Hong Kong: Responding to SFC Enforcement Action: New Tactics?

Last Updated: 30 November 2007
Article by Timothy Loh and Howard Burchfield III
The Securities and Futures Ordinance ("SFO") establishes the framework by which licensed or registered persons are regulated. Where they misconduct themselves, it provides for them to be disciplined and, in some cases, subjected to criminal proceedings or proceedings before the Market Misconduct Tribunal ("MMT").

Under this framework, disciplinary sanctions may be imposed on licensed and registered persons for conduct which may also serve as the subject of criminal offences. Perhaps more significantly, disciplinary sanctions in such cases may exceed criminal sanctions, even though the legal rights afforded to defendants in disciplinary proceedings are far fewer than those afforded in criminal proceedings.

In principle, this is wrong. Indeed, the recent decision of the Court of Appeal in Koon Wing Yee v. Insider Dealing Tribunal suggests that legal rights afforded to defendants in disciplinary proceedings may be more extensive than those currently afforded to them.

The Koon Decision

In Koon, the Court of Appeal held that proceedings before the Insider Dealing Tribunal ("IDT") were criminal in nature even though the legislature had classified them as civil proceedings under the now-repealed Securities (Insider Dealing) Ordinance. As a result, the targets of those IDT proceedings were entitled to the protection of Articles 10 and 11 of the Hong Kong Bill of Rights ("HKBOR"), including the right against self-incrimination and the heightened criminal standard of proof.

Consequences of Koon

The Koon decision opened up the possibility of litigation in relation to whether enforcement proceedings designated by the legislature as civil can retain that classification or should now be regarded as criminal.

Challenges based on Koon have been raised before both the MMT and the Securities and Futures Appeal Tribunal ("SFAT"). Although those challenges were rebuffed, with at least the MMT ruling now the subject of judicial review, they offer guidance for how licensed and registered persons faced with disciplinary proceedings under the SFO may proceed in the future.

The three criteria

Based on Koon, 3 factors determine whether proceedings are criminal or civil in nature:

  • the characterization of the offense under domestic law;

  • the nature of the offense; and

  • the nature and degree of severity of the penalty.

The characterization of the offense

The SFO classifies disciplinary proceedings as civil in nature, establishing that it is sufficient for the SFC to be satisfied on the standard of proof applicable to civil proceedings in a court of law that a licensed or registered person has contravened the SFO or any requirement made thereunder.

However, as the court noted in Koon, the classification of disciplinary proceedings as civil in nature is the least important of the 3 factors. Thus, in Koon, the court decided that insider dealing proceedings were criminal even though the legislature had classified them as civil. If it were otherwise, the legislature could create offenses punishable by incarceration and then insulate them from judicial scrutiny and the protections available in criminal proceedings merely by classifying as civil.

The nature of the offense

Disciplinary sanctions serve 2 purposes, the first being to protect the public and the second being to punish a licensed or registered person for misconduct. Under Koon, the nature of an offense will tend to be civil where sanctions are imposed primarily to protect the public but criminal if the sanctions are primarily intended to punish the offender.

There is also a moral component involved in establishing the nature of the offense, although it is often given less weight than the purpose of the sanctions; the Koon decision looked both to the element of dishonesty involved in the offense of insider dealing and to the fact that insider dealing is treated as a crime by many jurisdictions.

The nature and degree of severity of the penalty

The nature and degree of severity of a penalty includes consideration of whether an offense may result in incarceration or other loss of liberty. Generally, the loss of one’s ability to practice a chosen trade (for example, as a broker) is not likely to be regarded as a loss of liberty.

However, the prospect of a significant financial penalty may cause proceedings to be criminal in nature. This is so even if the penalty is calculated by reference to the profit made or loss avoided. Thus, in Koon, the fact that insider dealing could be punished by a fine of up to 3 times the amount of profit made or loss avoided resulted in a finding that proceedings before the IDT were criminal in nature.

Response to Koon

The initial response to Koon has been tepid. The MMT has ruled that MMT proceedings are civil in nature. Similarly, the SFAT has ruled that disciplinary proceedings are civil in nature but that the applicable standard of proof is subject to a sliding scale of legal protection.

