🏛️ Regulatory Overview of the Hong Kong Financial Industry

1. In Hong Kong, which ONE of the following bodies is responsible for the supervision of insurers and insurance intermediaries?

1. The Securities and Futures Commission
2. The Hong Kong Monetary Authority
3. The Insurance Authority
4. The Mandatory Provident Fund Schemes Authority

Insurers and insurance intermediaries come under the Insurance Authority, an independent statutory body. The SFC's remit is the securities and futures industry, the HKMA is the banking supervisor and the MPFA oversees Mandatory Provident Fund schemes; none of these three is the insurance regulator.

2. Which ONE of the following best describes a bond?

1. An ownership interest in the share capital of an issuing company
2. A debt security under which the issuer repays principal and interest
3. An agreement to buy an asset at a price fixed on a future date
4. A pooled investment scheme managed collectively for many investors

A bond is a debt security: the issuer borrows from investors and undertakes to repay the principal, normally with interest. An ownership interest in the share capital is a share (equity), an agreement to buy an asset at a price fixed for a future date describes a forward or futures contract, and a pooled scheme managed collectively for many investors is a fund.

3. Which ONE of the following best describes an over-the-counter (OTC) derivative, as distinguished from an exchange-traded derivative?

1. A contract whose terms are standardised by an exchange for general use
2. A contract that is traded through the facilities of HKFE alone
3. A contract whose terms are privately negotiated between two counterparties
4. A contract whose price is determined each day by the regulator

An OTC derivative is negotiated privately between two counterparties, so its terms can be tailored to them. Terms standardised by an exchange for general use, and trading through the facilities of HKFE alone, both describe exchange-traded contracts; and no regulator fixes the price of a derivative each day.

4. Which of the following statements about financial regulators in Hong Kong are CORRECT? I. The HKMA supervises authorised institutions, such as licensed banks. II. The MPFA regulates Mandatory Provident Fund schemes. III. The AFRC is the regulator of insurance intermediaries. IV. The FSTB supervises licensed corporations on a day-to-day basis.

1. I and III only
2. I and II only
3. II and IV only
4. I, III and IV only

The HKMA supervises authorised institutions such as licensed banks, and the MPFA regulates MPF schemes, so statements I and II are correct. The AFRC regulates auditors, not insurance intermediaries, which are regulated by the Insurance Authority. The FSTB is responsible for policy; the day-to-day supervision of licensed corporations is carried out by the SFC under section 5(1)(b) of the SFO.

5. Which ONE of the following statements about the legal status of the SFC is CORRECT?

1. It is a department of the Financial Services and the Treasury Bureau
2. It is a body corporate that can sue and be sued in its own name
3. It is a subsidiary company of Hong Kong Exchanges and Clearing Limited
4. It is a private association of licensed corporations and their staff

Section 3(1) of the SFO continues the SFC in existence as “a body corporate with power to sue and be sued in that name”. It is therefore an independent statutory body, not a government department; and it is not part of HKEX, since it supervises the recognized exchange companies and clearing houses of the HKEX group under section 5(1)(b). It is also not a private association of intermediaries.

6. Which ONE of the following is NOT a regulatory objective of the SFC under section 4 of the Securities and Futures Ordinance (“SFO”)?

1. To reduce systemic risks in the securities and futures industry
2. To maximise the number of companies listed on the Stock Exchange
3. To minimise crime and misconduct in the securities and futures industry
4. To promote public understanding of financial services and the industry

Section 4 of the SFO lists the regulatory objectives, including reducing systemic risks (paragraph (e)), minimising crime and misconduct (paragraph (d)) and promoting public understanding of financial services (paragraph (b)). Increasing the number of listed companies is not an objective: listing is a matter for the Stock Exchange, and section 6(2)(a) only requires the SFC to have regard to Hong Kong’s status as an international financial centre.

