Set Up an SFC Regulated Entity in Hong Kong for 2024: A Complete Guide
Hong Kong remains a key financial hub, attracting enterprises within and outside the Asia Pacific region that are eager to capitalise on its dynamic market and robust regulatory framework. Establishing a regulated entity in the city not only positions businesses at the heart of Asia's financial activities but also ensures their presence within a system known for its transparency and investor protection. Hong Kong’s finance industry is regulated by the Securities and Futures Commission (SFC), Hong Kong Monetary Authority, Insurance Authority, and Mandatory Provident Fund Schemes Authority.
This guide offers an introduction to the types of activities that are regulated in Hong Kong, compliance with the SFC, as well as a step-by-step walkthrough on setting up a regulated entity in Hong Kong.
This guide has been produced in collaboration with Peak Compliance Associates, PCA, the experts in Financial Services Compliance Consulting.
Jump to The Process of Establishing a Regulated Entity in Hong Kong
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What Types of Activities Are Regulated by the SFC in Hong Kong?
An SFC-regulated entity in Hong Kong is a business that conducts activities that are considered as being ‘regulated activities’ and overseen by a relevant regulatory authority. Some examples of SFC regulated entities include brokerage firms, asset management companies, investment advisors, corporate finance houses, private placement firms, and fintech companies.
Schedule 5 of the Securities and Futures Ordinance (SFO) identifies the following regulated activities:
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
Virtual Asset Service Provider (VASP) license
Type 11: Dealing in OTC derivative products or advising on OTC derivative products (Not implemented yet)
Type 12: Providing client clearing services for OTC derivative transactions (Partially implemented)
Type 13 providing depositary services for SFC-authorised collective investment schemes (CIS). (Becoming effective in October 2024)
Before you apply for an SFC license or registration, it is essential to assess feasibility first. If you are not sure whether your or your organisation’s operations constitute regulated activities, Peak Compliance Associates can help.
Understanding the SFO and the SFC
Generally, the chief regulator of the securities and futures markets in Hong Kong is the SFC. Regulatory licenses issued by the SFC under the SFO allow a holder to conduct the above-listed regulated activities.
As discussed above, the SFO further prohibits entities or persons from carrying out any business in a regulated activity without appropriate authorisation, except when an applicable exemption is in place.
Between 2020 and 2023, the total number of licensed firms with the SFC grew from 3,122 to 3,257, a 4.3% increase. During the same period, the total number of licensed persons rose from 43,983 to 44,722, a 1.68% increase. This indicates a steady growth in both the number of firms and individuals licensed to conduct regulated financial activities in Hong Kong.
Why Opt for Hong Kong for Your Regulated Entity?
There are several perks of operating a regulated entity in Hong Kong compared to other locations. The 2 major reasons being Hong Kong’s position as a global financial hub and one of the freest markets in the world.
In addition, Hong Kong boasts:
Proximity to Mainland China
Developed regulatory framework
Strong credibility and trust
Favourable tax regime
Deep talent pool
Simple work visa processes
Hong Kong’s closeness to Mainland China allows companies to tap into the growing Chinese market while maintaining a unique position to serve international clients.
Thanks to its developed regulatory framework, Hong Kong has a strong reputation for transparency and reliability compared to other Asian jurisdictions. The regulations that the SFC imposes help establish strong risk management practices for stable operations, fewer errors, and better client protection.
Consequently, this layer of protection draws in more investors, as compliance with SFC regulatory requirements mitigates instances of misconduct that could lead to loss of investor funds. Furthermore, Hong Kong has a favourable tax regime with low corporate tax and no capital gains tax, which extends to regulated entities.
Additionally, Hong Kong provides access to a deep talent pool of experienced finance, accounting, and law professionals. Obtaining work visas for your current staff is straightforward as well.
Who Can Establish a Regulated Entity in Hong Kong?
