Conventus Law (CL): Are there separate authorities for regulating financial services and products and which activities are they responsible for?
Hauzen LLP (H): Yes. The key regulators of financial services in Hong Kong are the Hong Kong Monetary Authority (“HKMA”), the Securities and Futures Commission (“SFC”), the Insurance Authority (“IA”) and the Mandatory Provident Fund Schemes Authority (“MPFA”).
The HKMA primarily oversees the banking sector. It regulates financial institutions, conducts monetary policy operations, and manages the Exchange Fund that affects the exchange value of the Hong Kong currency. Other roles of the HKMA include licensing and supervising stored value facilities and developing the financial market infrastructure. The Hong Kong Association of Banks plays an ancillary regulatory role.
The SFC is responsible for regulating the securities and futures markets. Its role is to maintain and promote the efficiency of the securities and futures markets, supervise activities of market participants, detect and discipline illegal and improper activities. The SFC has seven divisions, namely Corporate Finance, Enforcement, Intermediaries, Investment Products, Supervision of Markets, Corporate Affairs and Legal Services.
The IA regulates and supervises the insurance industry for the promotion of the general stability of the insurance industry and the protection of existing and potential policy holders.
The MPFA regulates and supervises the provident fund schemes of Hong Kong.
(CL): For each type of regulated financial services provider and product, what are the main regulatory areas?
(H): Licensed banks, restricted licence banks and deposit-taking companies (“Authorized Institutions”) are subject to the Banking Ordinance (Cap. 155) and its rules. The Banking Ordinance sets out the considerations for the authorization, suspension and revocation criteria of Authorized Institutions. It also provides the legal framework for, inter alia, audits and meetings, recovery planning, ownership and management, capital requirements, liquidity requirements, codes of practice, the Banking Review Tribunal, investigations, and money brokers. Authorized Institutions are also subject to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”).
Entities engaging in the 10 regulated activities under the Securities and Futures Ordinance (Cap. 571) (“SFO”), which include but are not limited to dealing in securities/futures contracts, advising on securities/futures contracts/corporate finance and providing automated trading services/credit rating services, must be licensed (or registered, if the entity is an Authorized Institution) by the SFC. Licensed intermediaries must demonstrate that they are fit and proper, competent and maintain a prescribed minimum paid-up capital and liquid capital at all times. Investment products such as unit trusts and mutual funds, real estate investment trusts, and open-ended fund companies will need to be authorized by the SFC as well. Licensed corporations, registered institutions and authorized investment products are subject to the wide legal framework of the SFO and its subsidiary legislation, certain parts of the Companies (Winding Up and Miscellaneous Provisions) Ordinance and various codes and guidelines. The AMLO and other legislation dealing with money laundering and terrorist financing also apply.
It is worth mentioning that there has been much development in recent years in Hong Kong in terms of regulation by the HKMA and SFC in respect of virtual asset related products or virtual asset service providers. Basil Hwang, Managing Partner, Hauzen LLP
It is worth mentioning that there has been much development in recent years in Hong Kong in terms of regulation by the HKMA and SFC in respect of virtual asset related products or virtual asset service providers. For instance, in December 2020, the SFC granted its first licence under the voluntary opt-in regime for platforms offering trading of securities-type virtual assets or tokens. In May 2021, the public consultation on the introduction of a licensing regime for virtual asset service providers (“VASPs”) was completed and it is hoped that an amendment bill will be introduced into the Legislative Council this year. In January 2022, the SFC and HKMA issued a joint circular on intermediaries engaging in virtual-asset related activities, and the HKMA also issued a separate circular on regulatory approaches to Authorized Institutions’ interface with virtual assets and VASPs.
Insurers, designated insurance holding companies and insurance intermediaries in Hong Kong are subject to the Insurance Ordinance (Cap. 41) (“IO”), its regulations, rules, Codes of Conduct for Licensed Insurance Brokers/Agents and various guidelines. For instance, a licensed insurance broker company is required to comply with the Insurance (Financial and Other Requirements for Licensed Insurance Broker Companies) Rules, which provide for the requirements in relation to, amongst others, share capital and net assets, professional indemnity insurance, client accounts and proper books and accounts. The AMLO and other legislation dealing with money laundering and terrorist financing also apply.
(CL): To what extent do national financial services authorities have the power to examine and investigate compliance? What are their enforcement powers for noncompliance? In practice, how does compliance get examined and enforced?
(H): The HKMA conducts investigations on issues raising concerns such as breaches of laws and regulations misconduct, and/or fitness and properness of banks and/or their staff. It can examine the books, accounts and transactions of any Authorized Institutions at any time. The HKMA can also conduct investigations on behalf of the Financial Secretary, request relevant information and arrange interviews. It is worth noting that the HKMA has entered into memoranda of understanding with the SFC and IA respectively to promote a coordinated regulatory approach to the supervision of financial services. Thus, the HKMA has certain investigatory powers in respect of matters involving banking and securities, and banking and insurance activities.
The SFO provides that the SFC may conduct investigations into any matter related to any offence under the SFO, market misconduct, and breach of a disclosure requirement under the SFO, etc. In practice, a notice will be issued by the SFC to the regulated person. The SFC will request evidence relevant to the investigation and interviews may be arranged. The SFC can also seize digital devices when executing a search warrant. Regulated persons will have the opportunity to make representations and be heard. Upon conclusion of the investigation, in general the SFC will either issue a decision notice or in some instances notify the persons under investigation that the investigation has been concluded and no action will be taken. The SFC’s decisions can be appealed.