7. Harbourview Bank Limited is an authorised institution registered with the SFC for Type 1 regulated activity. In performing its functions in relation to the bank as a registered institution, the SFC:

1. may rely, in whole or in part, on the supervision of the bank by the Monetary Authority
2. may rely on the Monetary Authority’s supervision once the Financial Secretary approves
3. must carry out its own supervision of the bank and may not rely on another authority
4. has no function over the bank’s Type 1 activities, which the Monetary Authority regulates alone

Section 5(3) of the SFO allows the SFC, in performing its functions in relation to an authorized financial institution registered as a registered institution, to rely in whole or in part on supervision by the Monetary Authority; the approval of the Financial Secretary is not required. The SFC does not give up its functions, because section 5(1)(b)(ii) makes it responsible for regulating the registered activities of registered institutions. The statement that the SFC may not rely on another authority therefore contradicts section 5(3).

8. Which ONE of the following is NOT a function of the SFC under section 5(1) of the SFO?

1. To operate the central clearing and settlement system for securities transactions
2. To promote and develop an appropriate degree of self-regulation in the industry
3. To advise the Financial Secretary on securities and futures industry matters
4. To recommend reforms of the law relating to the securities and futures industry

Recommending law reform is a function under section 5(1)(p), promoting self-regulation is a function under section 5(1)(c), and advising the Financial Secretary is a function under section 5(1)(q). Operating the clearing and settlement system is not an SFC function: it is carried out by a recognized clearing house, which the SFC supervises under section 5(1)(b)(i) and which owes the duties in section 38.

9. In pursuing its regulatory objectives and performing its functions, which of the following must the SFC have regard to under section 6(2) of the SFO? I. The need to protect investors against any investment loss on financial products II. The desirability of facilitating innovation in connection with financial products III. The importance of acting in a transparent manner, subject to its duties of secrecy and confidentiality IV. The principle that competition among regulated persons should not be impeded unnecessarily

1. I and II only
2. III and IV only
3. I, II and IV only
4. II, III and IV only

Section 6(2) of the SFO requires the SFC to have regard to the desirability of facilitating innovation in connection with financial products (paragraph (b)), the principle that competition among regulated persons should not be impeded unnecessarily (paragraph (c)) and the importance of acting in a transparent manner while preserving secrecy and confidentiality (paragraph (d)), so II, III and IV are correct. Statement I is wrong: section 6(2) contains no duty to protect investors against investment losses; the related objective in section 4(c) is to provide protection for members of the public investing in or holding financial products, which is not a guarantee against loss.

10. Which ONE of the following statements about committees established by the SFC under section 8 of the SFO is CORRECT?

1. The SFC cannot withdraw a matter once it has referred it to a committee
2. A person who is not a member of the SFC may be appointed to a committee
3. Referring a matter to a committee stops the SFC from dealing with it itself
4. A committee must obtain the Chief Executive’s approval of its own procedure

Section 8(3) allows the SFC to appoint a person to a committee whether or not that person is a member of the Commission. The SFC may withdraw a reference from a committee (section 8(5)(a)), a reference to a committee does not prevent the SFC from performing any of its functions (section 8(4)), and a committee may regulate its own procedure and business (section 8(7)), so no approval of the Chief Executive is needed.

11. Which ONE of the following statements about the delegation of the SFC’s functions under section 10 of the SFO is INCORRECT?

1. The SFC may delegate a function to a committee that it has established
2. The SFC’s power to delegate may itself be delegated to its chief executive officer
3. The SFC may authorise a delegate to sub-delegate, subject to conditions
4. The SFC may revoke a delegation, whereupon it ceases to have effect

Section 10(2)(a) of the SFO prohibits any delegation of the power to delegate, so the statement that the power may itself be delegated is incorrect. The other three are correct: delegation to a committee under section 8 is allowed by section 10(1)(b), sub-delegation may be authorised with conditions under section 10(3), and a delegation may be revoked under section 10(5)(a).

12. Which ONE of the following statements about written directions given to the SFC under section 11 of the SFO is CORRECT?

1. The SFC may decline a direction that it considers contrary to its objectives
2. A direction takes effect once approved by the Legislative Council
3. A direction is subsidiary legislation published in the Gazette
4. The SFC shall comply with any written direction given by the Chief Executive

Under section 11(1) the Chief Executive may, after consulting the SFC’s chief executive officer and being satisfied that it is in the public interest, give written directions, and section 11(2) states that the SFC shall comply with them. There is no power to decline and no approval by the Legislative Council. Section 11(4) provides that written directions are not subsidiary legislation.

