More and more investors look for investment advice to advance their short- and long-term financial goals. Abundant “tips” and “advice” regarding investment have become increasingly accessible through social media platforms.
However, any company or individual carrying out regulated activities such as in the securities and futures market needs to apply for a relevant type of regulated activity license with the Securities and Futures Commission (the “SFC”) to carry out these regulated activities in Hong Kong.
This article will help you understand the SFC licensing regime and will provide an overview of (i) the relevant regulated activities; (ii) the licensing requirements; (iii) the exemptions from the licensing requirements; and (iv) the license application process.
Regulated activities
As per the Securities and Futures Ordinance (“SFO”), any company or individual engaged in a regulated activity must apply for the relevant license, unless an exemption applies. Depending on the nature of your business, you may need to apply for more than one license to engage in the regulated activities.
Currently, there are 12 types of regulated activities and some of the relevant ones are described below:
Advising on securities (Type 4)
- Giving advice and issuing analyses or reports on whether, which, when and terms of securities should be acquired or disposed of.
Advising on futures contracts (Type 5)
- Giving advice and issuing analyses or reports on whether, which, when and terms of future contracts should be entered into.
Advising on corporate finance (Type 6)
- Giving advice concerning
- The compliance with or in respect of the rules governing the listing of securities and the code published under section 399(2)(a) or (b) of the Securities and Finance Ordinance.
- Any offer or acceptance to dispose or acquire securities from the public
- Corporate restructuring in respect of securities, to a listed corporation or public company or a subsidiary of the corporation or company, or its officers or shareholders
In light of the emergence of financial technology, it should be noted that Bitcoin Futures traded on and subject to the rules of certain exchanges in the United States are regarded as “futures contracts”, hence entities carrying out regulated activities involving Bitcoin Futures would be required to be licensed. Moreover, digital tokens offered or sold may be regarded as “securities” depending on the specific facts and circumstances. If so, advising on these digital tokens may constitute a regulated activity and require a license.
When do you need a license to give investment advice?
Generally, you need a license if you are not an authorised financial institution (i.e. a bank, a restricted licence bank or a deposit-taking company) and you:
- Carry on a business in a regulated activity;
- Actively market yourself to the public any services you provide that constitute a regulated activity;
- Are an individual performing a regulated function in relation to the regulated activity for your principal which is a licensed corporation.
In Case (3), you have to be a licensed representative accredited to your principal. In addition, if you are an executive director of the corporation, you need to be approved as a responsible officer. A responsible officer is a licensed representative who is approved to supervise the regulated activities of the licensed corporation to which he is accredited.
In essence (a) any corporation carrying on one or more regulated activities should apply to the SFC for a corporate licence; (b) any individual carrying on one or more regulated activities for a licensed corporation to which he is accredited to should apply to the SFC for a representative license; (c) a licensed representative, approved as a responsible officer, supervising the regulated activity of the licensed corporation he is accredited to.
An overseas corporation carrying out the regulated activities outside Hong Kong must apply for a temporary license to carry out those activities in Hong Kong.
What are the exemptions from licensing requirements?
There are some specific circumstances which may exempt a firm from having to apply for a license to engage in regulated activity. A relevant exemption is incidental exemption, where the regulated activities are performed wholly incidental to you carrying out another regulated activity for which you are already licensed. This exemption is applicable to the following circumstances:
- If you are licensed for dealing in securities (Type 1) and wish to advise on securities (Type 4), you may not need to be licensed for Type 4 provided that these activities are carried out wholly incidental to your securities dealing business.
- If you are licensed for dealing in futures contracts (Type 2) and wish to advise on futures contracts (Type 5), you may not need to be licensed for Type 5 provided that these activities are carried out wholly incidental to your futures dealing business.
- If you are licensed for asset management (Type 9) and wish to advise on securities and/or futures (Type 4 and 5), you may not need to be licensed for these regulated activities provided that these activities are carried out wholly incidental to your asset management business.
SFO provides for group company exemptions, professional exemptions, journalist exemptions, dealing with professional investors exemption etc. The details for all types of exemptions can be found here.
What are the requirements to qualify for a license?
There are several requirements to be satisfied in order to qualify for a license. Most of these requirements differ between corporate license and representative license applicants, but both applicants must satisfy the Fit and Proper Guidelines. In simple terms, a fit and proper person means one who is financially sound, competent, honest, reputable and reliable. In determining whether a person is fit and proper, the following criteria set out in the Securities and Futures Ordinance must be satisfied:
- Financial status or solvency;
- Educational or other qualifications or experience regarding the nature of the functions to be performed;
- Ability to carry on the regulated activity competently, honestly and fairly; and
- Reputation, character, reliability and financial integrity.
The SFC has set out elaborate guidelines on the fit and proper requirements for corporations and representative license in Guidelines on Competence.
How can I apply for a license to give investment advice?
To apply for a license to engage in regulated activity, you need to submit an application form, several supplements and questionnaires along with an application fee to the SFC.
All individual-related license applications should be submitted through the SFC Online Portal, while corporate license applications may be submitted using paper forms or through the Portal.
It should be noted that all applications for approval as responsible officers should be filed with the SFC for consideration together with your licence application.
The processing time for a corporate license and representative license application normally take around 8 weeks and 15 weeks respectively; that of a responsible officer takes around 10 weeks.
Your application may be refused for instance if you fail to meet the statutory requirements or fail to satisfy that you are a fit and proper person to be licensed or meet other competence requirements set out in the Guidelines on Competence. Before the refusal, you will be given an opportunity to be heard. Upon refusal, you may, within 21 days, apply to the Securities and Futures Appeals Tribunal for a review of the decision.
You will be notified of the approval of the application in writing. For an approved corporate license application, a license certificate will be posted by registered mail. For an approved individual license application, only approval letters will be issued by email.
Key Takeaways
- Generally, you should obtain a license to advise on securities, futures contracts and/or corporate finance, and/or be remunerated for the advice.
- For a successful application, you would need to satisfy the SFC’s requirements on fitness, properness and competence in the regulated activity.
References:
- SFC Licensing Handbook: https://www.sfc.hk/-/media/EN/files/LIC/handbook/licensing-handbook.pdf
- Fit and Proper Guidelines: https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/guidelines/fit-and-proper-guidelines/Fit-and-Proper-Guidelines.pdf
- Guidelines on Competence: https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/guidelines/guidelines-on-competence/Guidelines-on-Competence.pdf
- SFC Online Portal: http://portal.sfc.hk/
- Licensing forms: https://www.sfc.hk/en/Forms/Intermediaries/Licensing-forms
- Application procedures: https://www.sfc.hk/en/Regulatory-functions/Intermediaries/Licensing/Application-procedures