Understanding Hong Kong's Type 9 License Application in Cross-Border Compliance

2023-09-05

As the world's third-largest financial center, Hong Kong's influence in the global financial sector trails only behind New York and London. The financial industry is highly regulated, and Hong Kong is no exception. Anyone, whether an individual or a company, looking to engage in financial activities in Hong Kong needs to apply for the relevant financial license.

Hong Kong's major financial regulatory authorities include the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA), the Insurance Authority (IA), and the Mandatory Provident Fund Schemes Authority (MPFA). They are responsible for regulating the banking industry, securities and futures industry, insurance industry, and retirement schemes, respectively. These regulatory bodies work closely together to ensure that market participants adhere to ethical practices, thereby deterring financial crimes and misconduct.

Type 9 License: Leading the Hong Kong Financial License Rankings

With the gradual deepening of financial reforms and the growing demand for cross-border investment and financing, Hong Kong has become a popular choice for many asset management institutions. According to the Hong Kong Securities and Futures Ordinance, the financial services industry is divided into various subcategories, each corresponding to a different market access license. As of June 2023, a total of 6,364 licenses have been issued for Categories 1 to 10 by the SFC. Among these, Category 4 licenses account for 29.7%, and Category 9 licenses account for 32.9%. Applications for both Category 4 and Category 9 licenses have been on the rise in recent years.

Regulated Activities

Before 1974, Hong Kong's securities and futures markets were largely unregulated. It wasn't until 1989, after multiple stock market crashes, that Hong Kong established the Securities and Futures Commission (SFC) to regulate its securities and futures markets. The SFC plays multiple roles, with its primary responsibility being to maintain and promote fairness, efficiency, competitiveness, transparency, and order in the securities and futures industry. One of its most crucial functions is licensing and regulating intermediaries engaged in activities subject to SFC oversight. The regulated activities, as defined by the Securities and Futures Ordinance, encompass 12 categories, including:

Securities dealing
Futures contract trading
Leveraged foreign exchange trading
Advising on securities
Advising on futures contracts
Providing credit rating services
Providing automated trading services
Providing securities margin financing services
Asset management
Providing credit rating services
Dealing in over-the-counter derivative products or advising on over-the-counter derivative products
Providing client clearing services for over-the-counter derivative transactions

For instance, those engaging in Category 1 activities related to "securities dealing" require a "Type 1 license," while those offering advisory services on securities typically need a "Type 4 license." Asset management activities, which are commonly associated with "Type 9 licenses," require a separate application. In practice, these 12 categories of activities are sometimes intertwined, and the SFC has made special exemption arrangements. For example, entities holding a Type 9 license can also engage in certain Category 1 and Category 4 activities, such as securities trading and securities advisory, without the need for separate Type 1 and Type 4 licenses.

Asset Management Activities Under Type 9 License

This article primarily focuses on the application process for providing asset management services, typically referred to as a "Type 9 license." Under Schedule 5 of the Securities and Futures Ordinance, asset management activities mainly encompass:

Management of real estate investment schemes
Management of securities or futures contracts

Most private fund managers in Mainland China likely engage in securities management activities. Under Section 245 of the Securities and Futures Ordinance, securities generally refer to shares, stocks, debentures, debenture stocks, unit trusts, bonds, notes, and other instruments issued or likely to be issued by any group, government, governmental authority, or any person who is a legal entity. Therefore, fund managers involved in managing funds and other non-corporate entities are likely engaged in activities classified under the Type 9 license, requiring a separate application.

Types of Licensees and Their Eligibility

According to the Securities and Futures Ordinance, persons engaging in one or more regulated activities must apply for licenses from the SFC. Applicants fall into two main categories: corporations and individuals.

Corporations can be further categorized as licensed corporations, temporary licensed corporations, and registered institutions (banks, restricted license banks, or deposit-taking companies). Individuals can be categorized as responsible officers, licensed representatives, temporary licensed representatives, and short-term licensed representatives. Licensed corporations, licensed representatives, and registered institutions are eligible to engage in asset management activities under a Type 9 license.

