The Hong Kong Chief Executive’s policy address on 19 October 2022 promised to strengthen Hong Kong’s asset management industry[1]. A target of attracting no less than 200 family offices to establish or expand their operations in Hong Kong by end-2025 was set.
One of the main considerations that asset managers such as family offices and private equity firms must consider when commencing or expanding their business in Hong Kong is whether their office and personnel need to be licensed. In an effort to encourage more asset managers to operate in Hong Kong, the SFC has published a set of five quick reference guides to encourage more family offices and private equity businesses to operate in Hong Kong. As Mr. Keith Choy, the SFC’s Interim Head of Intermediaries, has said in the press release on the quick reference guides, “These are part of the SFC’s ongoing efforts in consolidating Hong Kong’s leading role as a full-fledged international financial centre.”
This article aims to cover these five quick reference guides and identifies new information set out in them.
1. Family Offices
The Family Offices quick reference guide generally tracks the position that was set out in the SFC’s circular dated 7 January 2020 and the SFC’s FAQ on this topic. In summary, the SFC’s position on licensing requirements for family offices are as follows:
- (Depending on the structure, an individual single-family office would generally not be considered as carrying on a business and hence would not require a licence. For example, some family offices run on a cost recovery basis (i.e. no income other than reimbursements of operating costs), or do not pursue profit as its objective. Further, there is no definition of "family”, “family office” and what constitutes “family membership” under the Securities and Futures Ordinance (Cap. 571). Accordingly, it is permissible that a single-family office may serve non-family members as well without needing to be licensed.
- A multi-family office serving more than one high net-worth family and running as a commercial venture by receiving fees for such services is likely required to be licensed.
Notably, the SFC has for the first time given structural examples of ownership structures which do not require a licence:
Family offices which are interested in commencing its business in Hong Kong may refer to the above examples when considering how to structure their Hong Kong family office at an initial stage.
2. Private Equity Firms
The Private Equity Firms quick reference guide generally tracks the position that was set out in the SFC’s circular dated 7 January 2020. The guide summarises some of the key points set out in the circular:
- If a private equity firm deals in or advises on securities or manages a portfolio comprising securities, it is likely required to be licensed.
- Whether a Type 9 (asset management) regulated activity licence is required will depend on whether the private equity firm has the discretionary authority to make investment decisions. Offering co-investment opportunities to investors generally requires a Type 1 (dealing in securities) regulated activity licence, but an incidental exemption may be available for a firm that is licensed for Type 9 regulated activity.
- The SFC recognises a broad range of experience for individual private equity practitioners, including conducting research, managing private equity fund’s underlying assets and structuring corporate transactions etc.
As new practical guidance for private equity firms, the SFC has summarised a number of typical licences that licensed private equity firms hold, they include:
- Type 9 (asset management) – For a firm delegated with discretionary investment authority;
- Type 1 (dealing in securities) – For a firm that negotiates or executes securities transactions for a PE fund, markets a PE fund or offers co-investment opportunities to investors; and
- Type 4 (advising on securities) – For a firm that provides non-discretionary investment recommendations or research reports to investors.
Additionally, private equity firms should also take into account whether any licensing exemption would be available to them when considering whether to commence business in Hong Kong.
3. Hedge Fund Managers
This is the first time the SFC has specifically addressed hedge fund managers that may be looking to apply for a licence in Hong Kong. In summary, the SFC’s position is as follows:
- Generally speaking, hedge fund managers in Hong Kong are required to be licensed for Type 9 (asset management). If they also operate a central dealing desk in Hong Kong to execute securities or other futures transactions for portfolios not under its management, it may also need to be licensed for Types 1 (dealing in securities) and 2 (dealing in futures contracts) regulated activities.
- The SFC will impose “not hold client asset” and “professional investors only” licensing conditions where appropriate.
- The SFC recognises a broad range of experience when assessing the competence of applicants applying for approval as a responsible officer. Exemptions from taking licensing examinations may be applicable provided that certain prerequisites are met.
4. Overseas Practitioners
The SFC’s Guidelines on Competence sets out the SFC’s requirements in respect of licensed corporations and individuals. The guide provides fresh relatable examples of how the Guidelines on Competence works for overseas practitioners. From a practical perspective, overseas practitioners may also need to consider working visa requirements if they are not residents in Hong Kong. While the SFC does take a pragmatic approach when considering the relevance of a licence applicant’s industry experience, the SFC may sometimes discount the relevant industry experience of applicants if they consider the experience to be of limited relevance.
5. China Mainland Practitioners
The China Mainland Practitioners quick reference guide is only available in Chinese and sets out the key competence requirements for China Mainland practitioners to become licensed in Hong Kong. In respect of the arrangements relating to the qualifications of China Mainland securities and futures industry practitioners to practise in Hong Kong, the relevant guidance is generally set out in an FAQ published by the SFC, including explanation on recognition of industry qualifications and the requirement of regulatory examinations.
In terms of regulatory requirements, the China Mainland Practitioners quick reference guide did not introduce new requirements or relaxations. Nevertheless, it provides fresh examples of how the regulatory requirements can be applied for China Mainland Practitioners together with a concise summary of the requirements, which may be helpful in attracting more China Mainland practitioners to consider applying for a licence in Hong Kong.
6. What’s next?
These five quick reference guides address frequently asked questions about licensing topics and provide practical examples of licensing requirements and exemptions. As the Hong Kong government continues its effort in attracting more fund managers and capital to Hong Kong, Hong Kong is expected to consolidate its position as one of the premier private equity fundraising hubs favoured by China Mainland and overseas industry professionals.
King & Wood Mallesons has a dedicated team with a broad range of experience in asset management and regulatory matters (including licensing and ongoing compliance matters). We have assisted numerous clients with setting up their fund management business in Hong Kong and would be keen to work with you. Please feel free to speak to us if you have any questions.
In this article:
- “Hong Kong” or “Hong Kong SAR” shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
- The Mainland of China is described as “China Mainland” and Hong Kong SAR is described as “Hong Kong”.
Reference
[1] The Chief Executive’s 2022 Policy Address, p.15, accessible at https://www.policyaddress.gov.hk/2022/public/pdf/policy/policy-full_en.pdf
