A Comprehensive Guide to SFC Licences in Hong Kong

The Securities and Futures Commission (SFC) requires certain businesses to obtain SFC licences if they do business around what Hong Kong refers to as “regulated activity.” Read on to learn more about these licences, how to determine which SFC licence type your business could fall into, and the SFC licence application process.

Hong Kong SAR was ranked fourth globally in the recent thirty-second edition of the Global Financial Centres Index (GFCI 32) published last 22 September 2022. This recent evaluation has strengthened Hong Kong’s position as a leading international financial centre in the Asia Pacific Region, second only to Singapore. The report also shows that the city is seventh in the financial development competitiveness sector, proving that the Hong Kong fund management industry remains optimistic. 

If you are interested in the recent updates on the fund industry in Hong Kong. You can check out Lanturn’s article: the 2022 facts to know about Hong Kong’s fund management scene.

Types of SFC Licences

The Securities and Futures Ordinance (SFO) granted the SFC the power and authority to be the regulator of the securities and futures markets of Hong Kong. Every company or individual that doesn’t fall under the category of an authorised financial institution and plans on carrying out regulated activities (RA) in Hong Kong, is required to acquire the corresponding RA licence from the SFC. Any firm or corporation that carries out a business in a “regulated activity” in Hong Kong must first be licensed by the SFC unless deemed exempted.

An individual must first be registered as a licensed representative to perform a regulated function on behalf of a licensed corporation. The licence will also be required for any firm in and outside of Hong Kong that performs active marketing of their investment and other related products to the Hong Kong public. 

The following are the different licences and what are considered regulated activities, under the SFO Schedule 5:

SFC Licence Type 1 – Relating to securities

SFC Licence Type 2 – Dealing in futures contracts

SFC Licence Type 3 – Leveraged foreign exchange trading

SFC Licence Type 4 – Advising on securities

SFC Licence Type 5 – Advising on futures contracts

SFC Licence Type 6 – Advising on corporate finance

SFC Licence Type 7 – Providing automated trading services

SFC Licence Type 8 – Securities margin financing

SFC Licence Type 9 – Asset management

SFC Licence Type 10 – Providing credit rating services

Common Types of Regulated Activities and Their Licences

Dealing in Securities – SFC Licence Type 1

According to the SFO, to “deal in securities” is to create an agreement with another person, for the main purpose of the acquisition of securities or to gain profit from the securities. A securities brokerage firm usually falls under Licence Type 1, while its brokers and dealers must become licensed representatives accredited to it.

Dealing in Futures Contracts – SFC Licence Type 2

The SFO defines “dealing in futures contracts” as offering an agreement with another person to acquire or enter into a futures contract. Another definition is the act of inducing a person to enter an agreement to dispose of a futures contract.

According to the standard of this regulated activity, a futures brokerage firm will need to acquire an SFC Licence Type 2. Just like in the first license type, brokers, dealers and sales traders of a futures brokerage firm must become licensed representatives accredited to it

Advising on Securities – SFC Licence Type 4 and Advising on futures contracts – SFC Licence Type 5

According to the SFO, “advising on securities” is to provide advice or a suggestion about the acquired or disposed securities. 

“Advising on futures contracts” pertains to providing advice or a suggestion to enter into a futures contract, to issue analyses or reports, that will influence the party’s decision to acquire or dispose of securities and to enter into a futures contract.

Asset Management – SFC Licence Type 9

As per SFO standards, real estate investment scheme management falls under “asset management”. Securities or futures contracts management also falls under “asset management”, services about the management of securities portfolios and futures contracts must acquire an SFC Licence Type 9. 

Hedge fund managers, carrying investment responsibility on behalf of the hedge fund, will be required to obtain an SFC Licence Type 9. A hedge fund’s portfolio managers will have to be licensed representatives accredited to it, to perform the regulated activity.

SFC Licence Criteria

Most of the public, and investors in particular, would prefer to enter into a business agreement with people and organisations that are competent, fair and honest. In the financial sector, an entity that has been specially authorised by the regulating body of the government will inspire confidence that their investments are in good hands. 

Oftentimes, individuals and organisations licenced or registered with the government carry an assurance that they are financially sound, reputable and reliable. Any applicant or individual wishing to obtain an SFC licence in Hong Kong must be considered fit and proper according to the SFO standards. 

In particular, they must fall within the “Fit and Proper Guidelines” in the following categories:

Financial Status or Solvency

The SFC will find it unlikely to consider an individual as fit and proper, should they have any exposure to Receivership, Bankruptcy or any other similar proceedings. About this, any individual who has failed to settle a judgment debt is also unlikely to be considered fit and proper. 

