Private banking and wealth management

Regulation

What are the main sources of law and regulation relevant for private banking?

Within the realm of private banking and wealth management businesses, there are two main sources of law and regulation. The conduct of banking and deposit-taking business in Hong Kong is under supervision and regulation by the Hong Kong Monetary Authority (HKMA), and subject to the Banking Ordinance (BO). On the other hand, the conduct of securities and futures business in Hong Kong is primarily regulated under the Securities and Futures Ordinance (SFO), subject to supervision and regulation by the Securities and Futures Commission (SFC).

A bank, restricted licence bank or a deposit-taking company engaged in banking and deposit-taking business would need to be an authorised institution under the BO (‘authorised financial institution’). Where an authorised financial institution carries on a business of regulated activity in securities and futures or actively markets to the public, whether by itself or another person on its behalf and whether in Hong Kong or from a place outside Hong Kong, any services it provides, which would constitute a regulated activity in securities and futures if provided in Hong Kong, such authorised financial institution will need to be a registered institution with the SFC to conduct the relevant regulated activity (other than Type 3 and Type 8 as referred to below, and unless any relevant exemption applies).

Currently, there are 10 types of regulated activities:

  • dealing in securities (Type 1);
  • dealing in futures contracts (Type 2);
  • leveraged foreign exchange trading (Type 3);
  • advising on securities (Type 4);
  • advising on futures contracts (Type 5);
  • advising on corporate finance (Type 6);
  • providing automated trading services (Type 7);
  • providing securities margin financing (Type 8);
  • asset management (Type 9); and
  • providing credit rating services (Type 10).

Persons engaged in the business of conducting regulated activities would need to be licensed by or registered with (in the case of authorised financial institutions) the SFC, unless any relevant exemption applies.

Besides the BO and SFO respectively, the HKMA and the SFC issue various circulars, handbooks, codes, guidelines or frequently asked questions (FAQs) containing additional requirements and expected standards of conduct that licensed corporations and registered intermediaries or market participants are subject to, including in particular, the SFC Code of Conduct for Persons Licensed by or Register with the Securities and Futures Commission (SFC Code of Conduct), which are relevant to the conduct of wealth management services relating to securities and futures businesses.

Regulatory bodies

What are the main government, regulatory or self-regulatory bodies relevant for private banking and wealth management?

The HKMA is the main prudential and supervisory regulator for banks, while the SFO empowers the SFC as the primary regulator for the securities and futures market and the conduct of securities and futures businesses in Hong Kong, which would encompass private banking and wealth management financial services.

Authorised financial institutions should also observe the Code of Banking Practice issued by The Hong Kong Association of Banks and the DTC Association, as endorsed by the HKMA, in providing banking services such as:

  • current accounts;
  • saving and other deposit accounts;
  • loans and overdrafts;
  • card services;
  • electronic banking services; and
  • stored value card services.
Private wealth services

How are private wealth services commonly provided in your jurisdiction?

Private wealth services are commonly provided in Hong Kong by private banks, investment managers or advisers, securities brokers, multi-family offices or trust companies providing private trust services.

Definition of private banking

What is the definition of private banking or similar business in your jurisdiction?

In section 1, schedule 14 of the BO, private banking in relation to an authorised institution is defined as:

the provision by the institution of banking or other financial services to individuals who are considered by the institution to be of high net worth, but does not include such services so provided as part of the institution’s retail banking

The term is generally understood to refer to the provision of banking and wealth management services to high-net-worth clients, covering general banking, asset management or other investment products or services, and also private wealth or trust services. The HKMA and SFC consider the conduct of private banking as a specific type of business that is under certain additional regulatory considerations or requirements.

Licensing requirements

What are the main licensing requirements for a private bank?

A private bank must be authorised by the HKMA in conducting banking business, and it may be one of the following forms of authorised financial institutions under Hong Kong’s three-tier system:

  • licensed banks, which may operate current and savings accounts and accept deposits of any size and maturity from the public and pay or collect cheques drawn by, or paid in by, customers;
  • restricted licence banks, which may take deposits of any maturity of HK$500,000 and above and principally engaged in merchant banking and capital market activities; and
  • deposit-taking companies, which may take deposits of HK$100,000 or above with an original term of maturity of at least three months and which may engage in specialised activities such as consumer finance and securities business.

The HKMA has a general discretion whether to approve or refuse an application for authorisation, and certain requirements and minimum criteria set forth in the BO and as clarified by HKMA must be met, failing which the HKMA will refuse to grant authorisation. The requirements for authorisation and to maintain authorisation include:

  • applicable minimum capital for the relevant forms of authorised financial institutions;
  • adequate financial resources and capital adequacy;
  • fitness and propriety of the directors, controllers, chief executives and executive officers of the applicant;
  • adequacy of home supervision where the applicant is a bank incorporated outside Hong Kong;
  • adequate accounting system and systems of control; and
  • adequate disclosure of information.

A private bank must also be a registered institution with the SFC in order to conduct business in securities and futures regulated activities of offering asset management, wealth management or other investment products or services, which may fall under one or more types of regulated activities as mentioned in question 1.

