SFC issues warning on dealings with Mainland investors – issues for LCs to consider

On 17 June 2019, the Securities and Futures Commission (SFC) issued a circular to licensed corporations (LCs), which conduct business in Hong Kong, concerning matters of Mainland law governing the conduct of unauthorised activities in the Mainland (Circular). The Circular sounded a warning to Hong Kong LCs against breaching Mainland law and reminded them that any such breach might also constitute a breach of paragraph 12.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, thereby calling into question their fitness and properness to be, or to remain, licensed in Hong Kong. Similar warnings were issued by the Australian Securities and Investments Commission (ASIC) by way of a media release dated 11 April 2019.

The SFC is empowered to administer Hong Kong law governing the financial markets in Hong Kong and to regulate intermediaries conducting business in those markets. It is unusual for a regulator, such as the SFC, whose powers are only exercisable in Hong Kong, to issue advice concerning the law of another jurisdiction.

It appears from the SFC and ASIC publications that Mainland regulators are concerned in relation to the activities of intermediaries based outside the Mainland, which are unlawfully engaging in unauthorised business in the Mainland. A particular concern is unauthorised intermediaries conducting foreign exchange margin trading business in the Mainland.

Many Hong Kong LCs have Mainland clients and this, of itself, has never been a matter of particular concern for the SFC. The concerns expressed by the SFC in the Circular, seemingly on behalf of Mainland regulators, appear to relate to the conduct by Hong Kong LCs of business activities which occur in the Mainland and for which they are not authorised in the Mainland.

When considering this issue, a Hong Kong LC should have regard to matters such as the following:

  • Whether its account-opening procedures in relation to its Mainland clients are conducted in the Mainland.

  • Whether it actively and directly markets its services in the Mainland in a manner specifically designed to attract Mainland investors.

  • Whether it has its own staff, related parties or third party agents acting on its behalf in the Mainland, who are marketing its services in a manner designed to attract Mainland investors, or whether it is employing other means to achieve this objective, such as conducting seminars for investors in the Mainland.

  • Whether it actively and specifically targets Mainland investors on its website and/or provides toll-free Hong Kong telephone numbers for the benefit of Mainland investors.

  • Whether the location of its server is in the Mainland, in which case it might be regarded as promoting its services in the Mainland.

If a Hong Kong LC is conducting any of these activities, it should seek legal advice from a Mainland law firm as to whether this requires it to be authorised in the Mainland.  If so, it might have to adjust its business activities to avoid breaching Mainland law.

Deacons has offices in the Mainland and can assist Hong Kong LCs wishing to obtain such advice.