In the case of a corporation or an authorised financial institution that is subject to receivership, liquidation or other similar proceedings; or has failed to meet any judgment debt will also find it hard to be judged by the SFC as fit and proper. This ruling also extends to those who are unable to meet any financial or capital requirements applicable to it.

Educational, Experience and Other Qualifications

The SFC will take into account the education, experience and other related qualifications of the applicant against the nature of the regulated functions. Under the Fit and Proper Guidelines, an individual must be more than 18 years of age to enter the register maintained by the Hong Kong Monetary Authority (HKMA) or to apply to the SFC to become a licenced representative. 

An individual must also be able to demonstrate that he/she can perform the regulated activities efficiently and effectively while adhering to the “Guidelines on Competence”. If you wish to know if you are qualified regarding education, experience and other requirements about these criteria. You may contact Lanturn’s Hong Kong fund management specialists for an assessment and to know more detailed information regarding this.

Competency and Honesty

The applicant must be able to perform the regulated activities in compliance with all relevant laws, codes and guidelines promulgated by the SFC and other applicable Hong Kong regulators. A person must possess the ability to carry on the regulated activity honestly, fairly and according to the Guidelines on Competence. 

For individuals, the SFC is not likely to be satisfied that a person is a fit and proper person if:

• They had been a patient as defined in section 2 of the Mental Health Ordinance and assessed by the SFC as unable to carry out the inherent requirements of the regulated activity. The SFC takes into account the person’s past training, experience and qualifications, in the process of assessing the individual.

• Has a history of being disciplined by a regulatory body, dismissed or requested to resign from any position for the reason of negligence, incompetence or mismanagement.

In the case of a corporation or an authorised financial institution. They shall not be deemed as fit and proper if the non-executive directors, key personnel (such as manager, officer, director, chief executive), substantial shareholders or other controllers are:

• Unable to meet the Fit and Proper Guidelines.

• Unable to demonstrate that it is competent to perform the regulated activities efficiently and effectively.

• Its organisational structure and personnel are unable to comply with the legislative or regulatory requirements accordingly.

• Its infrastructure and internal control systems are unable to avoid conflict of interest, manage risk effectively, and provide a proper audit trail.
  
  

Reputation, Reliability, Character and Financial Integrity

The SFC will find it unlikely to consider an individual as fit and proper if it has been a party to an arrangement with a creditor involving a considerable amount. Similarly, an individual that was found to be of poor reputation, character or reliability, and dishonest shall also be deemed as unfit and improper. 

In the case of a corporation or an authorised financial institution, if they are found to have been served with a winding up petition and bearing poor reputation, character or reliability, and lacking financial integrity will be deemed as unfit and improper. 

The four aspects above are the fundamental basis for the SFC to consider upon each licence or registration application received. Once an applicant acquires the licence, they must continue to adhere to the Fit and Proper Guidelines together with the Guidelines of Competence. 

If you want to take an SFC license exam in Hong Kong, the Licensing Examination for Securities and Futures Intermediaries (LE) has been approved by the SFC. The purpose of the LE is to meet the competence requirements for individuals applying for the SFC licence as Representatives and/or Responsible Officers. 

If you want more information regarding the licence exam that will be needed, our Lanturn Hong Kong fund specialists would be pleased to assist you with that. Contact us today to learn more. 

Are you a fund manager interested in setting up in Hong Kong? Check out the feature we made on how to start a VC fund in Hong Kong.

SFC Licence Application Procedure

Applications are submitted to the SFC online through the WINGS platform. Before submitting your application, make sure that every applicable question in the application form, including the supplement(s) must bear an answer. The application must be properly signed and attached with the necessary supporting documents required. For individual accounts, their online application must be under the “Individual Account” category, while for corporate applicants it shall be under the “sub account of an Advisory Firm Account”. 

The applications by licensed corporations, registered institutions or responsible officers, must be able to provide a resolution bearing the approval of the application to the SFC. The resolution must bear the approval directly from the board of directors or their authorised person. 

The status of your application through the account that you submitted your application on WINGS. Once your application is accepted, you will be required to pay the required application fee through the online payment facility on WINGS. Here is the table for the required application fee for the more common regulated activities:

The SFC processing of new applications takes about 8 weeks for a standard licenced representative application. On the other hand, it will take around 10 weeks for a responsible officer application and 15 weeks for a licenced corporation application. 

Hong Kong SAR is one of the best countries to enter into the asset and fund management industry. Hong Kong is also ranked fifth globally in the 2022 IMD Competitiveness Ranking, rising two places from its 2021 rank and further proving that it is still an attractive financial hub in the world.

Let Lanturn Help You!

For step-by-step assistance on your SFC licence application, contact us right away, and our HK specialists will be in touch to assist you. From acquiring and assessing the most appropriate SFC licence type for your company to assisting in fund formation and administration services, we can help you get started!