Companies incorporated in Hong Kong and overseas companies registered with the Companies Registry can apply for an SFC license or registration to carry on a regulated activity.
A cornerstone of the licensing process is the personnel requirement, which requires the “fit and proper” assessment. This evaluation focuses on the overall suitability of persons who will conduct regulated activities on behalf of a licensed company. Some key considerations include:
Financial stability
Qualifications, education, and experience
Commitment to ethical conduct, fair treatment of clients, and honesty
Reputation and integrity
The exact requirements for obtaining an SFC license vary depending on the type of regulated activity. The official SFC website provides more details about the requirements.
The Process of Establishing an SFC-Regulated Entity in Hong Kong
Broadly speaking, there are two steps to establishing a regulated entity:
Register a business
Obtain the SFC License
Under these 2 steps, there are other important considerations we will review in more detail.
Step 1: Register a Business
The first step involves registering your business entity in Hong Kong.
Company Incorporation
Hong Kong has one of the most straightforward processes for registering a company. Assuming you meet the requirements, you could expect to have the company registered within a week or less.
Your regulated entity can be 100% foreign-owned, and an incorporated subsidiary in Hong Kong can carry on regulated activities without additional restrictions.
One of the major steps before registering a business is to choose the right company structure for the regulated entity. The most common is a private limited company, which is perfectly suitable for applying for an SFC license.
Note: Sole proprietorships and partnerships are not eligible for SFC licensing.
Here are the other requirements for incorporating a business in Hong Kong:
Company name: The company name must be original and in English or Chinese or have separate English and Chinese names. Mixing English and Chinese is not permitted.
Director: The company must appoint at least one local or foreign director; it can either be an individual or body corporate.
Company secretary: The company secretary is legally mandated and acts as an intermediary between the company and the government.
Shareholder: A company must have at least one shareholder and up to 50.
Share capital: As a licensed corporation, a minimum share capital may apply according to the type of regulated activity (see table below). Work with a compliance advisor prior to setup, as in some cases you may be able to incorporate with minimum capital in order to obtain a license before increasing.
Registered office: A local office is mandatory for all businesses; it cannot be a PO box.
After submitting your documents and the business is incorporated, you will receive a business registration certificate, which is a required document to apply to the SFC.
Don’t hesitate to reach out to us if you need help incorporating your business in Hong Kong.
Corporate Bank Accounts
Opening a business bank account in Hong Kong is a crucial step that allows you to manage your company’s finances.
The SFC expects regulated entities to have proper management systems for handling their clients’ resources. In a 2021 circular, the SFC expressed dissatisfaction with the lack of effective controls over bank accounts implemented by licensed corporations.
You must demonstrate strong control and responsible management of financial resources. To achieve this, communicate your specific needs with your bank to ensure your bank accounts have the appropriate security measures and features in place.
Insurance Coverage
Companies in Hong Kong have to obtain appropriate insurance coverage, both to fulfil legal requirements and to cover their liabilities.
Employee Compensation Insurance (ECI) is legally required for all companies in Hong Kong; the policy covers work-related employee injuries and illnesses.
In addition, you should consider obtaining business insurance to cover your needs. You should have some form of liability insurance that protects you from financial losses.
A common form of business insurance is Professional Indemnity Insurance (PII), which covers legal costs in case of negligence claims.
SFC-related insurance requirements are more strict for regulated entities licensed for Type 1 and Type 2 (securities and futures) regulated activities who are members of the Hong Kong Exchange. These corporations are required to take out insurance in accordance with the Securities and Futures Rules. You can learn more about it in this SFC Circular.
Employment
Hong Kong's Employment Ordinance outlines the labour laws for businesses in Hong Kong. The same requirements for regular companies also apply to regulated entities:
Rest days
Mandatory public holidays
Annual and sick leave
Paternity leave
Mandatory Provident Fund (MPF) contributions
Severance pay
There are also several employee benefits that are not legally required but are instead common practice, such as health insurance, a 13th salary, and various recreational benefits.