To apply to the SFC and qualify for registration, a private bank must appoint not less than two executive officers responsible for directly supervising the conduct of each regulated activity, with at least one executive officer available at all times to supervise the business. The executive officers are expected to meet certain competence requirements and should obtain the consent of the HKMA to act in such capacity under the BO. The SFC further requires the substantial shareholders, directors, chief executive, managers, executive officers and any other person who will be acting for or on behalf of the private bank in relation to the regulated activity to be fit and proper.

Licensing conditions

What are the main ongoing conditions of a licence for a private bank?

As noted in question 5, the requirements for authorisation and to maintain authorisation as a private bank include:

  • applicable minimum capital for the relevant forms of authorised financial institutions;
  • adequate financial resources and capital adequacy;
  • fitness and propriety of the directors, controllers, chief executives and executive officers of the applicant;
  • adequacy of home supervision where the applicant is a bank incorporated outside Hong Kong;
  • an adequate accounting system and systems of control; and
  • adequate disclosure of information.
Organisational forms

What are the most common forms of organisation of a private bank?

The licensed banks or restricted licence banks that operate private banking business may be locally incorporated (such as a subsidiary of a foreign bank) or be a branch of a bank incorporated outside Hong Kong which the HKMA is satisfied is adequately supervised by the relevant banking supervisory authority.

Licences

Obtaining a licence

How long does it take to obtain a licence for a private bank?

A private bank would first need to obtain authorisation from the HKMA. The process of preparing an application involves preparing a business plan and providing relevant information on the applicant and its controllers, chief executive, directors or executive officers as required. If the applicant is a bank incorporated outside Hong Kong seeking to establish a subsidiary or branch in Hong Kong, the application process involves the HKMA consulting with the relevant overseas banking supervisory authority to confirm its approval for the proposed Hong Kong setup. The time to obtain authorisation from the HKMA will depend on the circumstances of each application, including the completeness of information and quality of documents submitted, and, in the case of overseas applicants, the time taken by the relevant banking supervisory authority to respond to the enquiries of the HKMA in respect of the overseas bank.

Licence withdrawal

What are the processes and conditions for closure or withdrawal of licences?

The HKMA may revoke its authorisation of an authorised institution on any one or more grounds specified in Schedule 8 of the BO, such as:

  • where the criteria for authorisation is no longer satisfied;
  • on an insolvency or winding up or inability of the institution to meet its obligations;
  • failure to provide the HKMA with information of a material nature or provision of materially false;
  • misleading or inaccurate information to the HKMA;
  • contravention of a condition of authorisation;
  • the cessation of banking business or business of taking deposits; or
  • engaging in prohibited business practices.

Other grounds relating to having a controller objected by HKMA or the appointment of executive officers or directors without the consent of the HKMA or in breach of any condition imposed by HKMA may also result in revocation of authorisation. An institution may make a request in writing to the HKMA to voluntarily revoke its authorisation, which the HKMA may approve if satisfied that the interests of depositors are or will be adequately safeguarded.

If the HKMA shall revoke the authorisation of an authorised institution, the HKMA should first consult with the Financial Secretary and serve a notice in writing to the authorised institution on its intention to revoke the authorisation, and inform the institution of the grounds for the proposed revocation and provide the institution with an opportunity of being heard and to appear against such a proposed revocation if desired. The HKMA may specify by notice in writing to the authorised institution the effective date of revocation when the appeal procedures are exhausted or if the institution has waived its right of appeal.

If an authorised institution shall cease to carry on any regulated activity, the institution should notify the SFC for cancellation of its registration, as soon as reasonably practicable and not later than seven business days before such intended cessation.

Wealth management licensing

Is wealth management subject to supervision or licensing?

Wealth management services that involve the conduct of regulated activities (such as those referred to in question 1) may be subject to licensing requirements by the SFC that would require the relevant corporation or institution to be licensed by or registered with the SFC and subject to regulatory supervision by the SFC.

Common forms of wealth management services that constitute regulated activities include:

  • securities dealing services (Type 1 regulated activity) and incidental discretionary account management services;
  • dealing in futures contracts (Type 2);
  • advising on securities (Type 4); or
  • asset management (Type 9) (including discretionary management of a portfolio of securities or futures contracts).

It should be noted that ‘securities’ is broadly defined under the SFO to cover various forms of equity and debt instruments, collective investment schemes and other investment instruments or products.

Requirements

What are the main licensing requirements for wealth management?

See question 10.

What are the main ongoing conditions of a wealth management licence?

The most important ongoing condition of holding a relevant wealth management licence (namely registration with the SFC to engage in relevant regulated activities) is to remain fit and proper, including compliance with all applicable provisions of the SFO and other regulatory requirements, codes and guidelines (and in the case of private banking, as supplanted by such requirements of the HKMA).

Anti-money laundering and financial crime prevention

Requirements

What are the main anti-money laundering and financial crime prevention requirements for private banking and wealth management in your jurisdiction?

The following key legislation in Hong Kong deals with anti-money laundering and financial crime prevention:

  • Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap.615) (AMLO);
  • Drug Trafficking (Recovery of Proceeds) Ordinance (Cap.405);
  • Organised and Serious Crimes Ordinance (Cap.455); and
  • United Nations (Anti-Terrorism Measures) Ordinance (Cap.575).

