Topic 1
Regulatory Overview of the Hong Kong Financial Industry
Master the fundamentals of Hong Kong's financial regulatory framework. Explore the roles of the SFC, HKEX, and other key regulators through interactive charts, quizzes, and flashcards.
Expected Learning Outcomes
After completing this topic, you should be able to:
Demonstrate a basic awareness of the variety of products and services offered by Hong Kong as an international financial services centre
Explain the objectives and functions of Hong Kong's financial regulators and the background to securities regulation
Identify the interlinking of Government functions, responsibilities and powers with the SFC
Demonstrate knowledge of semi-governmental, statutory and non-statutory bodies in financial regulation
Describe the objectives, functions, powers, responsibilities and structure of the SFC
Recall the workings of the SFC's operating divisions
Explain the roles of committees, tribunals and panels associated with the SFC
Broadly distinguish the roles of the SFC, exchanges and clearing houses
Discuss and determine the roles of investors, intermediaries, principals and support services providers
Financial Products and Services, and Their Regulation
Introduction
Hong Kong is an international financial centre with a wide range of financial products and services developed to meet demands for investment, capital formation, hedging, safe custody, speculation and insurance. The financial markets also provide price discovery and liquidity.
Financial Products
Products include debt securities, equity securities, virtual assets and derivatives:
Financial Services
- Securities dealing
- Futures trading
- Foreign exchange trading
- Virtual asset trading
- Financial advising, corporate finance
- Underwriting
- Mergers & acquisitions
- Venture capital
- Investment & portfolio management
- Investment banking
- Commercial banking
- Credit rating services
- Money lending
- Gold trading
- Insurance
- Insurance broking
- Depositary services
Objectives of Hong Kong's Regulatory Framework
Approaches to Regulation
Disclosure-Based Regulation
Focuses on maximising disclosure and provision of information regarding public offerings of securities. Investors are expected to use full information to make independent investment decisions.
Disclosure can be mandatory or voluntary. The CO is disclosure-based and has legal force.
Merit-Based Regulation
Screens out undesirable players and offerings. Investors cannot invest in offerings deemed "undesirable" as the system bars them.
The Listing Rules are primarily disclosure-based but have been described as having merit-based elements, as they aim to ensure fair balance between promoters and investors.
Risk-Based Regulation
The SFC's described approach: regulation is weighted towards areas that pose the greatest risk to markets and participants.
Regulatory Authorities
Government Hierarchy
The primary governmental participants in Hong Kong's securities and futures markets:
Key Government Roles
- Appoints the Chairman, Deputy Chairman, CEO and directors of the SFC
- May remove any member of the SFC
- Determines terms and conditions of office (Schedule 2, SFO)
- May give written directions to the SFC on objectives and functions (s.11, SFO)
- Receives SFC income/expenditure estimates for approval
- Principal official overseeing financial, monetary, economic, trade and employment policy
- Chairman of the Exchange Fund Advisory Committee (governing body of HKMA)
- Has effective overall authority over the SFC
- Can require SFC to provide information on principles, practices and policies
- Receives and tables SFC annual report and financial statements in LegCo
- Closest regular government contact with the SFC
- Oversees the Financial Services Branch
- Three Deputy Secretaries report through the Permanent Secretary
- Deputy Secretary 1: Securities/futures, banking, monetary matters
- Deputy Secretary 2: Insurance, retirement schemes
- Deputy Secretary (Special Duties): Accountancy, companies, trusts
Financial Regulators Network
Key Regulators
HKMA
Maintains currency stability, banking system safety. Frontline regulator of AFIs. Manages Exchange Fund. MOU with SFC.
Insurance Authority
Statutory body regulating insurance industry. Can impose sanctions up to greater of HK$10M or 3× profit gained.
MPFA
Registers MPF schemes, approves trustees, monitors MPFSO compliance. MOUs with SFC for product authorisation.
CGSE
Chinese Gold & Silver Exchange Society. Bullion trading. Not directly regulated. Paper gold schemes classified as CIS under SFC.
Registrar of Companies
Administers CO and related ordinances. Maintains public registry. No direct regulatory function. Active liaison with SFC.
