On 23 June 2017, the Securities and Futures Commission of Hong Kong (the “SFC”) issued the “Circular to clarify competence requirements for existing licensed persons intending to provide asset management services” (the “Circular”), with an aim to provide further guidance on how the SFC assesses the competence of a corporation or a responsible officer (“RO”) to carry on asset management activities.

The Circular focuses on the eligibility criteria for licensed persons to be approved to carry out Type 9 regulated activity of asset management with respect to industry experience that may be relevant and acceptable, and also on the conditions for seeking exemptions from passing the required local regulatory papers.

As the title of the Circular suggests, it is directed to existing licensed persons that may consider expanding their scope of business into asset management.  In a press release on the Circular, the SFC’s expresses that it welcomes existing licensees to broaden their business scope in light of the growth in Hong Kong’s asset management industry.

The Circular also emphasizes that the SFC will consider each application for exemption based on the specific circumstances of each case and that interested firms are encourage to approach the SFC to discuss their proposed business plans.

The Circular can be seen as the SFC’s effort to inform the industry that the SFC will continue to take a pragmatic approach in considering licensing applications, and spells the SFC’s intention to encourage existing licensed entities to apply to engage in Type 9 regulated activity of asset management as a stand-alone business, to spur further growth of Hong Kong’s asset management industry.

Considering the mention of the broader industry experience that the SFC would take into account including investment research, private equity and proprietary trading, as well as industry experience in other recognized local or overseas markets, the Circular also suggests the SFC’s welcome attitude for qualified and experienced investment professionals around the globe to seek to be licensed in Hong Kong to engage in asset management.

For details, please refer to our firm’s publication:

香港证监会(“证监会”)于2017年6月23日发布《关于厘清与有意提供资产管理服务的现有持牌人有关的胜任能力规定的通函》(“《通函》”)，就证监会对法团和负责人员进行资产管理活动的胜任能力的评估提供进一步指引。

《通函》主要说明持牌人获批准进行第9类（提供资产管理）受规管活动的有关行业经验是否可能相关及被接受方面的资格标准，以及可豁免通过本地监管架构考试的条件。

如《通函》的标题所指出，《通函》是针对可能考虑将业务范围扩展到资产管理的现有持牌人。在有关《通函》的新闻发布中，证监会表示鉴于香港资产管理行业的增长，该会欢迎现有持牌人扩展其业务范围。

《通函》亦强调证监会将就个案特别情况考虑每个豁免申请，亦欢迎有兴趣的机构与证监会讨论其拟定的业务计划。

《通函》体现证监会希望告知行业该会将继续采取务实方式考虑发牌申请，亦说明证监会有意鼓励现有持牌人申请第九类（提供资产管理）牌照作为一项独立的业务，以进一步开拓香港资产管理行业。

考虑到《通函》提及的证监会将会顾及到的范围更广泛的行业经验，包括投资研究、私募股权投资、自营交易及在其他认可的本地或海外市场的行业经验等，《通函》亦反映了证监会对全球合资格和有经验的专业人士在香港申请牌照参与资产管理业务所持的欢迎态度。

详情请参阅本所刊物：

On 5 May 2017 the Securities and Futures Commission (“SFC”) issued the ‘Consultation Paper on the Proposed Guidelines on Online Distribution and Advisory Platforms’ (“Proposed Guidelines”).

In view of the increasing use of electronic distribution channels, the use of algorithms to construct investment portfolios and to provide investment advice(e.g. automated portfolio construction or model portfolios based on a client’s personal circumstances) (commonly referred to as “robo-advice”), SFC issued the Proposed Guidelines to (1) provide guidance and control on the design and operation of online platforms; (2) clarify how suitability requirements would be triggered in terms of online trading; and (3) provide additional safeguard proposed for the sale of complex products on online platforms on an unsolicited basis.

The Proposed Guidelines will be applicable to all SFC licensed or registered persons when conducting their regulated activities in providing order execution, distribution and advisory (including discretionary and automated) services in respect of investment products via online platforms (“Platform Operators”).

We would urge asset management companies to take a closer look to the Proposed Guidelines and provide necessary feedback before the end of the consultation period (4 August 2017) since there is a growing trend for fund houses to develop their own trading platform, and provision of robo-advice. These activities will be caught under the Proposed Guidelines. It would also be helpful to be aware of these requirements when fund houses select distributors and assess whether they are compliant with such requirements.  Lastly, fund houses may wish to take a closer look at the proposed definition of ‘Complex Products’ as set out in the Proposed Guidelines as this will likely impact fund distribution and product design.