The IA is granted express powers under the IO to initiate investigations against licensed insurance intermediaries, authorized insurers, and designated insurance holding companies. Generally speaking, the IA may initiate an investigation if it has reasonable cause to believe that the IO may have been contravened; there may have been involvement in defalcation, fraud, misfeasance or other misconduct, acts contrary to the interests of policy holders/ potential policy holders/ the public interest; or that an entity is or was not fit and proper.
In practice, the appointed investigators will inform the relevant entity of an investigation and may require a person to produce a record or document, give an explanation in respect of the record or document, answer a question relating to the investigation, and give other assistance.
(CL): What methods do the regulating authorities have for disciplining or punishing infractions? What other bodies are responsible for criminal enforcement of compliance violations?
(H): The HKMA is empowered to determined appropriate disciplinary actions, including but not limited to ordering a pecuniary penalty, setting financial sanctions and restrictions, public reprimands and suspending the relevant particulars of a relevant individual from the register maintained by the HKMA.
The SFC is empowered to impose various sanctions, including but not limited to revocation or partial revocation of a licence/registration; suspension or partial suspension of licence or registration; a fine (up to the maximum of HK$10 million or three times of the profit gained or loss avoided, whichever is the higher); and a private or public reprimand. The SFC may also take civil action or refer the matter to the Department of Justice for a criminal prosecution.
The IA is granted express powers under the IO to impose a range of disciplinary actions against a regulated person if the person is or was guilty of misconduct, or when the person is or was, in the opinion of the IA, not fit and proper under section 81 of the IO. Before the IA exercises its disciplinary power, the regulated person concerned would have a reasonable opportunity of being heard. Possible disciplinary actions include but is not limited to a private/public reprimand, a pecuniary penalty not exceeding the greater of HK$10 million or 3 times the profit gained or loss avoided as a result of the contravention and the suspension/revocation of a licence.
As for other criminal enforcement of compliance violations, the Hong Kong Police Force’s (“HKPF”) Commercial Crime Bureau investigates serious and complex commercial fraud, counterfeiting or forgery of currency, or criminal matters involving other commercial instruments. The Joint Financial Intelligence Unit is jointly run by the HKPF and the Hong Kong Customs & Excise Department. It deals and manages the anti-money laundering/ suspicious transaction reporting regime in Hong Kong and disseminate the same to the appropriate law enforcement agencies in or outside Hong Kong. The Independent Commission Against Corruption deals with corruption matters in Hong Kong and has very wide investigation powers. The aforesaid bodies work closely with financial services regulators in combatting various criminal activities.
(CL): How are firms and individuals typically sanctioned for violations?
(H): Financial services regulators are subject to guidelines in sanctioning financial services providers depending on the seriousness and gravity of misconduct. For instance, the SFC will consider factors such as the nature and seriousness of the conduct, the profits or loss involved, previous disciplinary records of the entity, duration and frequency of the conduct. Thus, there is no one-size-fits-all sanction and all would depend on the individual facts and circumstances of each case.
The SFC has recently banned numerous individuals from re-entering the industry for life due to the individuals failing to meet the fit and proper criteria to carry on regulated activities because of either his/her bribery convictions or misappropriation of funds for personal use. The SFC has also recently publicly reprimanded and fined numerous licensed intermediaries/registered institutions for internal control failures and breach of the code of conduct, failure to comply with anti-money laundering regulatory requirements, and serious regulatory failure over client facilitation activities. The fines ranged from HK$5 million to HK$350 million.
The HKMA has reprimanded and ordered pecuniary penalties of about HK$1 million to entities operating a payment system/stored value facility for their failures to fulfil minimum criterion relating to anti-money laundering measures. The HKMA has recently reprimanded and fined banks (ranging from HK$6 to HK$20 million) for contraventions of AMLO.
The IA has suspended a broker’s registration and prohibited a broker from applying to be licensed for the next two years for his misconduct and failure to be fit and proper during the course of his employment. A former insurance agent was reprimanded and prohibited from applying to be licensed for 5 months for contravening the IO and the IA’s Code of Conduct for Licensed Insurance Agents. Two former insurance companies were fined HK$7 million for contravening seven specified provisions of AMLO. A licensed insurance broker company was fined and suspended its licence on 22 December 2021 for failing to submit its audited financial statements and auditor’s report within six months following the end of its financial year.
For further information, please contact:
Basil Hwang, Managing Partner, Hauzen LLP
+852 2150 2988
basilhwang@hauzen.hk
Basil is recognized by clients for his business insight and sensible advice, his familiarity with regulations and business practices in Hong Kong and Greater China, and his ability to deliver results for clients. Prior to founding Hauzen LLP, he founded and was the Managing Partner of a US law firm for seven years, managed and ran a Hong Kong Mainboard-listed company, and was general counsel and independent director of other companies listed in Hong Kong and Singapore. Basil is admitted as a solicitor in Hong Kong, as a solicitor in England and Wales, and as an advocate and solicitor in Singapore. He is fluent n English, Mandarin and Cantonese.
Kelly Ho, Associate, Hauzen LLP
+852 2525 2920
kellyho@hauzen.hk
Kelly was admitted as a solicitor in Hong Kong in 2021. Prior to joining Hauzen LLP in October 2021, Kelly completed her two-year training contract at another Chambers-ranked firm in Hong Kong handling various types of civil litigation, criminal litigation and non-contentious commercial matters. Kelly has worked on advisory assignments regarding the cryptocurrency regulatory landscape in Hong Kong, financial fraud claims, and advisory work regarding SFC regulatory requirements and SFC licensing. Kelly is fluent in English, Cantonese and Mandarin.