If you or your employees are interested in obtaining work visas, read our Hong Kong Work Visa Overview.
Regulated entities might have stricter requirements for employment, such as higher qualification requirements, thorough background checks, and additional training requirements. This ensures that they are staffed with competent, trustworthy employees who can minimise risks and uphold responsible conduct.
Additionally, regulated entities typically adopt stricter internal controls based on best practices, such as a code of conduct and employee reporting and conflict of interest policies.
Taxation
Hong Kong is known for its favourable tax rates and simple tax return procedures, making it an excellent choice for your regulated entity.
The same general tax laws and principles that apply to traditional companies also apply to regulated entities, with the exception of potential industry-specific levies, fees, and withholding tax requirements.
Employees have to file their annual salaries tax return; employers have to pay profits tax and file profits tax returns once a year.
Some Alternative Investment Funds (AIF) are exempt from the profits tax, such as those obtained from qualifying transactions, as specified in Schedule 16C.
Step 2: Obtaining an SFC Licence: Regulatory Licensing Requirements
Timeline
Obtaining a license with the SFC can be a lengthy process, often taking around 6-8 months on average from the date a license application is submitted to the SFC to the date the license is granted. As is generally the case, a license application’s timeline depends on several factors, including but not limited to, the complexity of the application, the type of license being sought, the competency of certain key personnel and shareholders, the availability of appointed SFC licensing Case Officer and importantly, the completeness of the license application materials.
Steps to Apply for an SFC license
Step 1 - Analysis
First, there's the Analysis stage. At this stage, a company that intends to apply for an SFC license will typically consult with a compliance consulting firm to ascertain whether their proposed activities in Hong Kong trigger any licensing requirements and, if so, which ones. As of Q1 2024, there are currently 11 different types of SFC licenses which allow firms to conduct activities such as asset management, brokerage, investment advisory, and corporate finance advisory, to name but a few. At this first stage of the process, companies will also receive advice on matters such as the key SFC licensing requirements, timelines, processes, and permitted activities the firm may conduct whilst waiting for their license to be granted.
Step 2 - Preparation
Second, there’s the Preparation stage. Here, all necessary information is used to complete the SFC’s application forms and other supporting documents. Companies will often work with a compliance consulting firm to assist them with preparing a license application on the basis there are numerous forms to complete and documents to prepare, and not all of these materials are intuitive from the Licensing Application Guides provided by the SFC. This step of the process could take from just a couple of weeks to a few months, depending on the availability of information, documentation, and key stakeholders. This is one of the most important stages of a license application process because a well-prepared application package can shave up to months of the overall application processing timeline, whereas conversely, a poorly prepared application will likely lead to an initial return by the SFC and/or numerous questions raised by the SFC relating to inconsistencies. It is encouraged to engage professional compliance consulting firms like Peak Compliance Associates to expedite this process.
Step 3 - Initial Review + Requisitions
After submitting the license application to the SFC, the SFC begins its Initial Review. This Initial Review stage can take between 2 - 4 weeks after submission of the application and during this time, the SFC assesses whether the applicant meets the necessary licensing requirements. Often, the SFC will ask for additional information to be provided and/ or clarifications on certain areas of the application, which often extends the process.
Step 4 - Acceptance/Payment
Once satisfied there are no fundamental issues with the application, the SFC will then formally accept the application and issue an invoice for the payment of application fees.
Step 5 - Further Processing + Requisitions
Once the invoice has been settled, the SFC will continue to process the application. This includes examining different aspects of the application, such as the proposed business activities, target clients, proposed workflows, internal control arrangements, key personnel, shareholders, revenue structure, funding plans, etc. The SFC aims to process all corporate license applications within 15 weeks from the date of acceptance (i.e., the date the applicant pays the acceptance invoice). However, this does not include the time it takes for applicants to respond to questions raised by the SFC. During this stage of the process, the SFC will typically issue 3 - 6 rounds of requisitions, containing between 5 – 50 questions each round. This is another key stage of the application process, as well-answered questions will result in fewer follow-up questions, which results in a shorter application process. Conversely, where an applicant provides incorrect answers to SFC questions and/or provides a response which causes concern, the SFC will issue additional questions.
