Grounded Ingenuity | Refined Results

September 18, 2018
By Gavin Cumming
This article sheds light on a number of regulatory developments since the 2016 edition of the IFC Review, in particular consultations on Asset Management Regulation and Point-of-Scale Transparency, the Professional Investor Regime, Position Limit Regime, Protected Arrangements under the Financial Institutions Resolution Ordinance, Online Distribution and Advisory Platforms and Mandatory Clearing and Expanding Mandatory Reporting. The Establishment of the Insurance Authority, along with the SFC proceedings against AcrossAsia and Andrew Left are also discussed. The article has previously been published on the IFC Review earlier in September 2017.

Hong Kong has continued to maintain its status as a leading financial centre throughout 2016 and into 2017, and there have been a number of regulatory developments since last year's edition of the IFC Review.

Consultation on Asset Management Regulation and Point-of-Sale Transparency

In November 2016, the Securities and Futures Commission (SFC) published a consultation paper on proposals to enhance asset management regulation and point-of-sale transparency. In respect of asset management regulation, it is proposed that the Fund Manager Code of Conduct be amended to clarify that it applies to all licensed persons whose business involves the management of collective investment schemes or discretionary accounts.

The amendments also propose to set out in a schedule the code-specific requirements which are not applicable to managers of discretionary accounts. Insofar as point-of-sale transparency is concerned, the consultation proposes amendments to the Code of Conduct for Persons Licensed by, or registered with, the SFC (Code of Conduct) that will restrict the use of the term ‘independent’, specifically when monetary or non-monetary benefits are received by the intermediary.

The consultation also requests further disclosure to be made regarding the range of monetary benefits receivable by an intermediary on an annual basis and the maximum dollar amount of such monetary benefits receivable per year. The proposed amendments do not change the existing Code of Conduct requirement for intermediaries to disclose non-explicit remuneration arrangements in relation to the organization and distribution of investment products.

The consultation concluded on 22 February 2017, but comments have not yet been published.

Consultation on the Professional Investor Regime

In March 2017, the SFC published a consultation paper concerning proposed amendments to the Securities and Futures Rules (Professional Investor Rules), the objective of which is to enhance transparency and promote market consistency by formalizing modifications previously granted by the SFC on an ad hoc basis and to expand the categories of persons who qualify as professional investors. The proposed amendments would (i) allow a portfolio held in a joint account with a person other than an associate, or wholly owned investment vehicle, of an individual to be counted in ascertaining whether the threshold to qualify as a professional investor is met, (ii) expand the definition of corporations which qualify as professional investors, and (iii) allow alternative forms of evidence to demonstrate qualification as a professional investor. The consultation concluded on 3 April 2017 but comments have not yet been published.

Consultation on Position Limit Regime

In March 2017, the SFC published consultation conclusions from November 2016 regarding (i) proposed enhancements to the position limit regime, and (ii) associated amendments to the Securities and Futures (Contracts Limits and Reportable Positions) Rules (CLRP Rules) and the Guidance Note on Position Limits and Large Open Position Reporting Requirements.

The amended CLRP Rules came into operation on 1 June 2017.

Consultation on Protected Arrangements under the Financial Institutions Resolution Ordinance

In April 2017, the SFC, in conjunction with the Financial Services and the Treasury Bureau of the Government (FSTB) and the Hong Kong Monetary Authority (HKMA), published joint consultation conclusions in respect of the November 2016 consultation regarding the regulations on protected arrangements (PARs) to be made as subsidiary legislation under section 75 of the Financial Institutions (Resolution) Ordinance (FIRO).

The objective of the PARs is to ensure legal certainty of those financial arrangements that are vital to the daily functioning of financial markets and which are entered into with a financial institution that is within the scope of the resolution regime under FIRO. The consultation paper sought feedback on  (i) the necessary scope and degree of protection for the different classes of protected arrangements to achieve orderly resolution; and (ii) the consequences and applicable remedial actions to be taken by a resolution authority should it inadvertently not act in accordance with the PARs in effecting a partial property transaction or bail-in. All proposed arrangements were adopted, and both FIRO and the PARs came into effect on 7 July 2017.

Consultation Paper on Online Distribution and Advisory Platforms

In May 2017, the SFC published a consultation paper on proposed guidelines regarding the provision of investment products via online platforms. Under the current regulatory regime, these transactions are not regulated under a specific code or set of guidelines. The objective of the proposed guidelines is to enhance investors’ understanding of investment products available on such platforms through appropriate disclosure, in light of the ease of access to such products and the absence of face-to-face communication with a licensed intermediary in such transactions.