Pursuant to AMLO, a ‘financial institution’ includes:

  • an authorised institution (as defined in the BO);
  • a licensed corporation (which is granted a licence by the SFC); and
  • an authorised insurer.

A private bank that is an authorised institution shall comply with the legal and supervisory requirements set forth in AMLO and the ‘Guideline on Anti-Money Laundering and Counter-Terrorist Financing’ (HKMA Guideline) issued by the HKMA.

The HKMA has also issued additional guidelines, FAQs and guidance papers to which authorised institutions should give full consideration:

  • ‘Guideline on Exercising Power to Impose Pecuniary Penalty’;
  • FAQs on Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance;
  • Guidance Paper on Transaction Screening, Transaction Monitoring and Suspicious Transaction Reporting;
  • Guidance Paper on Anti-Money Laundering Controls over Tax Evasion; and
  • FAQs on Customer Due Diligence.

An SFC licensed corporation shall comply with the legal and supervisory requirements set out in AMLO and the requirements of the ‘Guideline on Anti-Money Laundering and Counter-Terrorist Financing’ issued by the SFC (SFC Guideline).

The SFC has also issued the following guidelines and FAQs, to which licensed corporations should give full consideration:

  • ‘Prevention of Money Laundering and Terrorist Financing Guideline issued by the Securities and Futures Commission for Associated Entities’;
  • ‘SFC Disciplinary Fining Guidelines’ issued under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance; and
  • FAQs on Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance.
Politically exposed persons

What is the definition of a politically exposed person (PEP) in local law? Are there increased due diligence requirements for establishing a private banking relationship for a PEP?

Under AMLO, a PEP is defined as:

  1. an individual who is or has been entrusted with a prominent public function in a place outside the People’s Republic of China and:
  2. includes a head of state, head of government, senior politician, senior government, judicial or military official, senior executive or a state-owned corporation and an important political party official; but
  3. does not include a middle-ranking or more junior official of any of the categories mentioned in subparagraph (i);
  4. a spouse, a partner, a child or a parent of an individual falling within paragraph (a), or a spouse or a partner of a child of such an individual; or
  5. a close associate of an individual falling within paragraph (a).
Notes
  • For the purpose of paragraph (b) of the definition of a PEP, AMLO also defines a ‘partner of an individual’ as: ‘if the person is considered by the law of the place where the person and the individual live together as equivalent to spouse of the individual’.
  • For the purpose of paragraph (c) of the definition of PEP, AMLO defines a ‘close associate of an individual’ as:
    • ‘an individual who has close business relations with the first-mentioned individual, including an individual who is a beneficial owner of a legal person or trust of which the first-mentioned individual is also a beneficial owner’; or
    • ‘an individual who is the beneficial owner of a legal person or trust that is set up for the benefit of the first-mentioned individual’.

There are increased due diligence requirements for establishing a private banking relationship with a PEP. An authorised institution should apply enhanced customer due diligence (EDD) procedures, including:

  • obtaining approval from its senior management;
  • taking reasonable measures to establish the customer’s or the beneficial owner’s source of wealth and the source of the funds; and
  • applying enhanced monitoring to the relationship in accordance with the assessed risks.
Documentation requirements

What is the minimum identification documentation required for account opening? Describe the customary level of due diligence and information required to establish a private banking relationship in your jurisdiction.

The following identification documents should be obtained as a standard requirement:

Natural persons
  • for Hong Kong permanent residents: an individual’s name, date of birth and identity card number should be verified by reference to their Hong Kong identity card;
  • for non-permanent residents: an individual’s name, date of birth, nationality and travel document number and type should be verified by reference to a valid travel document (eg, an unexpired international passport); and
  • proof of residential address.
Corporations
  • a copy of the certificate of incorporation and business registration (where applicable);
  • a copy of the company’s memorandum and articles of association that evidence the powers that regulate and bind the company;
  • details of the ownership and structure control of the company (eg, an ownership chart);
  • the names of all directors, verifying the identify of directors on a risk-based approach;
  • confirmation that the company is still registered and has not been dissolved, wound up, suspended or struck off;
  • independent identification and verification of the names of the directors and shareholders recorded in the company registry in the place of incorporation; and
  • verification of the company’s registered office address in the place of incorporation.

The HKMA expects that prior to establishing a private banking relationship, authorised institutions should carry out a more detailed customer due diligence than expected for normal retail banking. For each private banking customer, an authorised institution should obtain the following information:

  • purpose and reasons for opening the account;
  • business or employment background;
  • estimated net worth;
  • source of wealth (where possible and appropriate, corroboration of major economic activities that gave rise to the wealth);
  • family background, such as information on spouse, and where appropriate (eg, in the case of inherited wealth), parents;
  • source of funds (ie, description of the origin and the means of transfer for monies that are acceptable for the account opening);
  • anticipated account activity including nature and level of business and transactions; and
  • references (eg, introduced by whom and when and the length of relationship) or other sources to corroborate reputation information where available.