Here’s our Legal Update on the Proposed Guidelines under consultation:

Following the regulatory changes in 2016 that increased suitability requirements on licensed persons when soliciting or recommending investment products to clients, the Hong Kong Securities and Futures Commission (SFC) has on 23 December 2016 issued two sets of Frequently-Asked-Questions (FAQs) to clarify and provide further guidance to the industry on meeting the suitability obligation.

The first set of FAQs on Triggering of Suitability Obligations clarifies the circumstances under which the suitability obligation would apply.  The second set of FAQs on Compliance with Suitability Obligations by Licensed or Registered Persons provides further guidance on the SFC’s expectations on satisfying the suitability obligation.

Please refer to our legal update for further information:

Further to the Shanghai-Hong Kong Stock Connect announced in 2014, in August 2016, a good two years later, it was jointly announced by the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) that the Shenzhen–Hong Kong Stock Connect will soon be implemented.  It is anticipated that the Shenzhen-Hong Kong Stock Connect will be launched in November 2016.

Expanded universe of stocks for cross-market access

Stock Connect refers to the program that allows mutual stock market access between Mainland China and Hong Kong, whereby Mainland investors may access eligible Hong Kong stocks within scope through their domestic Mainland securities firms, while Hong Kong investors may access eligible Mainland stocks within scope through Hong Kong brokers. Hong Kong investors already able to access selected stocks listed on the Shanghai Stock Exchange under the Shanghai-Hong Kong Stock Connect will now also have access to selected stock lists on the Shenzhen Stock Exchange (SZSE) through the Shenzhen-Hong Kong Stock Connect.

The Shenzhen-Hong Kong Stock Connect will expand the universe of Mainland stocks that may be accessed by Hong Kong and international investors through the Hong Kong Stock Exchange, in particular eligible constituent stocks of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index.  To be eligible, relevant constituent stock should have a market capitalization of RMB6 billion or above.  All SZSE-listed shares of companies which also has H-shares listed in Hong Kong would also be within scope.   On the other hand, Mainland investors will be able to access constituent stocks of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, any constituent stock of Hang Seng Composite SmallCap Index with market capitalization of HK$5 billion or above, and shares of all companies with both listed H shares and A shares.

ChiNext access restricted

However, while the range of accessible stocks have broadened for investors’ cross-market access, the regulators have stipulated that, for the Northbound link, at the initial stage, only institutional professional investors as defined under Hong Kong law and regulations will be able to invest in shares listed on the ChiNext Board of SZSE.

The restriction that only institutional professional investors may access ChiNext stocks may be considered to be in line with the SFC enhanced investor protection measures including around increased regulatory requirements around suitability of investments and financial products for investors, which may now be exempted only for institutional professional investors or corporate professional investors that satisfy relevant conditions under a designated assessment of investment decision-making process and investment personnel.  The definition of “institutional professional investors” as defined in the Securities and Futures Ordinance (Cap 571) (SFO) covers mostly regulated financial institutions such as licensed investment intermediaries, banks, insurance companies, central banks.  Collective investment schemes authorized by the SFC under Section 104 of the SFO (SFC Authorised Funds), registered schemes or constituent funds under the Mandatory Provident Fund Schemes Ordinance (Cap 485) (MPF Schemes) and registered schemes under the Occupational Retirement Schemes Ordinance (Cap 426) (ORSO Schemes).

Accordingly, investors who are not “institutional professional investors” under Hong Kong law and regulations and initially unable to access ChiNext stocks under the Shenzhen-Hong Kong Connect may only have exposure through SFC-Authorized Funds.  Investment by MPF Schemes in Mainland securities are limited to 10% of the scheme’s net asset value.

SFC Updated FAQ re Shenzhen-Hong Kong Connect

On 25 October 2016, the SFC updated question No. 19 under its “Frequently Asked Questions on Post Authorization Compliance Issues of SFC-authorized Unit Trusts and Mutual Funds” (SFC’s FAQ) regarding disclosure and approval requirements for participation in Stock Connect, to include Shenzhen–Hong Kong Stock Connect within scope.  Details are set out in our latest publication:

自内地与香港基金互认安排（“基金互认”）于2015年7月1日起正式实施至今，已有多达40余只内地基金成功南下获得香港证监会认可于香港市场公开销售。按照基金互认的相关规定，内地基金在获得香港证监会认可后（“内地互认基金”），除须符合相关内地法律法规及基金合同的要求外，还须遵守香港证监会不时颁布的有关内地互认基金获认可后的持续合规要求以及基金于香港销售方面的要求。下文就内地互认基金获香港证监会认可后的持续合规问题，从持续信息披露、基金销售文件更改以及基金广告/推广材料等多方面进行分析和阐释:

