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The Licensing Regime under The Securities and Futures Ordinance

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The Licensing Regime under The Securities and Futures Ordinance

7. APPROVAL CRITERIA

Part V sets out various criteria to be met by an applicant for a corporate or representative licence. The most important of these is that the SFC must be satisfied that the applicant is a fit and proper person to be licensed for the regulated activity (Sections 116(3) and 120(3)). Section 129 sets out matters to be taken into account by the SFC in determining an applicant’s ‘fitness and properness’ which include the applicant’s financial status, qualifications and experience, ability, reputation, character, reliability and financial integrity. The SFC’s Fit and Proper Guidelines and Guidelines on Competence made under Section 399 SFO provide further details as to the matters considered by the SFC in determining the fitness and properness of an applicant.

In addition to fitness and properness, the SFC is also required to consider certain other matters, including, in the case of corporations, their ability, if licensed, to comply with the financial resources rules and the adequacy of their insurance coverage in respect of prescribed risks (Section 116(3)).

APPROVAL CRITERIA FOR CORPORATIONS

Competence

The SFC must be satisfied that a licensed corporation has a proper business structure, good internal control systems and qualified personnel to ensure the proper management of risks.

Financial Resources

Depending on the type(s) of regulated activity for which a corporation is licensed, it must maintain at all times paid-up share capital and liquid capital in amounts at least equivalent to those specified in the Securities and Futures (Financial Resources) Rules. If a corporation applies to be licensed for more than one regulated activity, the minimum paid-up share capital and liquid capital that must be maintained is the highest amount required among those regulated activities. A table summarising the minimum paid-up share capital and liquid capital requirements for each type of regulated activity is set out at Annex B to this note.

Insurance

The Securities and Futures (Insurance) Rules (the ‘SFIR’) set out the insurance requirements applicable to corporations licensed for certain regulated activities. A corporation licensed for regulated activity Type 1 (dealing in securities), Type 2 (dealing in futures contracts) or Type 8 (securities margin financing) is required to take out and maintain insurance against specific risks for specified amounts when the SFC approves a master policy of insurance applicable to it. Licensed corporations who are not exchange participants or whose licences are subject to a condition that they may not hold client assets are exempt from this requirement (section 3 of the SFIR).

APPROVAL CRITERIA FOR LICENSED REPRESENTATIVES

A person applying to be approved as a licensed representative (other than a responsible officer the approval requirements for which are detailed at section 8 below) must demonstrate that he has the requisite basic understanding of the market in which he is to work as well as the laws and regulatory requirements applicable to the industry. In assessing a person’s eligibility to be licensed as a representative, the SFC will have regard to the three basic elements mentioned in the table set out at Annex C to this note.

8. RESPONSIBLE OFFICERS

In addition to requiring persons carrying on regulated activities to obtain a ‘representative licence’, Part V also introduces a ‘responsible officer’ concept. In relation to each regulated activity for which a corporation is licensed, there must be at least one ‘responsible officer’ of the licensed corporation who is available at all times to supervise the business of the regulated activity (Section 118(1)).

Every licensed corporation is required by Section 125 to have at least 2 persons who have been approved by the SFC as ‘responsible officers’ in relation to each of its regulated activities. At least one of those persons must be an executive director (defined as a director who actively participates in, or is responsible for directly supervising, the business of a regulated activity for which a corporation is licensed (Section 113(1)) of the licensed corporation. In addition, every executive director of a licensed corporation is required to be approved by the SFC as a ‘responsible officer’ in relation to the regulated activity in which he participates or supervises.

Approval Criteria for Responsible Officers

An individual applying for approval as a licensed representative and a responsible officer is required to demonstrate that he has sufficient authority to supervise the business of the regulated activity within the licensed corporation. The individual must also possess appropriate skills, knowledge and experience to properly manage and supervise the relevant regulated activity and must meet the requirements set out in the table at Annex D.

Additional competence requirements apply if a person wishes to be licensed to conduct regulated activities in relation to matters falling within the ambit of a particular code issued by the SFC, e.g. the Codes on Takeovers and Mergers and Share Repurchases or the Code on Real Estate Investment Trusts.