Pursuant to the newly revised paragraph 5.1 of the SFC Code of Conduct, licensed or registered persons are required to take all reasonable steps to establish the true and full identity of each of their clients. When account opening procedures are not conducted face to face, the licensed or registered person needs to adopt an approach that satisfactorily ensures the identity of the client. In June 2019, the SFC published on its website acceptable account opening approaches for non-face-to-face account opening. It includes:

  • certification by qualified persons;
  • certification by certification services recognised by the Electronic Transactions Ordinance (Cap 633) (ETO) or recognised certification authorities outside Hong Kong;
  • mail approach where non-corporate entities post to intermediaries physical copies of relevant documents and subsequent verification through Hong-Kong licensed bank accounts;
  • online onboarding of clients using a designated bank account in Hong Kong; and
  • specific procedures applicable to remote onboarding of overseas individual clients (see question 47).
Tax offence

Are tax offences predicate offences for money laundering? What is the definition and scope of the main predicate offences?

Under AMLO, ‘money laundering’ is defined as:

an act intended to have the effect of making any property:

(a) that is the proceeds obtained from the commission of an indictable offence under the laws of Hong Kong, or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong; or

(b) that in whole or in part, directly or indirectly, represents such proceeds,

not to appear to be or so represent such proceeds.’

‘Tax evasion’ under the Inland Revenue Ordinance is an indictable tax offence fulfilling the above ‘money laundering’ definition, which constitutes a predicate offence for money laundering in Hong Kong:

(1) Any person who wilfully with intent to evade or to assist any other person to evade tax-

  • omits from a return made under this Ordinance any sum which should be included; or
  • makes any false statement or entry in any return made under this Ordinance; or
  • makes any false statement in connection with a claim for any deduction or allowance under this Ordinance; or
  • signs any statement or return furnished under this Ordinance without reasonable grounds for believing the same to be true; or
  • gives any false answer whether verbally or in writing to any question or request for information asked or made in accordance with the provisions of this Ordinance; or
  • prepares or maintains or authorizes the preparation or maintenance of any false books of account or other records or falsifies or authorizes the falsification of any books of account or records; or
  • makes use of any fraud, art, or contrivance, whatsoever or authorizes the use of any such fraud, art, or contrivance,

commits an offence.

Compliance verification

What is the minimum compliance verification required from financial intermediaries in connection to tax compliance of their clients?

An authorised institution as financial intermediary is required to identify, assess and understand its money laundering risks. The risk assessment should take into account relevant risk factors, including the risk in relation to tax evasion during the account opening stage.

Liability

What is the liability for failing to comply with money laundering or financial crime rules?

If a financial institution (as defined in AMLO to include a licensed bank and a SFC licensed corporation) knowingly contravenes any specified provision in relation to client due diligence and record-keeping under Schedule 2 of AMLO, the financial institution commits a criminal offence. If a person who is an employee of a financial institution or is employed to work for a financial institution, or is concerned in the management of a financial institution knowingly causes or knowingly permits the financial institution to contravene any specified provision in relation to client due diligence and record-keeping under AMLO, that person commits a criminal offence and is liable on conviction to a fine and imprisonment:

  • on conviction on indictment to a fine of HK$1 million and to imprisonment for two years; or
  • on summary conviction to a fine of HK$100,000 and to imprisonment for six months.

Client categorisation and protection

Types of client

Does your jurisdiction’s legal and regulatory framework distinguish between types of client for private banking purposes?

Broadly, the legal and regulatory framework on offers of investment products and services in securities or futures differentiates between non-professional investors (retail investors) and professional investors (professional investors) as defined under the SFO. Pursuant to the SFO and the SFC Code of Conduct, there are three main categories of professional investors:

  • institutional professional investors (eg, financial institutions and specific bodies as prescribed in the legislation);
  • individual professional investors; and
  • corporate professional investors.

Individual professional investors and corporate professional investors should meet the relevant minimum net worth or net assets requirements (being individuals with a portfolio of at least HK$8 million, or are a corporation or partnership with a portfolio of at least HK$8 million or net assets of HK$40 million).

For corporate professional investors, a licensed or registered person may further conduct relevant assessment as required under the relevant provisions of the SFC Code of Conduct, to determine whether or not the corporate professional investor has the appropriate corporate structure and investment process and controls (for making investment decisions), whether the person responsible for making investment decisions has sufficient investment background (including the investment experience of such person), and whether or not the corporate professional investor is aware of the risks involved (considered in terms of the person making investment decisions for the corporate professional investor).

Certain requirements of the SFC Code of Conduct are exempted when dealing with institutional professional investors, and also in respect of corporate professional investors or individual professional investors provided a written and signed declaration of consent has been obtained from the client, and it has been fully explained to the client the consequences (the relevant regulatory exemptions) that flow from the client being treated as a professional investor and that the client has the right to withdraw from being treated as such at any time (also, where the client is treated as a professional investor in a particular product or market).

Client categorisation

What are the consequences of client categorisation?

Offers of investments that are not made to the public and not authorised for retail distribution may be made on a private placement basis, and in particular, private placement offers and marketing activities in that connection can be directed at an unlimited number of professional investors.

Licensed corporations or registered institutions are required to comply with applicable requirements under the SFC Code of Conduct in the conduct of regulated activities, including a certain expected standard of conduct with a view to investor protection, such as fulfilling a suitability obligation in the recommendation or solicitation of financial products, and certain disclosure requirements and requirements on client agreements.