经济合作与发展组织（经合组织）就政府间自动信息交换（自动信息交换）引入的共同报告准则（共同报告准则）是一项重大举措，可能引起金融行业的范式转变。

继《2016年税务（修订）（第3号）条例》刊登宪报并于2016年6月30日生效后，共同报告准则将很快在香港实施。自2017年起，香港的金融机构及金融中介机构将承担法律义务向香港税务局（税务局）报告须申报人士的财务账户，并且须于下一年度5月31日（即2018年5月31日）之前向税务局作出首次报告。香港税务局将于2018年年底前基于互惠原则与相关司法辖区进行首次自动信息交换。

据税务局认为：“在自动信息交换准则下，金融机构须根据尽职审查程序识别须申报税务司法辖区的税务居民所持有的财务账户。金融机构须收集此等账户的须申报信息，并向本局提交相关信息。本局将每年与自动信息交换伙伴司法辖区的税务机关交换信息。”

自动信息交换规定将涵盖属“须申报司法辖区”（即香港已与其签订自动信息交换安排的司法辖区）的税务居民的个人。如账户持有人并非属于与香港签订自动信息交换协议的司法辖区的税务居民，则金融机构毋须申报有关账户的信息。

一般而言，一名个人是否属一个司法辖区的税务居民，要根据该司法辖区的税法确定，并且典型地要考虑该人士实际身处或逗留于某地（例如在一个课税年度内是否超过183天或其他相关的最低限期），或如属公司，则根据该公司注册成立地或其中央管理及控制所在地而定[1]。金融机构可要求账户持有人就其税务居民身份提供自我证明，以确定有关账户是否属自动信息交换下须申报的账户。

于2016年9月9日，税务局公布《金融机构指南》（税务局指南），载列相关申报规定及尽职审查程序的进一步详细指引，并载有有关集体投资计划的说明及信托的处理。有关税务局指南的概要载于此文章：crs-legal-update-chinese。

[1]　经合组织已建立一个门户网站，提供有关已承诺实施自动信息交换之司法辖区税务居住地规则的信息： http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/#d.en.347760

The Common Reporting Standard (CRS) introduced by the Organization of Economic Cooperation and Development (OECD) for inter-governmental automatic exchange of information (AEOI) is a significant initiative that could be a paradigm shift in the financial industry.

CRS will soon be implemented in Hong Kong, following the Inland Revenue (Amendment) (No.3) Ordinance 2016, published in the Gazette and became effective on 30 June 2016. Financial institutions and intermediaries in Hong Kong will be under legal obligation to report to the Inland Revenue Department (IRD) on financial accounts for reportable persons, starting 2017, with first reporting to be made to IRD by 31 May the following year, ie. 31 May 2018. Hong Kong IRD will conduct the first automatic information exchange with relevant jurisdictions on a reciprocal basis by the end of 2018.

According to the IRD: “Under the AEOI standard, a financial institution (FI) is required to identify financial accounts held by tax residents of reportable jurisdictions in accordance with due diligence procedures.  FIs are required to collect the reportable information of these accounts and furnish such information to the Department.  The Department will exchange the information with the tax authorities of the AEOI partner jurisdictions on an annual basis.”

The AEOI requirement will cover individuals who are tax residents of “reportable jurisdictions”, being jurisdictions with which Hong Kong has entered into an AEOI arrangement.  Financial institutions are not required to report information on accounts where the account holder is not tax resident in a jurisdiction with AEOI agreement with Hong Kong.

As stated, in general, whether or not an individual is a tax resident of a jurisdiction is determined by having regard to the person’s physical presence or stay in a place (e.g. whether over 183 days within a tax year) or, in the case of a company, the place of incorporation or where the central management and control of the entity lies.[1] FIs may request account holders to provide self-certifications on tax residency in order to determine whether the accounts fall within scope of reporting under AEOI.

On 9 September 2016, the IRD issued the “Guidance for Financial Institutions” (Guidance), with further detailed guidelines on the relevant reporting requirements and due diligence procedures, and includes clarifications with respect to collective investment schemes, and the treatment of trusts. A summary of the Guidance is set out in this update:

[1] OECD has established a portal which provides information on tax residency rules in jurisdictions which have committed to implementing AEOI: http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/#d.en.347760