9. MANAGERS IN CHARGE OF CORE FUNCTIONS

The SFC’s Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management1 issued in December 2016 requires licensed corporations to:

  • appoint a Manager-in-Charge of each of eight core functions;
  • ensure that the Managers-in-Charge of any core functions that comprise regulated activities are licensed as responsible officers; and
  • inform the SFC of their management structure and notify the SFC of any changes to that structure within 7 business days of the change.

Managers-in-Charge of Core Functions

A Manager-in-Charge is an individual who is appointed to be principally responsible (alone or with others) for managing one of the following eight Core Functions of a licensed corporation:

  • Overall Management Oversight
  • Key Business Line;
  • Operational Control and Review;
  • Risk Management;
  • Finance and Accounting;
  • Information Technology;
  • Compliance; and
  • Anti-Money Laundering and Counter-Terrorist Financing.

Depending on its scale of operations and control measures, a licensed corporation may appoint one Manager-in-Charge to be responsible for several Core Functions and/or appoint two or more Managers-in-Charge to manage a single Core Function jointly. The board of directors is responsible for delegating authority and responsibilities among the Managers-in-Charge and other members of the company’s senior management; the SFC does not mandate any particular organizational or governance structure.

Whether an individual is a Manager-in-Charge depends on his/her apparent or actual authority. A person may be a Manager-in-Charge if one or more of the following applies:

  • he/she occupies a position within the corporation which is of sufficient authority to enable the individual to exert a significant influence on the conduct of that Core Function;
  • he/she has authority to make decisions (e.g. assume business risks within pre-set parameters or limits) for that Core Function;
  • he/she has authority to allocate resources or incur expenditure in connection with the particular department, division or functional unit carrying on that Core Function; and
  • he/she has authority to represent the particular department, division or functional unit carrying on that Core Function (e.g. in senior management meetings or in meetings with outside parties).
  • The SFC expects a Manager-in-Charge to have sufficient seniority to carry out his/her responsibilities. He/she should:
  • be able to report directly to; and
  • be accountable for the performance or achievement of the business objectives set by,

The SFC expects a Manager-in-Charge to have sufficient seniority to carry out his/her responsibilities. He/she should:

  • be able to report directly to; and
  • be accountable for the performance or achievement of the business objectives set by,

the company’s board of directors or to the Manager-in-Charge who assumes the overall management oversight function of the company.

Managers-in-Charge may or may not be employees of the licensed corporation. They may or may not be licensed by the SFC (unless their duties include performing a regulated activity, which requires them to be licensed). However, since they hold positions of authority within the licensed corporation, they must not be external parties that provide outsourced services. Licensed corporations must ensure that any person it employs or appoints to conduct its business is fit, proper and qualified to act in his/her capacity.

Managers-in-Charge might also need to be Responsible Officers

Managers-in-Charge of the Overall Management Oversight function or the Key Business Line function must be licensed as responsible officers in respect of the regulated activities that they oversee, because they would normally be responsible for supervising or participating actively in these regulated activities. The SFC does not expect Managers-in-Charge of other core functions to be licensed as responsible officers, and not every responsible officer needs to be a Manager-in-Charge.

A Manager-in-Charge of Overall Management Oversight must satisfy the industry experience tests under the SFC’s Guidelines on Competence in order to be licensed as a responsible officer. The SFC will consider the applicant’s overall career history within the industry, his/her proposed activities and the licensed corporation’s resources including systems and expertise.

Even if he/she has not had any experience in conducting or supervising a regulated activity directly, an applicant who has held a senior position to manage a control or operational function (e.g. risk management, compliance, etc.) for a long time may still be approved as a responsible officer for that regulated activity, subject to appropriate licensing conditions. A typical licensing condition for such a situation would be to require the applicant to work together with another fully competent responsible officer. A waiver from that licensing condition under section 134(1) of the SFO may be sought after accumulating sufficient experience in the relevant regulated activity.

Appendices D and E to the SFC’s Guidelines on Competence provide for exemptions from the recognised industry qualification requirement and the local regulatory framework paper requirement.

