The Hong Kong Banking Ordinance prescribes three kinds of authorised financial institutions: licensed banks, restricted licence banks ("RLBs") and deposit-taking companies ("DTCs").
Banking business is supervised by the Hong Kong Monetary Authority. Licensed banks, RLBs and DTCs are all regulated and must comply with the capital adequacy and liquidity requirements, reporting requirements, ownership and management rules, and financial restrictions imposed by the Banking Ordinance.
1.2 Licensed banks
Licensed banks perform the functions of typical banks, including the operation of current and savings accounts and the acceptance of deposits of any size or maturity. The interest rates banks can charge are subject to the interest rate rules of The Hong Kong Association of Banks, which sets the maximum rates payable on bank deposits of original maturities of up to 15 months less a day, with the exception of deposits of HK$500,000 or above for which banks may compete freely. Locally incorporated banks are required to have a minimum paid-up share capital of HK$150 million.
An overseas applicant for a banking licence must be incorporated in a country where the authorities exercise satisfactory supervisory control, the banking group of which the applicant is a member must have assets in excess of US$16 billion and there must be some acceptable form of reciprocity in the applicant's country of origin for Hong Kong banks. If the applicant is of undoubted standing or if granting the licence would serve Hong Kong's best interests, then licences can be issued even though the assets requirement is not met.
A local applicant must have been an authorised institution under the Banking Ordinance for at least 10 years, it must not be a subsidiary of a licensed bank and it must have a paid-up capital of at least HK$150 million, deposits from the public of at least HK$3 billion and total assets of at least HK$4 billion.
The Governor retains the discretion to refuse any application for a banking licence even though all the specified criteria are satisfied.
1.3 Restricted Licence Banks
Restricted Licence Banks ("RLBs") may accept deposits of any maturity from the public, but only in amounts of not less than HK$500,000. They cannot operate current or savings accounts nor carry on the business of paying or collecting cheques of customers. There are no restrictions on the interest rates that RLBs may offer.
An applicant for a restricted banking licence must have a paid-up capital of at least HK$100 million and it must be a fit and proper body to be granted a licence. There are various factors which will be taken into account in determining whether a company is "fit and proper" but overall discretion is given to the Financial Secretary. These factors include the competence of the management of the company, its general standing or, if newly formed, its parent company's general standing, in the financial community, the number of persons resident in Hong Kong who have effective control of the business (there must be at least two) and the identity of any owner of 10% or more of the voting share capital of the applicant. In the case of an overseas applicant, it must be subject to adequate supervision by the regulatory authorities in its country of incorporation.
If an RLB is an overseas bank and has the word "bank" or a derivation of that word in its name, it must use the term "restricted licence bank" in conjunction with its own name.
1.4 Deposit-Taking Companies ("DTCs")
DTCs are restricted to taking deposit of not less than HK$100,000 with a term to maturity of at least 3 months. DTCs are subject to the same restrictions as RLBs in that they cannot operate current or savings accounts and cannot carry on the business of paying or collecting cheques for customers.
Applications for registration as a DTC will be considered only if the paid-up capital of the applicant is at least HK$25 million and the applicant is a fit and proper body to be registered. The Banking Commissioner will take into account factors similar to those taken into account for RLBs when determining whether an applicant is "fit and proper" but has power to refuse an application even if all the usual conditions are satisfied.
1.5 Licensed Money Lenders
The Money Lender's Ordinance regulates the activities of those who carry on the business in Hong Kong of lending. However, licensed banks, RLBs, DTCs and their subsidiaries are exempt from the scope of the Money Lender's Ordinance and certain kinds of loan are exempt. Broadly speaking, a person who is not exempt from the Ordinance must obtain a money lender's licence in order to make unsecured loans to individuals or to companies with a paid-up share capital of less than HK$l million. In addition, the terms of a licensed money lender's loan documentation must comply with somewhat restrictive statutory requirements in order to be valid. Money lenders are supervised by the Royal Hong Kong Police and not by the Hong Kong Monetary Authority.
Securities business in Hong Kong is regulated primarily by the Securities Ordinance which regulates dealing in securities, advising on securities and investment management business and by the Protection of Investors Ordinance which governs advertising in relation to securities and investment arrangements. The Securities Ordinance is administered by the Securities and Futures Commission ("SFC"). The definition of "securities", for the purpose of the Securities Ordinance, is very broad and includes shares, stocks, debentures, loan stock and bonds. Some items are excluded, including bills of exchange, promissory notes, certificates for cash deposits and the shares of private companies.
It is an offence for a person to carry on the business of dealing in securities unless that person is registered as a dealer or declared an exempt dealer.
A person is regarded as dealing in securities if, in return for a commission, rebate or other remuneration, that person:-
(a) receives from another person an offer to effect a dealing or to acquire or dispose of securities and communicates it to a registered dealer or an exempt dealer; or
(b) effects an introduction between a registered dealer or an exempt dealer and another person in order that that other person may effect a dealing or make an offer to acquire or dispose of securities; or
(c) on behalf of another person, effects a dealing through a registered dealer or an exempt dealer or makes an offer to a registered dealer or an exempt dealer to acquire or dispose of securities.
On the other hand, a person will not be regarded as dealing in securities, so that the Securities Ordinance will not apply:-
i) in the case of transactions which are effected on that person's behalf by a registered or exempt dealer or where offers are made by that person to a registered or exempt dealer; or
ii) where that person, acting as principal, acquires, subscribes for or underwrites securities; or
iii) where that person, acting as principal, effects transactions with a professional investor (meaning a person whose business involves the acquisition or disposal or the holding of securities) whether the professional investor is acting as principal or agent; or
iv) where offering documents issued by that person meet certain criteria prescribed in the Securities Ordinance, for example an approved prospectus.