The proposed guidelines focus on governance and controls, the satisfaction of the suitability requirement when making a recommendation or solicitation online, and the additional protective measures which should be adopted for the sale of complex products on an unsolicited basis. The consultation period will end in August 2017.

Consultations on Mandatory Clearing and Expanding Mandatory Reporting

Mandatory clearing and mandatory reporting were introduced as part of the new regulatory regime for over-the-counter (OTC) derivatives, which was designed to increase transparency and reduce counterparty risk. Phase 1 mandatory clearing came into effect on 1 September 2016 and Phase 2 mandatory reporting came into effect on 1 July 2017.

In June 2017, further joint consultation conclusions were published by the SFC and the HKMA relating to Phase 2 mandatory reporting and the proposed adjustments to the scope of the term ‘OTC derivative product’. The effect of the adjustments is that (i) products traded on and cleared through the markets on the expanded list prescribed under s392A of the SFO and (ii) Delta One Warrants with certain prescribed features, will be excluded from the definition of ‘OTC derivative product’ and will therefore not be reportable under Phase 2 mandatory reporting.

Establishment of the Insurance Authority

The new independent Insurance Authority (IA) was established pursuant to the Insurance Companies (Amendment) Ordinance 2015 (ICO), and formally took over the role of regulator of insurance companies from the Office of the Commission of Insurance (OCI) on 26 June 2017.

In addition to the powers previously exercised by the old Insurance Authority (the individual who was the Commissioner of Insurance), the new IA has (i) the power to approve or revoke certain additional appointments at an authorized insurer and (ii) new regulatory, investigatory and enforcement powers. In particular, the new IA can revoke the approval of an appointment of the chief executive or managing director of an authorized insurer if the individual is no longer considered fit and all appointments of directors, additional controllers, appointed actuaries of long term insurers and key persons in ‘control functions’ are now subject to the approval of the IA. ‘Control functions’ include risk management, financial control, compliance, internal audit, actuarial, and intermediary management functions.

The IA’s new regulatory and investigatory powers will be similar to those of the other financial regulators in Hong Kong, and include the power to enter into the premises of an insurer and inspect and require the production of documents. Within the next two years, the IA will take over the regulation of insurance intermediaries from the three current self-regulatory organizations.


In 2015, the SFC began proceedings against AcrossAsia Limited (AcrossAsia) before the Market Misconduct Tribunal (MMT) for failing to disclose inside information as soon as reasonably practicable. Proceedings were also commenced against Albert Saychuan Cheok, the chairman of AcrossAsia, and Vicente Binalhay Ang, the chief executive officer of AcrossAsia, on the basis that their alleged reckless or negligent conduct had caused the alleged breach by the company. This was the first case brought by the SFC for a breach of the disclosure rules for listed-companies since it was introduced in 2013.

In November 2016, as a result of a settlement agreement with the SFC, the MMT found that AcrossAsia failed to disclose the information as soon as reasonably practicable as a result of Mr Cheok’s and Mr Ang’s negligence. In reaching this decision, the MMT held that the wording ‘as soon as reasonably practicable ran from when legal advice was obtained by AcrossAsia regarding the inside information in question, not when AcrossAsia first had knowledge of such information. The MMT fined each of AcrossAsia and Mr Ang HK$600,000 and fined Mr Cheok HK$800,000.

Andrew Left

In 2014, the SFC began proceedings before the MMT against Andrew Left, an activist short seller, author and editor of the online investment newsletter Citron Research for an alleged breach of section 277 of the SFO (disclosure of false or misleading information inducing transactions). The allegations related to a report published in 2012 by Mr Left through Citron Research, which alleged that Evergrande Real Estate Group Limited was insolvent and had presented fraudulent information to the investing public.

In August 2016, the MMT (a) found that the allegations in the report were false or misleading and Mr Left had been reckless in publishing the same, and (b) ordered that Mr Left (i) be banned from trading securities in Hong Kong for five years, (ii) not engage in market misconduct again, (iii) disgorge HK$1,596,240, being the profits received by him, and (iv) pay the SFC for its investigation and legal costs. Mr Left is currently appealing the decision of the MMT before the Court of Appeal.

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