Offers or provision of services to institutional professional investors and to corporate professional investors that meet relevant assessment criteria are exempted from such investor protection measures under the SFC Code of Conduct. However, the exemptions do not apply to individual professional investors or corporate professional investors that do not meet the relevant assessment criteria (see question 19), such that generally licensed or registered persons are subject to the expected investor protection requirements (in particular, suitability obligation and disclosure requirements) when dealing with clients who are high-net-worth individuals (likewise retail clients).

Consumer protection

Is there consumer protection or similar legislation in your jurisdiction relevant to private banking and wealth management?

The Hong Kong Consumer Council is constituted and empowered, pursuant to the Consumer Council Ordinance, to protect and promote the interests of consumers of goods and services (and also purchasers, mortgagors and lessees of immovable property). This is applicable to private banking and wealth management services, and consumers may lodge complaints to the Consumer Council on unfair treatment or practices in services received or dissatisfaction over services. The Consumer Council regularly provides feedback and views to promote the protection of consumers in banking or investment services.

Exchange controls and withdrawals

Exchange controls and restrictions

Describe any exchange controls or restrictions on the movement of funds.

Hong Kong does not impose exchange controls or restrictions on the movement of funds. Under article 112 of The Basic Law, it is stipulated that no foreign exchange control policies shall be applied in the Hong Kong Special Administrative Region, and the Government of Hong Kong shall safeguard the free flow of capital within, into and out of Hong Kong.

Withdrawal restrictions

Are there restrictions on cash withdrawals imposed by law or regulation? Do banks customarily impose restrictions on account withdrawals?

There are no restrictions on cash withdrawals imposed by law or regulation, and it is not usual for banks to impose restrictions on account withdrawals, unless a restriction on withdrawal is imposed on any account in question owing to legal or regulatory action over the account (such as sanctions or orders to freeze the account or under regulatory investigation or suspicion of money laundering or criminal activities).

Are there any restrictions on other withdrawals from an account in your jurisdiction?

Unless a restriction on withdrawal is imposed on any account in question owing to legal or regulatory action over the account (such as sanctions or orders to freeze the account or under regulatory investigation or suspicion of money laundering or criminal activities), there are no general restrictions on other withdrawals from an account.

Confidentiality

Obligations

Describe the private banking confidentiality obligations.

Confidentiality is generally protected under legal and contractual duties of confidentiality, code of banking practice and standard of conduct, and personal data privacy. However, legal and regulatory requirements may mandate disclosure or reporting of information to certain regulatory authorities or agencies, such as under anti-money laundering requirements, reporting of suspicious transactions and under CRS.

Scope

What information and documents are within the scope of confidentiality?

See question 41.

Expectations and limitations

What are the exceptions and limitations to the duty of confidentiality?

See question 41.

Breach

What is the liability for breach of confidentiality?

No statutorily prescribed liability exists.

Cross-border services

Framework

What is the general framework dealing with cross-border private banking services into your jurisdiction?

Where an institution engages in the conduct of regulated activities in securities and futures business in Hong Kong or actively markets to the public, whether by itself or another person on its behalf and whether in Hong Kong or from a place outside Hong Kong, any services it provides that would constitute a regulated activity if provided in Hong Kong, such an institution will need to be licensed by or registered with the SFC to conduct the relevant regulated activity, unless any relevant exemption applies. Failure to be licensed or registered where required would constitute an offence under the SFO. On the other hand, under the BO, it is also an offence to advertise, invite or issue any document to members of the public in Hong Kong to make a deposit, even if such an act is conducted from outside Hong Kong, unless in compliance with relevant requirements or authorised by HKMA.

Licensing requirements

Are there any licensing requirements for cross-border private banking services into your jurisdiction?

See question 25.

Regulation

What forms of cross-border services are regulated and how?

Forms of cross-border services that are subject to regulation and potential licensing requirements would be activities that would constitute the conduct of regulated activities in securities and futures business in Hong Kong or the active marketing, whether by itself or another person on its behalf and whether in Hong Kong or from a place outside Hong Kong, to the public any services it provides, which would constitute a regulated activity if provided in Hong Kong.

Employee travel

May employees of foreign private banking institutions travel to meet clients and prospective clients in your jurisdiction? Are there any licensing or registration requirements?

If employees of foreign private banking institutions travel to meet clients and prospective clients in Hong Kong that involves the conduct of regulated activities, there may be licensing requirements such that the foreign institution should apply for a temporary licence. In order to obtain a temporary licence, the institution should be carrying on business principally outside Hong Kong in an activity that, if carried on in Hong Kong, would constitute a regulated activity, and the temporary licence if granted shall be for a duration of not more than three months at any one time, and not more than six months in total within any period of 24 months. A temporary licence may be applied for carrying on the activities of:

  • dealing in securities (Type 1);
  • dealing in futures contracts (Type 2);
  • advising on securities (Type 4);
  • advising on futures contracts (Type 5);
  • advising on corporate finance (Type 6); and
  • providing credit rating services (Type 10).

Where the foreign private banking institution has a local affiliate or subsidiary in Hong Kong holding the relevant licence, such local affiliate or subsidiary may act as the sponsor to support the foreign institution’s application for the employees to obtain a temporary licence and be accredited to the local affiliate or subsidiary.

Exchanging documents

May foreign private banking institutions send documents to clients and prospective clients in your jurisdiction? Are there any licensing or registration requirements?

