Kong has a number of specialised tribunals responsible for the adjudication of disciplinary and civil financial services infractions. In most cases, the regulatory authorities are also able to pursue civil enforcement actions in the Hong Kong courts.

SFC disciplinary decisions, for instance, are appealable to the Securities and Futures Appeals Tribunal, where a full de novo review of the disciplinary proceedings is conducted by a three-member panel consisting of a chairman and two lay members. Final orders entered by the Securities and Futures Appeals Tribunal can be registered in or appealed to the Hong Kong courts.

Similarly, civil breaches of market misconduct provisions are heard by the Market Misconduct Tribunal, as part of a public inquiry heard by a three-member panel (one judge and two lay members) in which the SFC acts as the presenting officer. The Tribunal can issue injunctions, order disgorgement, or impose a prohibition on dealing in securities, taking management roles in listed companies or engaging in future misconduct. Subsequent violations of its orders are punishable by imprisonment and fines.

Otherwise, civil actions are dealt with by the Hong Kong courts.

Penalties

What are typical sanctions imposed against firms and individuals for violations? Are settlements common?

In the disciplinary setting, the most common sanctions are fines (ordinarily three times the profit earned or loss avoided), public reprimands and partial licence suspensions. Penalties can range from incidental amounts to well over US$50 million, depending on the severity and scope of the relevant violations. The settlement of disciplinary actions is quite common, but the regulators nearly always require some form of public reprimand.

For civil enforcement actions, the full range of economic and equitable sanctions are common, especially disgorgement and prohibitions on future activity (eg, acting as the director of a listed company). Settlements of civil actions are also quite common, although statistics as to the rate of settlement are not publicly available.

Compliance programmes

Programme requirements

What requirements exist concerning the nature and content of compliance and supervisory programmes for each type of regulated entity?

For financial services firms engaged in securities and futures activity, the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) enshrines compliance as one of its nine general principles, and sets out numerous principle-based requirements in respect of internal controls, IT infrastructure and trading systems, the disclosure of firm financials, the handling of client assets and compliance obligations. Other relevant subsidiary rules and regulations include the Securities and Futures (Accounts and Audit) Rules, the Guidelines on Anti-Money Laundering and Counter-Terrorist Financing, and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission.

The HKMA’s Supervisory Policy Manual also sets out detailed guidance as to the compliance programmes expected of authorised banking institutions, the principal focus of which is risk management. The Supervisory Policy Manual also includes a Code of Conduct, which sets out the standards of business conduct and competence expected of authorised institutions and their employees.

Gatekeepers

How important are gatekeepers in the regulatory structure?

Gatekeepers perform crucial functions within Hong Kong financial services firms. For firms engaged in regulated securities and futures activities, the roles of gatekeepers are governed by the SFO, its subsidiary rules and regulations, and codes and guidelines issued by the SFC. Under the SFO, firms engaged in regulated securities and futures activities in Hong Kong must have at least one ‘responsible officer’ for each regulated activity they are licensed to conduct. As recent cases have shown, responsible officers of licensed corporations are expected to actively supervise the functions they oversee, bear primary responsibility for compliance and may be subject to disciplinary penalties for compliance failures. This expectation is also codified in the Code of Conduct applicable to all licensed entities.

Beginning on 16 October 2017, licensed corporations are also subject to the new ‘managers-in-charge’ regime, which aims to more clearly define who should be regarded as senior management of licensed corporations, and enhance individual accountability. The SFC has identified eight core functions of licensed corporations and requires licensed corporations to designate a manager-in-charge for each. Among the core functions are compliance; AML/CTF; finance and accounting; risk management; and operational control and review. The managers-in-charge overseeing these gatekeeping functions are subject to SFC’s disciplinary powers, even if they are not themselves licensed persons, which means that traditional compliance, back-office and middle-office functions are, for the first time, brought within the scope of the SFC’s authority.

