On 12 October 2022, a Hong Kong-licensed corporation was fined HK$1.75 million by the Securities and Futures Commission (SFC) for failure of compliance.

The corporation failed to comply with EU regulation regarding short selling and certain aspects of credit default swaps, as well as promptly notifying the SFC of its regulatory breaches.

Additionally, the corporation’s Manager-In-Charge for Compliance was banned for two months in relation to these mentioned failures.

The SFC was unsympathetic towards the corporation’s explanations that its breach of the EU regulation was due to unfamiliarity with the regulation, its reliance on reference materials provided by its prime brokers rather than on legal advice regarding the EU reporting regime and the absence of alerts by their investment bank counterparts.

Instead, the SFC attributed referred the failures to:

• A lack of any formal process in compliance framework
• A failure to incorporate controls to ensure continuous compliance with the EU regulation
• Only relying on reference materials provided by its prime brokers without conducting any further analysis nor seeking legal advice.

This case above underlines once more the importance of compliance for licensed corporations.

What is a licensed corporation?

The Securities and Futures Ordinance (SFO) sets out that any corporation, that is not an authorised financial institution, and is involved in one or more of the SFO’s regulated activities needs to be licensed by the SFC.

“Authorised financial institutions” are those authorised under the Banking Ordinance to carry on the business of taking deposits, such as banks. Non-authorised financial institutions include securities firms, asset management banks, etc.

The current types of regulated activities supervised by the SFC are:

Type 1: Dealing in securities
Type 2: Dealing in futures contracts
Type 3: Leveraged foreign exchange trading
Type 4: Advising on securities
Type 5: Advising on futures contracts
Type 6: Advising on corporate finance
Type 7: Providing automated trading services
Type 8: Securities margin financing
Type 9: Asset management
Type 10: Providing credit rating services

Licensed corporations (and individuals) are published in a public register.

Only companies incorporated in Hong Kong or an overseas company registered with the Hong Kong Companies Registry can be licensed to carry on a regulated activity.

License vs Registration

Broadly speaking, licenses are for non-authorised financial institutions, while registrations are for authorised financial institutions.

Furthermore, in a licensed corporation the person monitoring the company’s regulated activity operations is called a Responsible Officer. The equivalent position in a registered institution is called an Executive Officer.

How to stay compliant

As a licensed corporation it is even more important to stay on top of ongoing obligations, including matters such as tax and accounting, as failure to comply may result in penalties or even licence revocation.

Here we give a non-exhaustive summary of some of the ongoing statutory obligations.

Notification of changes

Some of the common changes that require notification to the SFC include cessation in business, cessation to act as a licensed representative or responsible officer, change in name or business address, change in share capital or shareholding structure, significant changes in business plan, change in auditor’s name.

Certain changes require prior approval of the SFC, such as addition or reduction of regulated activity, change of financial year end, extension of deadline for submission of audited accounts.

Section 135 of the SFO and parts 1 to 3 of Schedule 3 to the Securities and Future (Licensing and Registration) (Information) Rules set out the events for which notifications to the SFC is required.

Continuous Professional Training (CPT)

Licensed Representatives must undertake a minimum of 5 CPT hours per calendar year for each regulated activity they engage in, to remain fit and proper at all times.

They are also required to retain appropriate records of all CPT activities completed in a year.

As a licensed company, they are primarily responsible for designing and implementing a continuous program best suited to the training needs of their Licensed Representatives. They are also expected to conduct own due diligence to ensure CPT compliance by the individuals concerned, as well as keep sufficient records on the CPT activities undertaken for a minimum of three years.

Financial reporting

According to the Financial Resources Rules, the company is required to maintain a prescribed minimum paid-up share capital and minimum liquid capital at all times during which it is licensed.

Subject to conditions, a company must submit semi-annual or monthly financial resources returns to the SFC, which include, amongst others, the company’s liquid capital computation and an analysis of the company’s profit and loss account.

Furthermore, the company is required to submit its audited accounts and other required documents to the SFC within four months after the end of each financial year.

Tax obligations

For a licensed corporation, the company’s tax return is generally monitored by the Compliance Officer to ensure timely submission.

Regarding employee tax obligations, the company is obliged to notify the Inland Revenue Department (IRD) of staff members within three months from their employment start date. The company also has the obligations to report to the IRD the details of remuneration made to the employees during each year ended 31 March by filing the Employer’s Return.

Should their employment be terminated, the IRD must be notified not later than 1 month before the termination. If the employee is known to be leaving Hong Kong, the company must withhold the final month’s salary payment until the employee has paid all their taxes and has been issued a “Letter of Release”.

Submission of annual returns

A licensed corporation must submit annual returns to the SFC through the SFC online portal. The due date is within one month after each anniversary date of their licenses.

Late submission could result in suspension and licence revocation, as described in the table below.

Overdue period	Penalty
Over 3 months, but less than 4 months	Suspension of licence, subject to the SFC giving 10 business days’ notice
Over 4 months	Revocation of licence

Others

Other ongoing compliance obligations include exhibiting the licence or certificate of registration on display, payment of annual fees, and complying with the Companies Ordinance.

How HKWJ can help licensed corporations

We can help you incorporate your company, file your taxes and annual returns, and assist in applying for the relevant licenses.

The HKWJ Group is a one-stop holistic service provider and advisor to help your business grow. Within the Group, HKWJ Tax Law assists with financial administration, such as payroll, bookkeeping and accounting, as well as tax and legal matters. At Triple Eight Ltd, we provide a wide range of professional and corporate services, such as company secretarial services, bank account opening and company incorporation.

Feel free to contact us to inquire more about our services.