If the activity of sending documents to clients and prospective clients in Hong Kong from outside Hong Kong amounts to the active marketing to the public, whether by itself or another person on its behalf and whether in Hong Kong or from a place outside Hong Kong, of any services it provides that would constitute a regulated activity if provided in Hong Kong, licensing requirements may apply (see question 25).

Tax disclosure and reporting

Taxpayer requirements

What are the main requirements on individual taxpayers in your jurisdiction to disclose or establish tax-compliant status of private banking accounts to the authorities in your jurisdiction? Does the requirement differ for domestic and foreign private banking accounts?

There are no specific requirements on individual taxpayers in Hong Kong to disclose or establish the tax compliant status of private banking accounts, but note the reporting obligations of financial institutions to the United States tax authorities or to the Hong Kong Inland Revenue Department with respect to the Common Reporting Standard (CRS), as discussed in question 31.

Reporting requirements

Are there any reporting requirements imposed on the private banks or financial intermediaries in your jurisdiction in respect to their domestic and international clients?

Since Hong Kong has signed Model II IGA for the US Foreign Account Tax Compliance Act 2010 (FATCA), which is supplemented by an agreement with the United States for the exchange of information relating to taxes, this forms the basis for Hong Kong to provide for the exchange of information in relation to information reported by financial institutions in Hong Kong to the United States under FATCA. Hong Kong has also implemented the CRS and the automatic exchange of financial account information in tax matters on a reciprocal basis with appropriate partners, with the first exchanges expected by the end of 2018. The legal framework has been put in place for CRS reporting by financial institutions in Hong Kong (which would include private banks or financial intermediaries) in respect of a list of 75 reportable jurisdictions, although Hong Kong would only exchange information with a reportable jurisdiction where there is an arrangement in place with such jurisdiction that forms the basis for exchange (currently, Hong Kong has signed comprehensive avoidance of double taxation agreements with 39 jurisdictions and tax information exchange agreements with seven countries).

Client consent on reporting

Is client consent required to permit reporting by the private bank or financial intermediary? Can such consent be revoked? What is the consequence of consent not being given or being revoked?

Following legislation amendment to the Inland Revenue Ordinance, financial institutions and intermediaries are under legal obligation to report to the Hong Kong Inland Revenue Department on financial accounts for reportable persons under CRS, and no client consent is required to permit reporting.

Structures

Asset-holding structures

What is the most common legal structure for holding private assets in your jurisdiction? Describe the benefits, risks and costs of the most common structures.

The most common legal structure for holding private assets in Hong Kong is the use of a special-purpose company or investment holding company incorporated in Hong Kong or in an offshore tax neutral jurisdiction. This structure is commonly adopted by high-net-worth individuals to hold private assets directly, and is also commonly the structure which settlors settle private assets into a trust arrangement under which the trustee shall hold assets through holding the shares of the special-purpose company or investment-holding company. Accordingly, a combination of a trust arrangement and private companies is commonly adopted for holding private assets. Where assets are held through a Hong Kong company, transfers of ownership through the transfer of shares in the Hong Kong company would attract Hong Kong stamp duty, whereas there would be no stamp duty if change of ownership is taken through a transfer of shares in a company incorporated in an offshore jurisdiction that does not impose stamp duty. Under Hong Kong’s tax framework, there is a potential charge of Hong Kong tax on profits derived from the conduct of a business in Hong Kong, but Hong Kong does not impose tax on foreign-sourced income or tax on the basis of receipt, and does not impose dividend withholding tax. Therefore, Hong Kong can offer a tax-efficient structure and may benefit with a reduced rate of withholding tax on dividends or other receipts from a jurisdiction under applicable double tax treaty. In comparison, using an offshore company in a tax-free jurisdiction may offer a tax advantage and reduce the administrative burden that a Hong Kong company is subject to (of annual returns and tax filings), but it involves the loss of treaty benefits that may otherwise potentially apply for a Hong Kong-resident asset owner. Further, the offshore companies may now be subject to relevant economic substance requirements if applicable, which may trigger a review of the structure and possible benefits or risks from tax and compliance perspectives.

Where private assets are to be held through a collective investment arrangement, it is common to structure such a collective investment scheme using an offshore fund structure for similar stamp duty and tax considerations. Under the efforts to further develop Hong Kong as an asset management and wealth management services hub, with effect from April 2019, Hong Kong profits tax exemption may now be available to both funds that are resident and non-resident in Hong Kong, subject to meeting the definition of a ‘fund’ and relevant prescribed conditions under the relevant tax legislation.

Know-your-customer

What is the customary level of know-your-customer (KYC) and other information required to establish a private banking relationship where assets are held in the name of a legal structure?

See question 15 for the KYC requirements for corporations.

Controlling person

What is the definition of controlling person in your jurisdiction?

Hong Kong has introduced requirements for Hong Kong companies to maintain a significant controllers’ register that shall contain the required particulars of its significant controller. A person is a significant controller if one or more of the following conditions is or are satisfied:

  • the person holds, directly or indirectly, more than 25 per cent of the issued shares in the company; or if the company does not have a share capital, a right or rights to share in more than 25 per cent of the capital or profits of the company;
  • the person holds, directly or indirectly, more than 25 per cent of the voting rights in the company;
  • the person holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company;
  • the person has the right to exercise or actually exercises significant influence or control over the company; and
  • the person has the right to exercise or actually exercises significant influence or control over the activities of a trust or firm that is not a legal person, but whose trustee or members satisfy any of the four conditions mentioned above (in their capacity as such) in respect of the company.
Obstacles

Are there any regulatory or tax obstacles to the use of structures to hold private assets?