Securities and Futures Commission (SFC)
SFC Regulatory Objectives (s.4, SFO)
Maintain and promote fairness, efficiency, competitiveness, transparency and orderliness of the market
Promote public understanding of the industry's operation and functioning
Provide protection to the investing public
Minimise crime and misconduct in the market
Reduce systemic risks in the industry
Assist the Financial Secretary in maintaining financial stability of Hong Kong
SFC General Duties (s.6, SFO)
SFC Organisation
SFC Divisions
Corporate Finance Division
- Vets listing applications together with SEHK
- Monitors listed companies' announcements for misconduct/irregularities
- Administers the Codes on Takeovers and Mergers and Share Buy-backs
- Supervises listing-related activities of the SEHK
- Reviews and recommends changes to Listing Rules
- Reviews and authorises prospectuses for unlisted shares/debentures
- Intervenes early in serious cases via Securities and Futures (Stock Market Listing) Rules
Enforcement Division
- Monitors trading of HK stock and derivative markets, inquires into irregularities
- Has power to discipline dishonest regulated intermediaries
- Inspects books and records of listed companies if impropriety suspected
- Cooperates with domestic and overseas law enforcement agencies
Investment Products Division
- Develops codes and guidelines for authorisation of investment products
- Regulates and authorises investment products offered to public
- Registers and regulates open-ended fund companies (OFCs)
- Monitors disclosures and ongoing compliance
- Formulates policies concerning regulation of asset management
Supervision of Markets Division
- Supervises and monitors exchange controller, exchanges and clearing houses
- Formulates policies for market infrastructure development
- Authorises automated trading service providers
- Regulates approved share registers
- Supervises Investor Compensation Company and manages compensation fund
- Fosters market development and liaison with participants
- Conducts market-related research
Intermediaries Division
Licensing Department:
- Licenses corporations and individuals for regulated activities
- Issues codes and guidelines on competence and suitability
- Monitors ongoing compliance of licensing requirements
- Maintains public register of licensed persons and registered institutions
Intermediaries Supervision Department:
- Supervises business conduct through on-site reviews and off-site monitoring
- Monitors financial integrity of licensed corporations
- Maintains communication with intermediaries on regulatory issues
- Processes applications for approval, waiver or modification
Committees, Tribunals & Panels
Advises SFC on policy matters. No executive powers. Chaired by SFC Chairman with CEO and 8-12 members appointed by CE of HKSAR.
Responsible for the Codes on Takeovers and Mergers and Share Buy-backs. Administration exercised by SFC staff (Takeovers Executive).
Hears appeals against disciplinary rulings of the Takeovers and Mergers Panel to determine if any sanction is unfair or excessive.
Advises on matters relating to SFC Handbook for Unit Trusts and Mutual Funds, ILAS, Unlisted Structured Investment Products, MPF Code, and Pooled Retirement Funds.
Administers the Investor Compensation Fund and regulates procedures in accordance with Part XII of the SFO.
Independent review body. Chaired by current/former judges appointed by CE of HKSAR. Reviews SFC regulatory decisions and Investor Compensation Company determinations.
Independent body appointed by CE of HKSAR. Reviews fairness of SFC's internal procedures. Reports to Financial Secretary.
Disciplinary Powers
- Breaches of SFO are legal offences - SFC investigates and refers serious cases to police/ICAC
- SFC can apply to courts for injunctions to restrain assets or business
- Codes and guidelines don't have force of law, but breaches may impugn fitness and properness
- Prejudiced persons may take private civil action using MMT findings as evidence
IOSCO & International Cooperation
The SFC is an active member of IOSCO, a global group of securities regulators promoting cooperation and high standards.
- 240 members as of June 2024
- SFC is a member of the IOSCO Board
- SFC is a signatory to IOSCO's multilateral MOU for mutual investigative assistance
- SFC has MOUs with wide range of local, Mainland and overseas regulators
Hong Kong Exchanges and Clearing Limited (HKEX)
HKEX
Listed company on SEHK. Exchange controller recognised under s.59, SFO.
SEHK
Stock market (s.19, SFO)
HKFE
Futures market (s.19, SFO)
HKSCC
Securities clearing (s.37, SFO)
SEOCH
Options clearing (s.37, SFO)
HKCC
Futures clearing (s.37, SFO)
Key Governance
- Board: mix of Government-appointed and shareholder-elected directors
- Chairman must be approved by Chief Executive of HKSAR
- Chief Executive of HKEX must be approved by the SFC
- SFC supervises and monitors activities, approves rules and fees
Participants and Intermediaries in the Hong Kong Financial Market
Categories of Market Participants
Retail Investors
Individuals or small businesses investing small amounts for themselves. Need most regulatory protection as less sophisticated.
High Net Worth Individuals (HNWIs)
Special class serviced by private banks. May be recognised as Professional Investors by SFC subject to conditions. Varying experience levels.
Institutional Investors
Entities investing on behalf of others: pension funds, unit trusts, mutual funds, insurance companies, AFIs, private banks, fund managers.
Professional Investors (PIs)
Highly experienced in investments. Include institutional investors. Not automatically given same protection as retail. (See Topic 5, s.2)
Intermediaries, Principals & Professional Support
Provide products and services to principals and investors:
Act for themselves (like wholesalers):
Essential professional services:
📅 Historical Timeline of HK Financial Regulation
Key milestones in the development of Hong Kong's regulatory framework
🃏 Flashcards
Test your knowledge of key terms and concepts
✅ Knowledge Check Quiz
Test your understanding with exam-style questions