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Obtaining an SFC Licence: 10+1 things to know

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Charlotte Robins

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Andre Da Roza

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21 June 2019

A company applying for a licence from the Securities and Futures Commission (SFC) may seem daunting but with careful thought and observation of some fundamental aspects of the SFC’s requirements, a successful outcome can be achieved. Below we have set out our top 10+1 things to know when embarking on the application process.

1. Having a clear business plan

First and foremost, you must be able to clearly explain your proposed business, the target clients and the relevant regulated activities involved. As context and justification for the licence application, this should be interwoven with legal analysis that addresses key potential concerns or issues that the SFC may have in relation to your business model (e.g. conflicts of interests). It should be easily comprehensible and (where appropriate) show the flow of the typical transaction / interaction cycle.

2. Ensuring that relevant persons are fit and proper

The applicant company, its substantial shareholders and all relevant personnel (including its responsible officers (ROs)) need to be “fit and proper”. Broadly speaking, this means being “financially sound, competent, honest, reputable and reliable”. One major area of the SFC’s focus is on litigation, disciplinary action or investigations that a person has been involved in, within the past five years. Where there are such cases, it is crucial to properly disclose them and explain why they do not affect the person’s fitness and properness. Being “fit and proper” is an on-going requirement.

3. Choosing your responsible officers

As a matter of law, you must have at least two ROs to supervise the conduct of each regulated activity, although, as a contingency you may decide to have more. A person may be an RO for more than one regulated activity, however, it is essential to demonstrate the relevance of the RO's past professional and working experience to the proposed regulated business.

Such experience can be illustrated by having a well-presented curriculum vitae. The SFC considers this closely. In addition, an RO must have certain recognized industry qualifications and pass specific local regulatory framework papers (although certain limited exemptions may be applicable, depending on the circumstances).

At least one RO must be permanently resident in Hong Kong whilst the other (or others) can be based offshore. If any ROs are based offshore, you will need to demonstrate how they will effectively supervise the business (e.g. by describing the frequency of travel to Hong Kong, regularity of communication etc.).

4. Disclosing your substantial shareholders

Substantial shareholders of the applicant company need to be identified and seek prior approval from the SFC. Broadly speaking, substantial shareholders fall into two categories:

  • Direct substantial shareholders: where a person has more than 10% of the issued share capital in the applicant company or more than 10% of the voting power in the applicant company; and 
  • Indirect substantial shareholders: where a person has 35% or more of the voting power in a corporation that controls more than 10% of the voting power in the applicant company. It is necessary to keep tracing upwards to determine whether there are any further indirect substantial shareholders by using the “35% or more voting control” test.

When assessing who is a substantial shareholder, a person needs to take into account the interests of any “associate”, a broadly defined term. All substantial shareholders, associates and directors of corporate substantial shareholders need to be disclosed to the SFC, and their fitness and properness assessed.

5. “MICs”

Corporate governance and the accountability of senior management is a key focus of the SFC. The SFC fully implemented the Manager-In-Charge (MIC) regime in October 2017. This regime requires at least one individual to be principally responsible for managing each of the eight “Core Functions”. MICs are accountable for their designated Core Function(s), and may be subject to civil and criminal liabilities, and other disciplinary actions. There are various considerations that you should take into account when deciding who the MIC should be, including the individual’s actual authority and seniority. While outsourcing is permitted, an MIC should not be an external party who merely provides outsourced services to it, and does not hold a position of authority within the company. MICs do not need to be approved by the SFC but must be disclosed in the applications. Thereafter the SFC must be notified of any changes.

6. Capital requirements

The financial resources requirements are set out in the Securities and Futures (Financial Resources) Rules. The two main requirements are for licensed corporations to meet, at all times, specified paid-up share capital and on-going liquid capital thresholds. The minimum amount for each depends on the type(s) of regulated activities you intend to carry out, but in every case at least 120% of the minimum required liquid capital must be maintained. If the amount falls below that, notification obligations are triggered. On-going monitoring is therefore important. Depending on the licence held, routine reporting to the SFC is required on either a monthly or bi-annual basis.

7. Implementing robust systems and controls

It is important to maintain robust internal systems and controls and have a good risk management framework. Appropriate policies and procedures should be put in place covering various aspects such as corporate governance, KYC, best execution, risk management, training, management of conflicts of interests, business contingency and recovery plans, anti-money laundering and complaints handling. You may rely on broader group policies, but they should be tailored or supplemented to cater for the Hong Kong business and applicable legal and regulatory requirements.

8. Managing conflicts

The SFC regularly issues reminders in relation to the proper management of conflicts of interests. You should have proper systems and controls to identify and address any conflicts of interests arising internally among staff, between group companies and externally with clients. Whether you should cease to act on a matter or continue (but make disclosures to the relevant parties) will depend on the circumstances. The general principles to bear in mind are that you should always treat your clients fairly and act in their best interests.

9. Outsourcing wisely

Outsourcing is a double-edged sword: it helps reduce costs but also introduces additional risks. While the SFC has not issued any guidelines dedicated to outsourcing, it has endorsed the Principles on Outsourcing of Financial Services for Market Intermediaries issued by the International Organization of Securities Commissions. If you decide to outsource certain functions, you should (amongst other things) ensure that the service provider is sufficiently experienced to provide the required services, assess the risks carefully, appropriately document the arrangements, ensure that there are appropriate contingency plans and monitor the services properly.

10. Being sensitive to “active marketing”

Actively marketing services (that would be regulated if conducted in Hong Kong) of any unregulated entity to the Hong Kong public could cause issues for you and the unregulated entity. The SFC will want to properly understand the relationship between the applicant company and any offshore companies with whom you may interact in relation to the services to be provided to your clients.

+1  Understanding your on-going obligations

It is essential to have a proper understanding of the licensed corporation’s on-going obligations, as well as those of its personnel and substantial shareholders, especially notification and annual filing obligations, as well as events which require prior approval from the SFC.

This article is for general guidance only and does not constitute legal advice to any specific person.