THE STATUTORY PROHIBITION UNDER SECTION 114
Regulated Activities require appropriate license
The regulatory framework administered by the Securities and Futures Commission (SFC) controls entry into Hong Kong's securities and futures industry. Under section 114 of the Securities and Futures Ordinance (Cap. 571) (SFO), carrying on a business in a regulated activity, performing a regulated function or holding out without the required licence or registration may constitute a serious criminal offence.
Whether authorisation is required depends on the substance of the activities, the way the business is conducted, the persons to whom services are offered and every applicable statutory exclusion. A contractual label does not determine the regulatory character of the conduct.
SECTION 114 RESTRICTIONS
Business, individual and representation restrictions
Carrying on a business
A corporation must not carry on a business in a regulated activity in Hong Kong unless it is appropriately licensed by the SFC or, in the case of an authorised financial institution, registered for that activity.
Performing regulated functions
An individual who performs a regulated function for a principal carrying on a regulated activity must hold the required representative licence or registration and be properly accredited, unless an exclusion applies.
Holding out
It is also prohibited to represent, advertise or otherwise hold out that a person carries on a regulated activity, or performs a regulated function, without the required authorisation.
EXTRATERRITORIAL MARKETING: SECTION 115
Marketing into Hong Kong from outside the jurisdiction
Section 115 extends the licensing boundary to certain overseas conduct. Where a person actively markets to the Hong Kong public, from outside Hong Kong, services which would constitute a regulated activity if provided in Hong Kong, that person may be regarded as holding themselves out as carrying on the regulated activity.
The provision can also affect representatives performing functions connected with that marketing. Whether conduct amounts to "actively markets" is assessed from the overall circumstances, including the targeting, language, distribution channels, client contact and repeated nature of the promotion.
CRIMINAL PENALTIES
Substantial fines and imprisonment
A person who, without reasonable excuse, contravenes the applicable section 114 prohibition may face the following maximum penalties under section 114(8):
Magistrates' Courts
A fine of HK$500,000 and imprisonment for two years.
Higher-court prosecution
A fine of HK$5 million and imprisonment for seven years.
SCHEDULE 5 REGULATED ACTIVITIES
The statutory classes of regulated activity
Schedule 5 defines thirteen categories. The exact statutory definition, exclusions and commencement status must be checked rather than relying only on the abbreviated label.
Type 1: Dealing in securities
Brokerage, placing, distribution and execution of securities transactions.
Type 2: Dealing in futures contracts
Executing or arranging transactions in index, commodity and other futures contracts.
Type 3: Leveraged foreign exchange trading
Providing or arranging leveraged foreign-exchange contracts within the statutory definition.
Type 4: Advising on securities
Providing securities advice or research within the statutory scope.
Type 5: Advising on futures contracts
Providing advice or research concerning futures contracts.
Type 6: Advising on corporate finance
Corporate-finance advice, including specified sponsor, takeover and restructuring work.
Type 7: Providing automated trading services
Operating qualifying electronic trading, order-matching or transaction facilities.
Type 8: Securities margin financing
Providing financial accommodation to facilitate acquiring or holding securities.
Type 9: Asset management
Discretionary management of portfolios of securities or futures contracts for another person.
Type 10: Providing credit rating services
Preparing credit ratings for dissemination to the public or distribution by subscription.
Type 11: Dealing in or advising on OTC derivatives
A legislated category for dealing in or advising on OTC derivative products; commencement of its licensing regime must be confirmed.
Type 12: Providing client clearing services for OTC derivatives
A legislated category for client clearing of OTC derivative transactions; commencement of its licensing regime must be confirmed.
Type 13: Depositary services for relevant CISs
Providing depositary services for relevant collective investment schemes; this licensing regime commenced on 2 October 2024.
STATUTORY EXEMPTIONS AND SAFE HARBOURS
Exemptions can be applied in limited circumstances
The SFO recognises circumstances in which particular conduct is excluded from a regulated-activity definition. Each exclusion is fact-sensitive and should be tested against the complete arrangement.
Wholly incidental activities
A person already licensed for a principal regulated activity may not require an additional licence for specified subordinate activities carried out wholly incidentally. For example, a Type 1 securities dealer may carry out Types 4, 6 or 9 activity when it is genuinely subordinate to the securities-dealing business. Relevant factors include whether a separate fee is charged and whether the additional service forms a major or distinct part of the business.
Group company exemption
A corporation may provide Types 4, 5, 6 or 9 services solely to its wholly owned subsidiaries, its holding company holding all its issued shares, or that holding company's other wholly owned subsidiaries. The exemption does not permit management of third-party or client assets merely because they are held through a group company.
Professional-practice exclusion
A solicitor, counsel or professional accountant may provide Types 4, 5, 6 or 9 advice or services without a separate SFC licence where the work is wholly incidental to the person's professional practice. The exclusion does not cover a distinct investment or asset-management business operated under the label of professional services.
HOW MCS CAN ASSIST
Defining the licensing boundary before or during an investigation
MCS can analyse whether a service, platform, communication or overseas marketing arrangement falls within a regulated activity, whether the correct corporate and individual authorisations were held, and whether an incidental, group-company, professional or other statutory exclusion applies.
Where the SFC is investigating suspected unlicensed activity, we can advise on compulsory requests, interviews, document preservation, privilege and written representations, and provide representation in disciplinary or criminal proceedings and related applications.