Step 6 - Approval-in-Principle (AIP)
Once the SFC is comfortable that the license applicant has satisfactorily answered all of its questions, an ‘Approval-in-Principle’ (“AIP”) will be issued. The license applicant has 3 months from the issuance of the AIP to satisfy any outstanding items (e.g., submission of updated accounts to demonstrate compliance with applicable regulatory capital requirements). Once all of the outstanding items have been satisfied, the SFC will proceed to approve the license application and grant the company its license.
5 Key Considerations When Applying for an SFC Licence (Step 1 - Analysis)
Company Incorporation or Registration
Responsible Officers
Bank Accounts
Regulatory Capital
Office Premises
We dive into each of these 5 key requirements in detail:
Consideration 1. Company Incorporation
Simply put, only companies who are incorporated in Hong Kong or an overseas company that is registered as a Hong Kong company are able to apply for a license with the SFC. Companies who do not satisfy this requirement are unable to apply for an SFC license.
You may refer to the above paragraphs, where we have discussed in detail the process of registering a business in Hong Kong (which includes incorporating a company in Hong Kong).
Consideration 2. Responsible Officers
When a company applies for a license, the SFC will look at the personnel who shall be responsible for carrying out the regulated activities in Hong Kong. These individuals are called “Responsible Officers”.
Each license applicant must identify at least 2 individuals who shall be appointed as the company’s ROs. Once the company obtains an SFC license, the ROs will be licensed with the SFC to carry out and supervise the regulated activities conducted on behalf of the licensed corporation.
As a general rule of thumb, the SFC’s expectation is that each licensed corporation has at least 2 ROs who reside in Hong Kong. However, upon the SFC’s discretion, it is possible for a licensed corporation to have just 1 RO who resides in Hong Kong, where the other RO(s) reside in another jurisdiction on the basis they are required to reside overseas as they have another role working for an affiliate of the SFC licensed corporation in that overseas jurisdiction. For example, if an asset manager which is headquartered in Japan wishes to set up a subsidiary which shall apply for an SFC license, it is likely the SFC would allow for one of the Portfolio Managers of the Japanese entity to apply to become an RO of the SFC licensed entity. Conversely, if a company is proposing to the SFC that one of their 2 ROs shall reside overseas merely because they prefer the weather in that overseas jurisdiction, it is unlikely the SFC would agree to this arrangement.
It is also possible for one individual to be appointed as an RO for more than one type of regulated activity, provided they meet the requisite licensing requirements.
Finally, at least one of a company’s ROs must be considered by the SFC as being an “Executive Director”. An Executive Director is someone who is a member of a licensed corporation’s board of directors and is also licensed with the SFC as an RO.
Responsible Officer Requirements
In order to become an RO, the SFC must consider an individual as meeting certain requirements, which include:
Sufficient Authority: An RO must have sufficient authority within the company to supervise the regulated business.
Competence: To be approved as an RO, an individual should possess the ability, skills, knowledge, and experience necessary to execute, manage and supervise the licensed corporation’s regulated activities, which includes fulfilling the four key elements below:
Academic / Industry Qualification: Hold a degree in the designated fields of Accounting, Business Administration, Economics, Finance or Law. It is also acceptable to have other degrees with passes in at least two courses in the designated fields or possess professional qualifications such as Chartered Financial Analyst (“CFA”), Certified Financial Planner (“CFP”), etc.
Industry Experience: Have at least 3 years of relevant industry experience within the 6 years preceding the date of application. This experience should be relevant to the activities the company is seeking to conduct under an SFC license.