These requirements also apply to banking organisations authorised by the HKMA, but registered with the SFC to conduct securities and futures activities. Otherwise, the HKMA takes a more traditional approach to the role of gatekeepers and corporate governance, largely relying on directors and senior officers to manage risk and ensure compliance. The HKMA’s Supervisory Policy Manual does, however, set out detailed and extensive guidance as to the role of the internal audit function, including the expectation that authorised institutions will, in most cases, have an audit committee and that the internal audit function will be appropriate by reference to the size, scope and complexity of an authorised institution’s business and operations. With respect to risk management and compliance, it is expected that there will be separate, designated risk and compliance officers, with the board of directors principally responsible for ensuring that these functions are adequately resourced.

Directors' duties and liability

What are the duties of directors, and what standard of care applies to the boards of directors of financial services firms?

Common law directors’ duties apply to the boards of directors of financial services firms in Hong Kong. These include the duties to:

  • act in good faith for the benefit of the company as a whole;
  • exercise power solely for proper purposes;
  • exercise independent judgement and refrain from delegation without proper authorisation;
  • exercise care, skill and diligence;
  • avoid conflicts of interest or abuses of position;
  • avoid unauthorised use of firm property or information; and
  • maintain proper accounting records.

The standard of care applicable to directors, meanwhile, is set out in statute, in the Companies Ordinance, which expressly displaces the common law standard of care. In determining whether a director has breached his or her duties, courts in Hong Kong will apply a mixed subjective and objective test, comparing the conduct of the director to that of a ‘reasonably diligent person’ having the general knowledge, skill and experience reasonably expected of a person in the director’s position (the objective component) and the knowledge, skill and experience that the director actually has (the subjective component).

Generally, directors of financial services firms should also bear in mind the need for management to instil a strong compliance ‘tone from the top’. This is especially important in light of heightened regulatory focus on individual and senior management accountability. In May 2017, the SFC published a reminder of steps that directors may take to minimise the risk of corporate misconduct and promote a culture of good corporate governance. Leading by example, directors are expected to regularly discuss governance-related matters, including by actively consulting senior management regarding observed issues within the firm, and to ensure effective channels for the escalation of concerns and suggestions of improvements. Directors’ genuine interest in the firm’s affairs, demonstrated by attendance at board meetings and obtaining updates on management accounts and corporate performance, is encouraged to promote timely identification of issues. In matters where personal conflicts of interest arise, directors should abstain from involvement. On a firm-wide level, directors should ensure the implementation of effective internal controls and whistle-blowing procedures. Systems of checks and balances should be in place to prevent policies from being overridden without due cause or accountability.

When are directors typically held individually accountable for the activities of financial services firms?

Directors may be held individually accountable for the activities of financial services firms as a result of regulatory breaches. For instance, the SFO empowers the SFC to seek injunctive relief and other orders on behalf of investors against persons who contravene (or aid, abet, induce or are involved in the contravention of) any provision of the SFO. The SFO also authorises civil actions against directors who fail to take reasonable measures to establish safeguards against market misconduct. Directors of licensed corporations who are also responsible officers or managers-in-charge are also subject to the SFC’s disciplinary powers if found liable for the misconduct of financial services firms.

Recent enforcement cases reflect Hong Kong’s regulatory focus on director and senior management accountability for the activities of financial services firms, with the SFC bringing civil proceedings against individual directors for, among other things, failing to act in a company’s best interest in connection with the late disclosure of inside information. These cases serve as reminders of directors’ personal accountability to their corporations, and of directors’ responsibilities to stay informed and alert to governance or compliance issues within their firms (see question 15).

Private rights of action

Do private rights of action apply to violations of national financial services authority rules and regulations?

Private rights of actions for regulatory violations are available in only very limited circumstances, for individuals who suffer pecuniary loss as a result of another person committing the market misconduct offences set out in the SFO. These offences include:

  • insider dealing;
  • false trading;
  • price rigging;
  • disclosure of information about prohibited transactions;
  • disclosure of false or misleading information inducing transactions; and
  • stock market manipulation.

