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Hong KongPart VII of the SFO: the statutory side of business conduct
Part VII of the Securities and Futures Ordinance holds the statutory business conduct obligations that apply to intermediaries and the SFC's power to make conduct rules. The Code of Conduct sits alongside it as non-statutory guidance, enforced indirectly through the fit and proper requirement.
Conduct regulation in Hong Kong runs on two levels, and Part VII is the lower one. Statute sets certain obligations directly and empowers the SFC to make rules. Above that sits a layer of codes and guidelines which are not law but which decide, in practice, whether you keep your licence. Candidates who understand the relationship between those two levels find the conduct material easy. Candidates who do not spend the whole topic guessing whether something is an offence.
What sits in the Part, and what sits above it
| Level | Instrument | Consequence of breach |
|---|---|---|
| Statute | Part VII of the Ordinance and rules made under it | Statutory consequences, which can include offences and disciplinary action |
| Subsidiary legislation | Conduct-related rules made under the Ordinance | Breach of a rule with the force of law |
| Non-statutory | The SFC Code of Conduct and the sector codes | Not an offence in itself, but bears on whether a person remains fit and proper |
A breach of the Code of Conduct is not, by itself, a criminal offence, and it does not by itself make a transaction void. It reflects on fitness and properness, and fitness and properness is a statutory requirement for holding a licence. That is the whole mechanism.
Why the Ordinance does not simply legislate all conduct
It could have. Several jurisdictions have tried. The reason Hong Kong keeps most conduct standards in a code is speed: a code can be revised when a product or a practice changes, and primary legislation cannot. The cost of that flexibility is that the standards are not directly enforceable as law, which is why the fit and proper bridge exists.
You can see the design decision quite clearly if you look at what did get put in statute. The provisions that survive at statutory level tend to be the ones where the state wants a hard prohibition rather than a standard of behaviour, and where the consequence should not depend on a regulator's discretion.
How Part VII interacts with the rest of the Ordinance
- Part V decides whether the conduct regime applies to you at all. No licence, no Part VII obligations, though other prohibitions still bite.
- Part VI covers client assets and records, which is conduct in the broad sense but sits in its own Part with its own rules.
- Part IX is where a conduct failure produces a sanction. Part VII creates obligations; Part IX punishes.
- Part X is the emergency lever, used where client interests need protecting before any finding is made.
That chain is worth rehearsing because exam items often describe a conduct failure and then ask what happens next, rather than asking what rule was broken. The answer is usually a Part IX disciplinary outcome, not a Part VII one.
What the Code of Conduct adds
The Code is where the obligations a client would recognise actually live: knowing your client, assessing suitability, having a client agreement, managing conflicts, seeking best execution, handling complaints. It is examined under Topic 5 of the Paper 1 syllabus rather than here, and we cover it separately in the SFC Code of Conduct explained.
For Topic 3 purposes you need only the relationship. Statute empowers and prohibits. The Code specifies. Fitness and properness joins the two. If you can say that in one breath, you have what Part VII is worth on this paper.
How Part VII gets examined
Lightly, and structurally. In our experience the items that touch Part VII are usually asking one of two things. Which Part of the Ordinance deals with business conduct of intermediaries. Or, more interestingly, what the legal status of an SFC code is. The second is the better question and it appears in several disguises.
The opinion, and it is a slightly unpopular one. Part VII is background reading. It is one of the eleven Topic 3 headings, but it carries less examinable substance than its neighbours, because most of what a candidate needs to know about conduct is taught and tested under Topic 5. Spend twenty minutes here. Spend the time you save on Part VI and the enforcement chain, which are dense with genuinely distinct content.
The concession: that judgement is ours and it is not verifiable. HKSI publishes no item-level breakdown, so nobody outside the Institute can prove which headings carry weight. If your sitting happens to draw two questions on the statutory basis of conduct regulation, twenty minutes will feel like the wrong call. The structural point in the callout above is the part that protects you either way.
The five-minute version
- Part VII is the statutory home of business conduct obligations for intermediaries.
- Detailed conduct standards sit in SFC codes, which are not statute.
- Breaching a code is not an offence in itself.
- It reflects on fitness and properness, which is a statutory licensing requirement.
- Sanctions for conduct failures come through Part IX, not Part VII.
If you want to see how the sanction end of that chain works, read supervision, discipline and intervention under the SFO.
Common questions
What does Part VII of the SFO deal with?
Business conduct of intermediaries. It carries statutory conduct obligations and supports rule-making on conduct, while the detailed standards that firms follow day to day are set out in the SFC's codes and guidelines rather than in the Part itself.
Is the SFC Code of Conduct legally binding?
Not as statute. Breaching the Code is not in itself a criminal offence and does not invalidate a transaction. It does bear on whether a licensed person remains fit and proper, which is a continuing statutory requirement, so the practical consequences of a breach can still be severe.
Which Part of the SFO punishes a conduct failure?
Part IX, which contains the disciplinary powers: revocation or suspension of a licence, public or private reprimand, fines, and prohibition orders. Part VII creates obligations. Part IX is the sanction machinery, and Part X provides intervention powers where clients need protecting immediately.
Why does Hong Kong keep conduct standards in a code rather than in statute?
Speed and flexibility. A code can be amended as products and practices change, while primary legislation cannot move at that pace. The trade-off is that code standards are not directly enforceable as law, which is why the continuing fit and proper requirement carries so much weight.
Is Part VII worth much on Paper 1?
It is one of eleven Topic 3 headings, but most conduct content is examined under Topic 5 through the Code of Conduct. The reliably useful points are the location of business conduct in Part VII and the legal status of SFC codes. Both take minutes to learn.