The Referral Fee That Looked Like Marketing
You are the compliance head of Kingsway Capital Limited (KCL), a Type 1 and Type 4 licensed corporation. Harbour Nominees Limited is an unlicensed corporate services firm. Harbour's staff identify potential clients, explain KCL's securities account and IPO subscription service, help clients complete KCL's account opening forms and forward them to KCL. Harbour receives HK$2,000 per opened account plus 0.4% per annum of the value of securities held in the accounts it introduces. Harbour's brochures carry KCL's logo and state: 'KCL is a licensed securities house.' KCL's management says Harbour is merely a marketing agent because it never touches client money and never places orders. One Harbour client, a 78-year-old retiree, was told by Harbour staff that a bond fund was 'capital guaranteed' and 'just like a deposit'. The fund is not capital guaranteed. KCL has already paid Harbour HK$460,000 this year. A new SFC licensing circular has just been issued.
1. Advise whether Harbour is carrying on a regulated activity requiring an SFC licence. Identify the specific activity types and explain the boundary between mere introduction and dealing or advising.
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Likely regulated activity. The SFO's definition of 'dealing in securities' is broad: it includes making or offering to make an agreement to acquire or dispose of securities and inducing or attempting to induce another person to enter into such an agreement. 'Advising on securities' covers giving advice on acquiring or disposing of securities or on the terms of such a transaction. A pure introduction may fall outside both, but Harbour does more: its staff explain the account and IPO service, help complete forms and recommend products. That is likely Type 4 advising, and if they actively induce clients to open accounts and subscribe, Type 1 dealing. The fact that Harbour never handles money or places orders is not decisive; the statutory test is activity-based, not custody-based. The 0.4% trailing fee and per-account fee also point to an ongoing, remunerated securities business. The retail retiree is not a professional investor, so no exemption applies. KCL's logo and the statement 'KCL is a licensed securities house' may also amount to holding out; even if it refers to KCL, it creates confusion about Harbour's status.
2. What are KCL's obligations and immediate actions in respect of the arrangement, the payments and the misleading statement?
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KCL should stop the arrangement immediately and make no further payments. It should conduct a licensing review, obtain legal advice, assess whether Harbour has been carrying on a regulated activity, and consider notifying the SFC. Paying a transaction- or asset-based fee to an unlicensed introducer is high risk: the SFC may view KCL as facilitating unlicensed activity and as failing to supervise its distribution channel. KCL must also address the 'capital guaranteed' statement. The fund is not capital guaranteed, so the statement is false or misleading. KCL is responsible for the marketing used to sell its services, even if a third party made the statement. It should correct the statement, review all client files, contact affected clients, and remediate any loss. Internally, KCL should add due diligence and ongoing monitoring of introducers, approve all marketing materials, train staff, and keep records. If KCL concludes that a breach occurred, it should make a timely self-report to the SFC and cooperate.