There are no particular regulatory obstacles. See question 33 in relation to the broad tax issues to consider.

Contract provisions

Types of contract

Describe the various types of private banking and wealth management contracts and their main features.

Broadly speaking, private banking and wealth management are commonly governed by client account terms and conditions that set out the contractual provisions for the access and use of account holders to the products and services of the private bank or financial intermediary. Where the services involve discretionary account management or specific investment management or an investment advisory or portfolio management arrangement, there shall be a specific written client agreement that contains appropriate authorisation for discretionary management, under the client account terms and conditions, or under a separate investment management agreement or investment advisory or portfolio management agreement. There is no mandatory requirement for such contracts to be governed by Hong Kong law. However, it is recommended to adopt Hong Kong law, since the private bank or financial intermediary is authorised or licensed in Hong Kong to conduct its business and provide the relevant products and services, and is subject to compliance with applicable Hong Kong law and regulatory requirements such as under the Code of Banking Practices or SFC Code of Conduct. The requirement to enter into a written client agreement and the minimum content requirements of a client agreement are set forth in the SFC Code of Conduct, as well as the SFC Fund Manager Code of Conduct with respect to discretionary account management (except where exempted).

Liability standard

What is the liability standard provided for by law? Can it be varied by contract and what is the customary negotiated liability standard in your jurisdiction?

Generally, there is no statutorily prescribed liability standard, and the liability of a private bank in its contractual obligations or duties to an account holder or client would fall to be determined by a court of law. The contract or client agreement would typically contain provisions on the standard of care as well as limits of liability.

Mandatory legal provisions

Are any mandatory provisions imposed by law or regulation in private banking or wealth management contracts? Are there any mandatory requirements for any disclosure, notice, form or content of any of the private banking contract documentation?

As noted in question 37, the requirement to enter into a written client agreement and minimum content requirements of a client agreement are set forth in the SFC Code of Conduct, as well as the SFC Fund Manager Code of Conduct with respect to discretionary account management (except where exempted).

In the context of the offer of financial products by a private bank or wealth management financial intermediaries, the SFC Code of Conduct specifically requires that there should be a mandatory provision on the obligation to ensure suitability in the solicitation or recommendation of financial products, which provision must appear in the exact prescribed form and cannot be abrogated by any other contractual provisions. Intermediaries are required to establish a client’s financial situation, investment experience and investment objectives, and to ensure suitability of a recommendation or solicitation of financial products, and to assess the client’s knowledge of derivatives. There are also requirements to disclose transaction related information, obtain written authority to effect transactions for a client without the client’s specific authority, and to disclose benefits receivable for effecting transactions for a client under a discretionary account.

Further, with effect from July 2019, unless an intermediary already complies with the suitability requirement in soliciting and recommending the investment, there are additional requirements under the SFC Code of Conduct when providing services in complex products (to be determined taking into account such criteria or factors as described in the SFC Code of Conduct or other SFC circular or guidance whether the investment is a complex product), to ensure that:

  • the transaction is suitable for the client in question in all circumstances;
  • sufficient information is provided on the key nature, features and risks of a complex product so as to enable the client to understand the complex product before making a decision; and
  • warning statements are provided to the client in relation to the distribution of the complex product, in a clear and prominent manner.
Limitation period

What is the applicable limitation period for claims under a private banking or wealth management contract? Can the limitation period be varied contractually? How can the limitation period be tolled or waived?

The general limitation period under Hong Kong law is six years for contractual or tort claims, except where otherwise prescribed or extended or where other specific circumstances apply for a longer or different limitation period, under the Hong Kong Limitation Ordinance.

Disputes

Competent authorities

What are the local competent authorities for dispute resolution in the private banking industry?

The competent local authorities for dispute resolution in the private banking industry could be the Consumer Council, the Small Claims Tribunal (for claims not exceeding HK$50,000), or more likely, higher amounts of claims at the District Court (where the claim amount is more than HK$50,000 but does not exceed HK$1 million) or the Court of First Instance of the High Court.

An investor may potentially also bring a claim to the Investor Compensation Fund for losses suffered owing to the default of a licensed intermediary or authorised financial institution in relation to exchange-trade products in Hong Kong. Hong Kong has also established the Financial Dispute Resolution Centre as an avenue (instead of making a claim by civil litigation) for disputes with financial institutions.

Disclosure

Are private banking disputes subject to disclosure to the local regulator? Can a client lodge a complaint with the local regulator? How are complaints investigated?

Complaints against a private bank may be lodged with the HKMA. The HKMA will review complaints received, and thereafter, where considered valid, refer the complaint to the bank for handling and reply. The HKMA may further investigate the complaint and potentially take such action against the bank in the exercise of its supervisory or disciplinary powers, where considered appropriate.

UPDATE & TRENDS

Recent developments

Describe the most relevant recent developments affecting private banking in your jurisdiction. What are the trends in this industry for the coming years? How is fintech affecting private banking and wealth management services in your jurisdictions?