Eligibility and Conditions for Licensed Corporations

For corporations to become licensed corporations, they must meet certain qualifications, including:
Being suitable candidates as prescribed by regulations.
Being companies registered in Hong Kong or overseas companies registered with the Companies Registry in Hong Kong.
Appointing at least two responsible officers to oversee asset management activities, one of whom must be an executive director as defined under the Securities and Futures Ordinance. For activities regulated under multiple categories, there must be at least one responsible officer supervising the relevant business. One person can be appointed as responsible officer for multiple regulated activities, provided there are no conflicts of interest.
Establishing a suitable business structure, robust internal control systems, and qualified personnel to manage risks associated with conducting business.
Ensuring that senior management, senior officers, and other individuals have suitable qualifications.
Maintaining sufficient paid-up capital and liquid capital. Specific requirements vary depending on conditions, but for Type 9 licenses, the minimum paid-up capital is generally not applicable if the corporation is subject to a restriction on holding client assets. The minimum liquid capital is HKD 100,000.

Eligibility and Conditions for Licensed Representatives

Licensed representatives of licensed corporations must also meet specific criteria:

Being suitable candidates as prescribed by regulations.
Meeting educational/professional qualification requirements. This typically includes degrees or professional qualifications in areas like accounting, business administration, economics, finance, or law. Alternatively, international recognized professional qualifications such as Chartered Financial Analyst (CFA), Certified International Investment Analyst (CIIA), or Certified Financial Planner (CFP) are accepted.
Possessing relevant industry experience. At least two years of experience in the past five years is required, with no specific limit for candidates who fully meet the education or professional qualification requirements.
Holding industry-recognized qualifications and undertaking continuous professional development. This involves a one-time requirement to complete five hours of continuous professional development related to the regulated activities applied for within six months before submitting the application. Candidates taking the Securities Institute of Hong Kong Licensing Examination Papers 7 and 10 meet this requirement.
Passing the Hong Kong local regulatory framework examination.

For corporations to apply for a Type 9 license, they must satisfy the criteria mentioned above. The application process can be done through the SFC's online portal, with paper applications accepted as per the SFC's requirements. Typically, the SFC processes licensed representative applications within eight weeks, responsible officer applications within ten weeks, and licensed corporation applications within 15 weeks.

The time required for processing applications may vary depending on factors such as the type of services or products provided, the completeness of application materials, the adequacy of supporting documents, and the need for revisions.

Ongoing Compliance Obligations

License holders, including licensed corporations, licensed representatives, and responsible officers, must fulfill several ongoing compliance obligations:

Continuously meeting suitability criteria for licensed personnel.
Promptly filing updates for any changes in the licensed entity's license application or usage, changes in directors or substantial shareholders, related entities, or any information relevant to the license application, all through the SFC's WINGS licensing system.
Submitting audited financial statements or other specified documents within four months after the end of each financial year.
Submitting financial resources returns to the SFC monthly, as specified by the Securities and Futures (Financial Resources) Rules. For Type 9 licensed entities subject to a restriction on holding client assets, this requirement is semi-annual.
Paying annual license fees within one month from the date of granting the license or registration, unless the SFC has announced an exemption for a specific period. Failure to pay fees on time may result in additional surcharges and the risk of temporary suspension or revocation of the license or registration.
Submitting annual returns to the SFC within one month from the anniversary of the granting of the license or registration. Failure to submit annual returns on time may result in temporary suspension or revocation of the license or registration.
Ensuring continuous professional development for licensed representatives and responsible officers.

In conclusion, obtaining and maintaining a Type 9 license, whether for a licensed corporation, a licensed representative, or a responsible officer, requires specific qualifications and involves a lengthy application process. Applicants should thoroughly assess whether they meet the necessary criteria before applying. Sinobravo can provide comprehensive assistance to clients seeking more information on Hong Kong Type 9 license applications.

-END-