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Four regulators, four perimeters

Hong Kong divides regulatory responsibility according to the product or activity involved. A single institution may therefore be supervised by more than one regulator. In an exam question, identify the activity first and then match it to the regulator.

• Securities and Futures Commission (SFC). The SFC regulates securities, futures, leveraged foreign exchange, asset management, corporate finance advice and the conduct of licensed intermediaries.
• Hong Kong Monetary Authority (HKMA). The HKMA is responsible for banking supervision, monetary stability and the Linked Exchange Rate System. It also supervises authorized institutions prudentially.
• Insurance Authority. This authority regulates insurers and insurance intermediaries.
• Mandatory Provident Fund Schemes Authority (MPFA). The MPFA regulates the Mandatory Provident Fund system and registered schemes.
• Product authorization. Only the SFC may authorize a collective investment scheme or a document that invites the public to acquire an interest in one.

The Financial Services and the Treasury Bureau sets policy above these regulators. The Accounting and Financial Reporting Council regulates auditors of listed entities. Neither body replaces the regulator responsible for the activity in the question.

SFO s.5SFO s.104

The bank that is also a broker

A bank that deals in securities carries on an SFC-regulated activity within an institution supervised by the HKMA. Under the SFO, it is registered with the SFC as a registered institution instead of being licensed as a corporation.

• Registration application. The SFC refers the application to the Monetary Authority. The Monetary Authority considers it, consults the SFC and advises whether the applicant is fit and proper.
• Routine supervision. The Monetary Authority enters premises and inspects records when supervising a registered institution in the ordinary course.
• Disciplinary action. The SFC retains disciplinary powers over regulated activities. Before taking action, it must consult the Monetary Authority and give the institution a reasonable opportunity to be heard.

This arrangement allows the two regulators to oversee different parts of the same institution without treating the entire bank as an SFC-regulated business.

SFO s.119SFO s.180SFO s.198

The SFC - an independent statutory body

The Commission is an independent statutory body established by the Securities and Futures Ordinance. It is separate from government departments and the civil service.

• Board. The Chief Executive of the HKSAR appoints the board. Executive directors run the operating divisions, while non-executive directors provide oversight.
• Accountability. The Commission is accountable to the Financial Secretary under the statute. It also appears before Legislative Council panels.
• Funding. Transaction levies and licensing fees provide most of its funding, which supports its operational independence.
• Operating divisions. Its main divisions include Corporate Finance, Intermediaries, Investment Products, Enforcement, Supervision of Markets and Corporate Affairs.
• Powers. The Commission may hold property, enter contracts, borrow on security and establish a wholly owned subsidiary for education and research. The Investor and Financial Education Council was established through that power.
• Good-faith immunity. A person acting in good faith while performing a function under the Ordinance is generally protected from civil liability. The specific exception for an auditor appointed under section 153 should be learned separately.

SFO Part IISFO s.5SFO s.380

The six regulatory objectives

Section 4 of the SFO states six regulatory objectives. Exam questions often ask which proposed objective does not belong, so learn both the list and its limits.

• Fair and orderly markets. The Commission seeks to maintain the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry.
• Public understanding. It promotes public understanding of financial services and how the industry operates.
• Investor protection. It provides protection for members of the public who invest in or hold financial products.
• Crime and misconduct. It works to minimize crime and misconduct in the industry.
• Systemic risk. It seeks to reduce systemic risks in the industry.
• Financial stability. It assists the Financial Secretary in maintaining Hong Kong's financial stability.

The objectives do not guarantee investors against loss or require the Commission to produce a particular market outcome.

SFO s.4

HKEX - one listed company, many markets

HKEX is listed on the exchange that it operates. The SFC therefore regulates HKEX when it acts as a listed issuer.

• Trading markets. The Stock Exchange of Hong Kong (SEHK) operates the securities market, while Hong Kong Futures Exchange (HKFE) operates the futures market.
• Clearing organizations. HKSCC operates CCASS and clears the securities market. SEOCH clears SEHK stock options, HKCC clears HKFE futures and options, and OTC Clear clears over-the-counter derivatives.
• SEHK as the front-line regulator. SEHK administers the Listing Rules and monitors listed issuers. The rules bind issuers through the listing agreement and do not have the status of legislation.
• The SFC as statutory regulator. The SFC oversees SEHK's listing function and exercises statutory powers, including the power to object to a listing application under the Stock Market Listing Rules.

For exam purposes, separate an SEHK listing decision from an SFC statutory power or sanction.

SFO Part III