Recent developments and fintech47 Describe the most relevant recent developments affecting private banking in your jurisdiction. How is fintech affecting private banking and wealth management services in your jurisdictions?

The establishment of new virtual banks and the emergence of increased online distribution and advisory platforms for investment products are two key trends expected to shape the private banking and wealth management industry in Hong Kong. The following sets out the legislative and regulatory framework that has developed in Hong Kong concerning these trends.

Virtual banks

Further to the revised Guideline on the Authorization of Virtual Banks (Revised Guidelines), issued by the HKMA in May 2018 after public consultation, one of the HKMA initiatives is to bring Hong Kong into a new era of smart banking. It is believed that the development of virtual banks will promote fintech and innovation in Hong Kong, and to help promote financial inclusion. The Revised Guidelines set out the principles that the HKMA will take into account in deciding whether to authorise virtual banks applying to conduct banking business in Hong Kong. A ‘virtual bank’ is defined as a bank that primarily delivers retail banking services through the internet or other forms of electronic channels instead of brick-and-mortar (physical) branches.

Applicants for a virtual bank licence would need to satisfy in substance the minimum criteria for authorisation in the Seventh Schedule to the Banking Ordinance that all licensed banks must meet, and the HKMA must be satisfied that the controllers, directors and chief executives of the applicant are fit and proper persons, with equal importance attached to credit, liquidity and interest rate risks as well as technology and related risks.

Virtual banks would be subject to ongoing supervision by the HKMA similar to conventional banks, but virtual banks would also be subject to tailored requirements that the directors and senior management should have requisite knowledge and experience to enable them to discharge their functions of a technology driven business model.

Although brick-and-mortar branches are not required, a virtual bank will still need to maintain a physical presence in Hong Kong since this is its principal place of business, enabling interaction between the HKMA, as well as dealing with customer queries or complaints. There is also a requirement to maintain local offices to keep full sets of books, accounts, transaction records, and facilitate examination and inspection by HKMA.

Since May 2019, eight virtual bank licensees have been granted by the HKMA, and it is anticipated that the licensees will launch their services by the end of 2019.

Online distribution and advisory platforms

In March 2018, the SFC issued the Guidelines on Online Distribution and Advisory Platforms, applicable to licensed persons or registered persons with effect from 6 July 2019, where engaging in online distribution and advisory platforms for investment products, whether providing order execution, distribution or advisory services (including ‘robo-advice’ services). The Guidelines contain requirements concerning six core principles, with the expectation that operators of online platforms ensure the following:

  • proper design - ensuring that the online platform is properly designed and operated in accordance with applicable laws and regulations;
  • client information - ensuring that clear and adequate disclosure of relevant information is available on its online platform, including:
    • up-to-date product documents or information, and other information enabling clients to appraise the position of their investments;
    • investment product ratings and methodologies; or
    • investment product risk profiles and clients; and
  • risk management - ensuring the reliability and security (including data protection and cybersecurity) of its online platform;
  • governance, capabilities and resources - ensuring there are robust governance arrangements in place for overseeing the operation of the online platform as well as adequate human, technology and financial resources available to ensure the operations are carried out properly;
  • review and monitoring - performing appropriate reviews of all activities conducted on the online platform as part of its ongoing supervision and monitoring obligation; and
  • record keeping - maintaining proper records in respect of the online platform.

Further to these specific requirements, it is emphasised that online platform operators are required to comply with all applicable laws and regulations including the conduct requirements applicable to all SFC licensed or registered persons under the SFC Code of Conduct (including suitability requirements).

Online client onboarding

Responding to industry enquiries, in June 2019, the SFC issued a ‘Circular to intermediaries - remote onboarding of overseas individual clients’ that sets out procedures that the SFC accepts for intermediaries to verify overseas client’s identities when onboarding individual clients online. Such procedures include:

  • identity document authentication;
  • identity verification;
  • execution of client agreements by way of electronic signature;
  • verification of designated overseas bank accounts;
  • record keeping;
  • training; and
  • assessment.

Paragraph 5.1 of the Code of Conduct has been amended correspondingly, such that intermediaries may onboard clients in a flexible and more efficient manner while meeting regulatory compliance requirements.

Complex products

With effect from July 2019, there are enhanced additional requirements under the SFC Code of Conduct where a licensed or registered person providing services in complex products (to be determined taking into account such criteria or factors as described in the SFC Code of Conduct or other SFC circular or guidance whether a product is a complex product) to ensure that the transaction is suitable for the client in question in all the circumstances;- to provide sufficient information on the key nature, features and risks of a complex product so as to enable the client to understand the complex product before making a decision; and to provide warning statements to the client in relation to the distribution of the complex product, in a clear and prominent manner.

Intermediaries would need to be review its services and product due diligence processes in order to determine whether its products are complex products subject to the enhanced requirements, and to accordingly comply with the enhanced suitability requirements, additional expected disclosures and provision of warning statements. This would certainly be relevant in the distribution and offering of investment products to retail investors as well as high-net-worth clients, especially with respect to investments or funds that are not authorised for retail offer (ie, private funds) and not traded in Hong Kong or a specified jurisdiction, that are likely to be considered complex products.