Documentation of Management Structure

The board of directors must approve a formal document (the ‘Management Structure Documentation’) setting out the licensed corporation’s management structure, including the roles, responsibilities, accountability and reporting lines of its senior management personnel. Where more than one Manager-in-Charge is responsible for a core function, the Management Structure Documentation must contain sufficient details regarding the responsibilities of each of those Managers-in-Charge. The board of directors must ensure that each Manager-in-Charge has acknowledged his/her appointment as a Manager-in-Charge and the particular core function(s) for which he/she is principally responsible. The SFC may request that the Management Structure Documentation be made available for its review.

When a corporation applies for a licence under section 116(1) of the SFO, it must submit an organisational structure chart in its application. This chart must include the following information on the corporation’s Managers-in-Charge:

(a) full name;

(b) identification information;

(c) job title indicating the individual’s position and particular business or operational area (e.g. CEO, CIO, Head of Risk Management, etc.);

(d) place of residence;

(e) the core function(s) for which he/she is responsible; and

(f) the job title(s) of the person(s) to whom he/she reports within the corporation and, if applicable, within the corporate group.

Changes to a licensed corporation’s appointment of Managers-in-Charge or any changes to the particulars of a Manager-in-Charge must be communicated to the SFC within 7 business days of the change. A new organisational structure chart must be submitted to the SFC in the case of a new appointment, cessation of appointment or any change in item (e) or (f) in the list above in respect of a Manager-in-Charge.

10. REGISTERED INSTITUTIONS

10.1 Authorised financial institutions (i.e. banks, restricted licence banks and deposit taking companies authorised under the Banking Ordinance) are required to be registered with the SFC if they wish to carry on one or more regulated activities, with the exception of Type 3 (leveraged foreign exchange trading) and Type 8 (securities margin financing) activities (Section 119(1)). An authorised financial institution may therefore carry out regulated activities Types 3 and 8 without being registered under the SFO.

Applications for registration from authorised financial institutions are referred by the SFC to the Hong Kong Monetary Authority (the ‘HKMA’)(Section 119). The HKMA will then advise the SFC as to whether it considers the applicant to be a fit and proper person for registration for the relevant regulated activity. Any registration of an authorised financial institution by the SFC may be made subject to reasonable conditions.

10.2  Executive Officers of Registered Institutions

Section 125(2) of the SFO requires that a registered institution must have complied with Section 71D of the Banking Ordinance in appointing at least 2 executive officers responsible for directly supervising the conduct of each business conducted by the registered institution that constitutes a regulated activity. Those executive officers are further required to be in compliance with the provisions of Section 71C of that Ordinance.

The HKMA’s prior written consent is required before a person may become an executive officer of a registered institution (Section 71C Banking Ordinance). Such approval is subject to the HKMA being satisfied that the person is a fit and proper person to be an executive officer of the institution and has sufficient authority within it to be an executive officer. The HKMA’s consent may be made subject to such conditions as it considers proper.

The SFO further requires that, in relation to each regulated activity for which a registered institution is registered, there must be at least one executive officer of the registered institution available at all times to supervise the business of such regulated activity (Section 119(8)).

10.3 Relevant Individuals of Registered Institutions

Section 20 of the Banking Ordinance requires registered institutions to register with the HKMA the following information:

(a) the name and business address of every ‘relevant individual’;

(b) the capacity in which each ‘relevant individual’ is engaged in relation to a ‘regulated function’ in a regulated activity;

(c) the date on which each relevant individual was first so engaged; and

(d) such other particulars as the HKMA thinks fit.

A ‘relevant individual’ of a registered institution is an individual who performs any ‘regulated function’ in a regulated activity for or on behalf of, or by an arrangement with, the institution, other than work ordinarily performed by an accountant, clerk or cashier.

A ‘regulated function’ is any function performed for or on behalf of, or by an arrangement with, the registered institution relating to the regulated activity, other than work ordinarily performed by an accountant, clerk or cashier.

Section 119(8) SFO further requires that any person whose name is registered under Section 20 of the Banking Ordinance must be a fit and proper person to be engaged in the relevant regulated activity.

10.4 Fitness and Properness

The fitness and properness of registered institutions, their executive officers and relevant individuals is considered and determined by the HKMA having regard to the criteria set out in Section 129 SFO and the SFC’s Fit and Proper Guidelines and Guidelines on Competence.


1 SFC. “Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management”. 16 December 2016. Available at http://www.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/licensing/doc?refNo=16EC68.

Skills

Posted on

2014-10-16