They also include the offences of:

  • use of fraudulent or deceptive devices in securities, futures contracts or leveraged foreign exchange trading;
  • disclosure of false or misleading information inducing transactions in leveraged foreign exchange trading; and
  • falsely representing dealings in futures contracts on behalf of others.

Persons found liable in connection with private rights of action brought pursuant to these provisions are required to pay damages if it is ‘fair, just and reasonable’ in the circumstances. Courts may also impose injunctive relief in addition to or in lieu of orders for damages. Potential defendants under these provisions are not limited to persons directly perpetrating a market misconduct offence. Investors may seek to recover from persons who knowingly assist or connive with others in the perpetration of market misconduct. Officers of corporations also may be named as defendants if market misconduct was perpetrated by the corporation with the officer’s consent or connivance. ‘Officers’ is widely defined in the SFO: directors, managers or secretaries, or any other person involved in the management of a corporation, are all deemed ‘officers of a corporation’.

Standard of care for customers

What is the standard of care that applies to each type of financial services firm and authorised person when dealing with retail customers?

In Hong Kong, the relationship between retail customers and financial institutions is principally a matter of contract, as applied in the context of the common law duties of banks. In addition, financial services firms licensed or regulated by the SFC must, as a condition of their licences, meet minimum, principles-based regulatory standards governing the treatment of customers, while banking organisations authorised by the HKMA are expected to comply with the recommended practices prescribed in the Code of Banking Practice, which was promulgated by industry associations, but endorsed by the HKMA.

The principles-based standards governing the relationship between entities licensed for securities and futures activities and their customers are principally set out in the Code of Conduct. The Code of Conduct requires licensed entities to act honestly, fairly and diligently, and in the best interests of their clients; to obtain adequate information about the financial situation, investment experience and objectives of clients; to make adequate disclosures of relevant information to clients; and to properly account for and safeguard client assets. The Code of Conduct also elaborates more particularised minimum requirements in respect of, among other things, the content of client agreements and the principles of prompt and best execution.

The Code of Banking Practice, although not binding or a condition of authorisation, sets out similar, albeit more particularised expectations for the treatment of banking customers, by reference to particular banking activities, including accounts, card services, payment services and electronic banking services, among others. These particularised expectations reflect a set of general principles announced in the Code, among which are the equitable and fair treatment of customers, with special attention given to the needs of vulnerable groups.

Does the standard of care differ based on the sophistication of the customer or counterparty?

In respect of securities and futures activity, including when such activity is performed by banks, the standard of care does vary based on the sophistication of the customer (ie, their net worth and investment experience).

Under the SFO and related guidance promulgated by the SFC, certain customers may be classified as ‘professional investors’, in which case certain regulatory requirements are relaxed, including those pertaining to the information about a customer’s financial condition, experience and objectives that licensed entities are expected to obtain; the minimum contents of client agreements; the suitability of investment products; and the type of transaction-related information that must be disclosed to clients.

The HKMA also recognises certain categories of customers (eg, private banking customers), for which suitability and other requirements are relaxed. In respect of banking activity, however, the standard of care does not vary based on customer sophistication, aside from the expectation, elaborated in the Code of Banking Practice, that banks will devote special attention to vulnerable populations (eg, the elderly).

Rule making

How are rules that affect the financial services industry adopted? Is there a consultation process?

With certain exceptions, all subsidiary legislation in Hong Kong ordinarily must go through a process of consultation prior to adoption. This is true for subsidiary legislation adopted both by the SFC and the HKMA (and often, the regulatory bodies are also required to consult each other). Subsidiary legislation refers to those rules and guidelines promulgated pursuant to express authority in the relevant governing statutes.

The consultation process for subsidiary legislation involves the circulation of proposed rules for public consideration, the opportunity for public comment, the circulation of consultation conclusions setting out any public comments received, regulator responses to these comments (as well as any new amendments that substantively differ from the original draft) and publication of the final rules for adoption.

