Hong Kong’s Securities and Futures Commission (SFC) published a circular on 7 January 2020 on the licensing obligations of family offices. This has now been supplemented by FAQs issued by the SFC on 8 September 2020, providing additional guidance on the application of the licensing regime to single family offices and multi-family offices. The SFC has reassured the industry that it is not its intention to regulate genuine single family office structures. However, the issue of whether multi-family offices require to be licensed with the SFC will depend on whether they are carrying on a business in a regulated activity in Hong Kong, as explained further below.
Also on 8 September 2020, the SFC published a revised FAQ on corporate professional investor (CPI) assessment criteria in order to specifically address the issue of family offices.
No definitions of “family”, “family offices”, “single family office” and “multi-family office”
The Securities and Futures Ordinance (SFO) does not define “family” or “family offices”. The SFC explained in the FAQs that it had not sought to define what constitutes “family membership” in the context of a single family office as the licensing obligations do not hinge on whether the clients of a family office are family members or not. Such an approach avoids the imposition of an otherwise narrow definition of what constitutes a single family office. Nonetheless, the SFC observed that a typical single family office would involve an arrangement (often structured as a corporate vehicle owned or controlled by a family) to manage that family’s assets or investments. In contrast, a multi-family office “by definition serves more than one high net worth family.”
Test for whether a family office is required to be licensed
The FAQs clarify that in order for a licensing obligation to arise in respect of a family office, all of the following factors must be present:
(i) the activities being undertaken must constitute regulated activity(ies);
(ii) such regulated activity(ies) is/are being carried out as a business; and
(iii) such business is carried out in Hong Kong.
The definition of regulated activities in the SFO contain a number of carve-outs which can be relied upon by single family offices. In particular single family offices which engage in asset management activities (Type 9) may rely on an intra-group carve-out where such services are provided to its wholly owned subsidiaries, its holding company which holds all of its issued shares, or other wholly owned subsidiaries of that holding company.
The FAQs clarify that what amounts to “carrying on a business in Hong Kong”, is a question of fact but the following factors may be taken into consideration:
(i) whether any person is performing a duty that requires attention;
(ii) whether the activities involve continuity; and
(iii) whether the activities were carried out in pursuit of profit and are capable of making profit.
In our experience, most single family offices are unlikely to be deemed to be carrying on a business in Hong Kong and hence the question of SFC licensing will fall away. However, multi-family offices are typically established and run as commercial ventures and the question of whether such activities require to be licensed will depend on whether the services being offered are caught by the definition of “regulated activity” as well as the additional factors outlined above. In most cases the investment management activities of multi-family offices are likely to trigger an SFC licensing obligation.
The SFC has clarified that the sharing of premises and a common administrative infrastructure by two or more single family offices would not automatically result in such arrangements being considered as a multi-family office. However, where such arrangements involve the sharing of resources in relation to the investment process, this is likely to be considered as constituting a multi-family office (thereby increasing the likelihood of a licensing obligation being triggered if the factors highlighted above are present).
Revised CPI assessment criteria to accommodate family offices
The Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) permits intermediaries to dis-apply certain investor safeguards in relation to relevant products and markets, most notably the suitability obligations, when dealing with institutional investors and/or CPIs. The assessment criteria as to whether an entity qualifies as a CPI is contained section 15.3A of the Code of Conduct as supplemented by an FAQ previously issued by the SFC in January 2015.
One of the criteria under section 15.3A of the Code of Conduct which requires to be assessed by intermediaries is whether such entity has an appropriate corporate structure and investment process and controls. Family office investment structures were not referred to in the previous FAQ and intermediaries have ended up adopting a more cautious approach in undertaking the CPI assessment on family offices. This has resulted in family offices failing to qualify as a CPI and having to be treated as retail investors in their interactions with such intermediaries thereby triggering the suitability and other obligations relating to retail investors under the Code of Conduct.
In its revised FAQ concerning appropriate corporate structures and investment processes that intermediaries may take into account in assessing CPIs, the SFC has provided greater clarity (and regulatory comfort) as to what criteria should be applied when assessing investment vehicles owned by family trusts or family offices that engage investment professionals to manage their investments. The SFC has amended the original FAQ to include the following additional example of when a CPI would be more likely to be regarded as having an appropriate corporate structure and substantive investment process and controls:
“ Where it is ultimately owned by or established for the ultimate benefit for an individual or individuals (such as family members) and it relies on competent and suitably qualified professionals to manage the investments of that CPI, where either:
the professionals are authorised to make investment decisions on behalf of the CPI; or
the CPI makes informed investment decisions taking into account the advice or recommendation of such professionals; and
the professionals are responsible for the investment strategies and investment process of the CPI.”
We welcome the publication of these two FAQs as facilitating the regulatory environment for family offices.