There are four principal types of authorisation: registered dealers, exempt dealers, registered investment advisers and exempt investment advisers.
2.2 Registered Dealers
Applications to register are made to the SFC. The applicant will have to satisfy the SFC that it is a fit and proper body to be registered. The SFC will take into consideration the financial status, educational or other qualificational experience, honesty and reputation of the directors and officers of the applicant. The SFC will also take into consideration matters relating to any employee or substantial shareholder of the applicant.
Registration involves (i) registration of the corporation as a dealing corporation, (ii) the registration of at least one director who will participate directly in and be responsible for the supervision of the applicant's securities business as a dealing director and (iii) the registration of any member of the applicant's staff (other than a director) who is involved in conducting securities business for the applicant as a dealer's representative.
A registered dealer is required to maintain a minimum net capital (currently HK$5 million) and a minimum liquidity margin (currently HK$500,000). In addition, it must pay clients' monies into a designated trust account and carry out an annual audit of its accounts relating to its securities business. These accounts must be separate from the accounts of any other business carried on by the registered dealer.
In January, 1992, the SFC published a Consultative Document containing a review of the capital adequacy requirements for securities and futures intermediaries and recommendations regarding revised financial resources rules. These rules came into operation on 1st December 1993. The new liquid capital requirement for each dealer varies with the level of business undertaken but only after a certain level of activity has been reached. Hong Kong's capital requirements are in line with those existing in other financial centres.
2.3 Exempt Dealers
The SFC is entitled to declare any person who deals in securities as an exempt dealer. This is available if (i) the applicant can satisfy the SFC that its main business is different from securities business or its main business is dealing in securities through underwriting and/or effecting transactions with professional investors who are acting as principals and (ii) its securities business in Hong Kong is conducted primarily through registered or exempt dealers or a member of a foreign stock exchange.
2.4 Registered Investment Advisers
It is an offence to carry on the business of advising on securities for remuneration unless registered as an investment adviser or an exempt investment adviser. However, if a registered dealer or exempt dealer gives investment advice which is incidental to its securities business, there is no need to register as an investment adviser or exempt investment adviser.
There are no formal qualifications prescribed for a person who applies to become a registered investment adviser. There is no statutory minimum capital requirement but the SFC expects a registered investment adviser to be capitalised to a level commensurate with the type of investment advisory and management business it proposes to conduct and at all times to maintain net tangible assets of not less than zero. The SFC is primarily concerned as to whether the applicant is "fit and proper" and will take into account various factors concerning each of the directors and officers of the applicant, including their financial status, their qualifications and experience, their reputation, character, financial integrity and reliability.
The registrations, in the case of investment advice and management, are similar to those for a registered dealer in securities involving (i) the corporation, as an investment adviser, (ii) at least one investment advising director and (iii) any investment adviser's representative (other than a director) involved in the business of giving investment advice on the corporation's behalf. The registration fees are HK$4,900 for a corporation, the same for an investment advising director and HK$1,850 for each investment adviser's representative.
A registered investment adviser must report various matters to the SFC, including any litigation, any changes in its board of directors or change of its ultimate holding company, any change in its nominal or issued share capital, any change in its registered representatives, any change of address and any intended change to the location of the premises at which it keeps the records of its investment advisory business. It must make annual returns to the SFC. It must also keep a register of securities in which it has an interest and of particulars relating to their acquisition and disposal. The SFC has wide general powers of supervision over registered investment advisers.
2.5 Exempt Investment Advisers
Exempt investment adviser status is available if the SFC is satisfied that investment advice is given either mainly to persons whose business involves the acquisition and disposal of or the holding of securities (professional investors) or to persons residing outside Hong Kong. The application fee is currently HK$7,000. The advantage of being an exempt investment adviser, as opposed to a registered investment adviser, is only that the reporting and recording regulations referred to above do not apply to exempt investment advisers. As these regulations are not considered onerous, it is usual for an applicant to apply to become a registered investment adviser.
The Insurance Companies Ordinance provides that insurance business can be carried on in or from Hong Kong only by:-
i) a company authorised to carry on that class of insurance business;
ii) Lloyds; and
iii) an association of underwriters approved by the Governor in Council.
Any company may make an application to the Insurance Authority for authorisation to carry on any class of insurance business. This authorisation will not be given to a company unless its director(s) or controller(s) are fit and proper persons to hold these positions. In addition, there are further requirements which the applicant must meet, the main ones being: net asset requirements (which vary depending on the amount of premium income received by the applicant in its last preceding financial year and the type of insurance business the applicant company intends to carry on); the company's share capital must exceed HK$5 million or HK$10 million (depending on the type of insurance business the applicant intends to carry on); the company must have covered its risks adequately; the company must be able to meet its obligations; that it would not be contrary to the interests of any existing and potential policy holders of the company for the company to be permitted to carry on the form of insurance business applied for.
Insurers carrying on any class of insurance business in the United Kingdom are exempt from the provision of the Insurance Companies Ordinance, subject to certain conditions.
3.4 Regulation of Insurers
Every authorised insurer is required to file its accounts with the Insurance Authority within six months after the end of the period to which they relate. Each insurer pays an annual fee to the Insurance Authority which is currently HK$50,000 and insurers must maintain the appropriate net asset value. In addition, the Insurance Authority is given wide powers of intervention under the Insurance Companies Ordinance in order to regulate authorised insurers.
NOTE: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
If you would like further advice please contact: David Ellis, Johnson Stokes & Master, 16th Floor, Princes Building, 10 Chater Road, Hong Kong; Tel 2843 4226; Fax no. : 2845 9121. Alternatively do a text search "Johnson Stokes and Master" and "Business Monitor"