Both the HKMA and SFC also regularly publish circulars and other guidance, in which they set out their interpretations of requirements set out in statute or subsidiary legislation. No consultation ordinarily is undertaken in connection with such interpretive guidance, as it is only persuasive, not binding.

Cross-border issues

Cross-border regulation

How do national financial services authorities approach cross-border issues?

Hong Kong largely takes a territorial approach to the regulation of its securities and futures markets. As explained in question 4, financial services firms must be licensed by the SFC to conduct regulated securities and futures activities whenever they conduct those activities in Hong Kong, as well as when they actively market to the public in Hong Kong any service that, if performed in Hong Kong, would be a regulated activity. This is true whether the firm is marketing its services from Hong Kong or abroad, including when it does so through a third party (eg, a subsidiary or affiliate). Even when such activity, or the marketing of regulated activity, is conducted in Hong Kong only on a temporary or short-term basis (eg, a one-off meeting with a brokerage client), a licence is required.

Banking organisations authorised in Hong Kong are also subject to regulation in respect of their overseas activity, including the HKMA’s powers of inspection. They cannot open overseas branches (or acquire overseas banks) without the approval of the HKMA, and must regularly disclose to the HKMA the assets and liabilities of their overseas entities.

The SFC and HKMA also both cooperate extensively with international regulators, especially mainland regulators. The SFC has memoranda of understanding with Switzerland, the United States and Japan to facilitate varying degrees of mutual assistance on a cross-border basis and frequently makes or receives requests for assistance from regulators globally. The HKMA has similar cooperative arrangements with foreign jurisdictions, including with Australia, Canada, mainland China, France, Germany, India, Japan, the United Kingdom and the United States.

International standards

What role does international standard-setting play in the rules and standards implemented in your jurisdiction?

International standard-setting plays an important role in the rules and standards implemented by both the SFC and the HKMA. Both are active participants in the Financial Stability Board, for instance, on the basis of of Hong Kong’s status as a systemically importance financial centre.

The SFC is also actively involved in the work of the International Organization of Securities Commissions (IOSCO), and its guidelines often reflect IOSCO standards. The chief executive of the SFC currently is the chair of IOSCO, and the SFC is represented in all IOSCO bodies, including policy committees and task forces.

The HKMA largely follows the approach to capital adequacy, leverage ratios, countercyclical capital buffers and liquidity prescribed by the Basel Committee on Banking Supervision, including Basel III, albeit with varying regimes for locally incorporated and overseas incorporated entities. The HKMA also has the authority to designate authorised banking institutions as ‘domestic systemically important’ institutions, and has adopted the Basel Committee’s framework for evaluating these institutions. However, it has not yet implemented local rules in respect of the Basel Committee’s exposure limits. The HKMA typically adopts regulations or guidance implementing the standards promulgated by the Basel Committee through the process of consultation described in question 20.

One potential exception to this territorial approach is the catchall fraud provision of the SFO, which is modelled on Rule 10b-5 in the United States, and which the SFC recently used to target insider dealing in Taiwan in securities listed on the Taiwan Stock Exchange. Importantly, significant elements of the fraudulent scheme were devised in Hong Kong, but this enforcement action nevertheless shows that the SFC will use its ostensibly territorial jurisdiction to reach conduct that principally occurs offshore, especially where it has effects on Hong Kong’s markets and market participants.

Hong Kong also takes a largely territorial approach to banking regulations, although the HKMA frequently communicates with overseas counterparts and can disclose information about the operations of institutions authorised in Hong Kong to overseas regulators, as long as there are adequate privacy measures in place. The HKMA also looks to the home regulators of banking organisations incorporated overseas in determining whether to authorise them to conduct banking activity in Hong Kong. Such organisations can only be authorised in Hong Kong if the HKMA is satisfied that they are adequately supervised by their home banking regulator. Without authorisation, overseas banks cannot engage in any banking business, although they can open local representative offices to liaise with local customers.