Management Experience: Have a minimum of 2 years experience in supervising or managing people. For example, where a person working in the industry has been responsible for managing at least 1 person for a period of 2 years, this requirement may be deemed satisfied.
Regulatory knowledge:
Have passed the required local regulatory papers as prescribed within the SFC’s Guideline on Competence. Where applicable, exemptions from this may be sought where an individual meets any of the exemption criteria within the Guidelines on Competence.
It is crucial that companies who are looking to apply for an SFC license understand these RO competency requirements and ensure that the individuals they are proposing as ROs meet the relevant requirements. Should the SFC consider an individual as not meeting the RO requirements, the license application will be returned. Companies who engage a compliance consulting firm to support their license application will get the benefit of comfort in knowing whether their proposed ROs meet the relevant requirements prior to the submission of applications.
Consideration 3. Bank Account
Companies who are looking to apply for a license with the SFC are required to open a bank account in Hong Kong.
Opening a bank account in Hong Kong can take anywhere between 2 and 6 months, and therefore, the SFC accepts instances where a company submits its license application to the SFC while it is still in the process of opening a bank account. However, prior to the final grant of the license, the company must have completed the bank account opening process and provided the relevant account information to the SFC.
Consideration 4. Regulatory Capital
Every company that wishes to be licensed with the SFC is required to comply with certain regulatory capital requirements. These capital requirements are imposed by the SFC to ensure that companies maintain sufficient financial resources to support their operations as a regulated entity on an ongoing basis. Where licensed corporations breach their regulatory capital requirements, they must cease conducting regulated activities which has an impact on both their businesses and also the services they provide to clients.
Regulatory capital requirements vary depending on the type of SFC license and regulated business activities a company intends to conduct in Hong Kong.
Where a company is applying for a license to conduct more than one type of regulated activity, the minimum requirements to be maintained will be the higher (or highest, if more than 2) among the proposed regulated activities which the license will be applied for.
The most common SFC license types are Types 1, 4 and 9, and the applicable regulatory capital requirements are set out below:
| Regulated Activity | Description | Minimum Paid-up Share Capital (HKD) | Minimum Liquid Capital (HKD) |
|---|---|---|---|
| Type 1 (Dealing in Securities) |
|
|
|
| Type 4 (Advising on Securities) |
|
|
|
| Type 9 (Asset Management) |
|
|
|
The minimum paid-up and liquid capital requirements for each regulated activity are set out within the Securities and Futures (Financial Resources) Rules.
At the end of the license application process (typically after the AIP has been issued by the SFC), companies are required to demonstrate to the SFC that they comply with the relevant regulatory capital requirements.
Consideration 5. Office Premises
Every company that wishes to be licensed with the SFC must have (i.e., rent or own) suitable office premises in Hong Kong.
The SFC has specific requirements relating to what offices are considered as being ‘suitable’, which includes having a segregated office space for the company’s own exclusive use, ensuring that only authorised personnel can enter the office, ensuring the office is available for inspection by the SFC upon request, and ensuring there are clear signs available to clients that the licensed corporation is available within the office.
It is worth noting the SFC does not allow for the use of residential addresses or hot desking arrangements for licensed corporations. This is based on the expectation that licensed corporations maintain proper and suitable business premises to ensure proper business operations and client confidentiality.
While having a suitable office is a mandatory requirement to obtain an SFC license, it is not compulsory that this requirement is met at the point at which the license application is submitted to the SFC. Therefore, a license applicant can be sourcing suitable office premises during the license application process.
FAQs
What types of activities are regulated under the SFC in Hong Kong?