SFAT decision

In holding that disciplinary proceedings were civil in nature, the SFAT relied on 2 points. First, the SFAT noted disciplinary proceedings are not of general application. Instead, they are limited to a restricted group (i.e. licensed or registered persons). Accordingly, based on English judicial precedent, they are unlikely to be classified as criminal unless they may lead to a loss of liberty.

Secondly, the SFAT found that disciplinary proceedings are concerned with both punishing offenders and protecting the public. Consequently, disciplinary proceedings are not necessarily criminal in nature.

However, the fact that disciplinary proceedings may be civil in nature does not mean that protections afforded criminal proceedings are necessarily absent. The sliding standard of proof mentioned above, reflecting the maxim that graver allegations require weightier proof, is one example of heightened protections available in a so-called civil proceeding. Ultimately, depending on how the Koon factors are applied in any given case, other criminal protections, particularly those implicated under the HKBOR, could come into play.

Practical Implications

Because the Koon criteria must be applied on a case-by-case basis, the SFAT decision cannot be read as support for the proposition that all disciplinary proceedings will be regarded as civil. Moreover, the SFAT is not a judicial body and its decisions are subject to review. Thus, some uncertainty remains.

In the right case, it may be possible to secure a criminal classification for certain proceedings, and the procedural protections that go along with such a classification. Even if not, it may be possible to press for greater legal rights including the application of a higher standard of proof, analogous if not identical to the criminal standard.

Arguing For A Criminal Standard

While there is judicial authority that a disciplinary proceeding is unlikely to be classified as criminal unless it involves or may lead to a loss of liberty, we do not believe that this means that disciplinary proceedings will never be classified as criminal.

Discipline in lieu of criminal prosecution

In particular, in a disciplinary proceeding, where the misconduct may also be prosecuted as a criminal offence under the SFO and the penalty proposed would exceed that available through the criminal proceedings, there is a compelling argument that the disciplinary proceeding should be treated as criminal. It is anomalous that where misconduct is prohibited as a criminal offence, disciplinary proceedings with fewer legal protections can be taken to punish that misconduct with sanctions which exceed those customary for the criminal offence.

In this regard, there have been a number of disciplinary and criminal proceedings in relation to unlicensed dealing in securities. In these cases, the sanctions imposed on a disciplinary basis have far exceeded those imposed on a criminal basis. For example, in one disciplinary case, a representative of a global financial institution was fined HK$287,372 by the SFC for dealing in securities without a license for a period of approximately 2 months. In contrast, in a different case prosecuted as a criminal offence, a bank was fined a mere HK$40,000 for dealing in securities without a license for a period of approximately 6 months.

The most striking aspect of the contrast in the size of the penalties in these cases is that in the disciplinary case, the SFC specifically found that the public had suffered no harm as a result of the representative’s actions. In other words, the fine was designed to punish the representative rather than to protect the public.

Under the criteria above, such disciplinary proceedings ought to have been classified as criminal since:

  • unlicensed dealing in securities is a criminal offence,

  • the fine was designed to punish the representative rather than to protect the public, and

  • the fine’s amount was far greater than what would likely have been imposed in a criminal proceeding.

Consequences of criminal classification

If a disciplinary proceeding is treated as criminal rather than civil in nature, the following consequences may arise:

  • the SFC may lose the right to compel or use testimony of a self-incriminatory nature;

  • the SFC may lose the right to rely upon hearsay testimony and to shield witnesses from cross-examination;

  • the SFC may have to meet the higher criminal standard of proof; and

  • the SFC may have to comply with the legal protections afforded to defendants under the HKBOR.

Falling Back On The Civil Standard Of Proof

Even if disciplinary proceedings are treated as civil in nature, the evolving law in this arena promises to provide an increasing number of opportunities for legal counsel to assert legal rights normally afforded only in criminal proceedings.

In particular, the recent MMT and SFAT decisions have reiterated the sliding nature of the civil standard of proof and have left the possibility open that in certain disciplinary proceedings, the civil threshold may approach or even be identical to the criminal standard.

TIMOTHY LOH, SOLICITORS serves as Hong Kong and International Legal Counsel to financial institutions. Since its establishment in 2004, its clients have included 10 financial institutions ranked in the FT Global 200 and it has been recommended each year by the Asia Pacific Legal 500 for its financial services and regulatory practice.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.