Licensing and registration of intermediaries and individual representatives
Domain 3 tests the gateway into the industry: who needs which licence, what the SFC checks before granting it, and what must be maintained afterwards.
Two routes, three statuses
A company conducting a regulated activity needs a licence from the SFC as a licensed corporation, unless it is an authorized financial institution registered with the SFC as a registered institution (the HKMA being its front-line supervisor). Individuals are licensed representatives, approved responsible officers, or, at banks, executive officers. The SFO defines thirteen regulated activities; Types 1 (dealing in securities), 2 (dealing in futures), 4 and 5 (advising), 6 (advising on corporate finance), 9 (asset management) and 13 (depositary services for relevant CIS) recur in questions.
Fit and proper
Section 129 factors: financial status, educational or other qualifications and experience, competence, reputation, character, reliability, and financial soundness. The SFC also weighs the applicant's regulatory history and any conviction for fraud, dishonesty or money laundering.
Responsible officers and competence
A licensed corporation needs at least two ROs for each regulated activity, with at least one available at all times to supervise. ROs must satisfy competence requirements - industry examinations such as HKSI Paper 1 plus the activity paper, and relevant experience - and must remain fit and proper. Individual licensees must complete at least 10 hours of continuous professional training a year.
Financial resources
The Financial Resources Rules set paid-up and liquid capital minima. A Type 1 dealer, for example, must maintain liquid capital of at least HK$3 million, with a higher paid-up capital requirement where client assets are held.
Continuing obligations
Notify the SFC of changes in particulars, cessation of business, breaches and disciplinary action; obtain approval for a substantial shareholder (10% or more); keep proper records; file annual returns; and cooperate with inspections. Breach of licensing conditions is itself a disciplinary matter.
Worked example
A start-up wants to advise on securities and manage funds. It needs Types 4 and 9 - four RO approvals if the activities are staffed separately, though one individual may be approved for both. It must show HK$3 million liquid capital, a compliant shareholding structure and two ROs with tested experience.
Traps
Thinking one RO suffices; assuming a bank needs an SFC licence; forgetting that licensed representatives cannot supervise; ignoring that a 10% shareholder needs approval.