Schedule 5 of the Securities and Futures Ordinance (SFC) identifies the following regulated activities:
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
Virtual Asset Service Provider (VASP) license
The following licenses are expected to be released at the end of 2024 / 2025:
Type 11: Dealing in OTC derivative products or advising on OTC derivative products (Not implemented yet)
Type 12: Providing client clearing services for OTC derivative transactions (Partially implemented)
Type 13 providing depositary services for SFC-authorised collective investment schemes (CIS). (Becoming effective in October 2024)
I am a non-Hong Kong Asset Management Firm Looking to Apply for a License with the SFC. Do I Need to Set up a Company in Hong Kong to Apply for a License?
Yes, in order to apply for a license with the SFC, you must (i) incorporate a company in Hong Kong or (ii) register an overseas incorporated company as a registered Hong Kong company. The SFC will not grant a license to a company who does not satisfy one of these two requirements.
How long does it take to get a license?
The process of obtaining a license from the SFC typically takes between 6 – 8 months. This timeline varies depending on several factors, including but not limited to the complexity of your business, competency of key personnel, availability of information that is required to be provided to the SFC, and importantly, the quality of the application submitted to the SFC.
To help ensure a smooth and efficient license application process, most firms engage third-party compliance consulting firms. The Consultants at Peak Compliance Associates have handled hundreds of SFC license applications and are able to guide clients through the process.
I am a Corporate Finance Advisory firm based in Shanghai and intend to apply for a Type 6 license with the SFC. Do I need to meet all of the 5 key licensing requirements before I can submit my application to the SFC?
No, companies who are seeking to apply for an SFC license only need to meet with following key licensing requirements prior to the submission of their license application to the SFC: (1) incorporate a company in Hong Kong and (2) identify the proposed ROs.
During the license application process, applicants should satisfy the other 3 key licensing requirements (i.e., (3) open a corporate bank account in Hong Kong, (4) satisfy applicable regulatory capital requirements, and (5) rent a suitable office in Hong Kong).
What are the benefits of engaging compliance service providers to help our firm apply for an SFC license?
While you may choose to handle an SFC license application independently, most companies find that engaging external support from professional service providers can significantly reduce workload and the overall processing time. Simply put, companies are unable to conduct regulated activities in Hong Kong until they receive their license form the SFC, so receiving a license as quickly as possible is a priority for many firms.
Compliance service providers, like Peak Compliance Associates, understand how to present information in a way which the SFC accepts and is familiar with, as well as provide responses to SFC questions which are correct and will not promote further questions.
In addition, there are many forms and other supporting documents that are required to be prepared in connection with an SFC license application, and service providers are able to take this significant workload off a license applicant’s hands.
What are the major deadlines for Hong Kong companies who are licensed with the SFC throughout the year?
Generally, companies in Hong Kong are subject to annual deadlines for profits tax, employer submissions, business registration, and licenses. In most cases these change depending on your business registration date so it’s important to keep track.
Regulatory deadlines for SFC-licensed firms include but are not limited to: the Asset and Wealth Management Activities Survey, the SFC and HKMA Joint Product Survey, the Annual Returns, the periodic Financial Resources Returns, the Business Risk Management Survey and the Audited Financial Statements.
Where can I find additional information regarding the SFC’s licensing requirements?
You may find additional information on licensing in the SFC’s Licensing Handbook, as well a tailored course on the SFC’s licensing regime by Peak Compliance Associates.
Where can I find more information on the ongoing competency and continuous professional training requirements for Responsible Officers of licensed corporations?
Further information about the ongoing competency and Continuous Professional Training (CPT) requirements for Responsible Officers of licensed corporations is provided within the SFC’s Guidelines on Continuous Professional Training, which details the mandatory requirements and classifications of what may be acceptable as CPT.
Additionally, you can refer to the training materials provided by Peak Compliance Associates, which elaborates on the mandatory requirements, recommended practices, and the scope of skills and knowledge that Responsible Officers must maintain.
Reach out to us at info@shepherd-asia.com for more information on any topics covered in this guide. This guide has been produced in collaboration with Peak Compliance Associates, PCA, the experts in Financial Services Compliance Consulting.