13. Which ONE of the following is a requirement for the composition of the SFC under Part 1 of Schedule 2 to the SFO?

1. The Commission must have at least twelve members in total
2. Non-executive directors must outnumber executive directors
3. The members must be appointed by the Financial Secretary
4. The chairman must be a former exchange participant

Section 1 of Part 1 of Schedule 2 to the SFO requires that the number of non-executive directors exceeds the number of executive directors, that there are not less than 8 members, and that all members are appointed by the Chief Executive. The minimum of twelve members, appointment by the Financial Secretary and a requirement that the chairman be a former exchange participant do not appear in the Schedule.

14. Which ONE of the following statements about Hong Kong Exchanges and Clearing Limited (“HKEX”) is CORRECT?

1. It is a government department that is supervised by the SFC
2. It is the statutory regulator that licenses intermediaries
3. It is a listed company whose shares trade on the Stock Exchange
4. It is a non-profit association owned by its exchange participants

HKEX is a company whose own shares are listed and traded on the Stock Exchange, and it controls the group’s exchange and clearing house companies. It is not a government department, and it does not license intermediaries: licensing is a function of the SFC. It is a listed commercial company, not a non-profit association of exchange participants.

15. Which of the following statements about the roles of companies in the HKEX group are CORRECT? I. The Stock Exchange of Hong Kong Limited operates the stock market. II. Hong Kong Futures Exchange Limited operates the futures market. III. Hong Kong Securities Clearing Company Limited clears and settles securities transactions. IV. The SEHK Options Clearing House Limited clears futures contracts traded on HKFE.

1. I and II only
2. I and IV only
3. II, III and IV only
4. I, II and III only

The Stock Exchange of Hong Kong Limited operates the stock market, Hong Kong Futures Exchange Limited operates the futures market and Hong Kong Securities Clearing Company Limited (HKSCC) is the clearing house for securities transactions, so I, II and III are correct. Statement IV is wrong because SEOCH clears stock options traded on the Stock Exchange; futures contracts traded on HKFE are cleared by HKFE Clearing Corporation Limited (HKCC). Operating a stock or futures market requires recognition under section 19 of the SFO, and a clearing house is recognized under section 37.

16. Harbourview Markets Limited, a company that is not the Stock Exchange Company and is not a recognized exchange controller, intends to operate a stock market in Hong Kong. Which ONE of the following must it first do?

1. Be authorised by the HKMA to carry on banking business
2. Be licensed by the SFC for Type 1 regulated activity
3. Be recognized as an exchange company by the SFC
4. Obtain written consent from the Stock Exchange Company

Section 19(1)(a) of the SFO prohibits operating a stock market unless the person is the Stock Exchange Company or a recognized exchange company (controlled by, or itself being, a relevant recognized exchange controller), so recognition by the SFC as an exchange company under section 19(2), after consultation with the public and then the Financial Secretary, is a necessary first step. A Type 1 licence permits dealing in securities, not operating a market; authorisation by the HKMA concerns banking business; and the consent of the Stock Exchange Company is not a statutory route.

17. Which ONE of the following best describes a duty of a recognized clearing house under section 38(1) of the SFO?

1. To ensure an orderly, informed and fair market in the securities traded
2. To authorise collective investment schemes for offer to the investing public
3. To guarantee the investment returns earned by its clearing participants
4. To ensure orderly, fair and expeditious clearing and settlement arrangements

Under section 38(1)(a) a recognized clearing house must ensure, so far as reasonably practicable, orderly, fair and expeditious clearing and settlement arrangements, and under section 38(1)(b) that its risks are managed prudently. An orderly, informed and fair market is the duty of a recognized exchange company under section 21(1)(a). Authorising schemes is a matter for the SFC, and a clearing house guarantees no investment returns.

18. Harbourview Exchange Limited is a recognized exchange company. It becomes aware that one of its exchange participants is unable to comply with the financial resources rules. What must Harbourview Exchange Limited do under section 21(5) of the SFO?

1. Notify the SFC within three business days of becoming aware of it
2. Notify the Financial Secretary, who then informs the SFC
3. Wait until the participant has had a chance to remedy the shortfall
4. Notify the SFC immediately upon becoming aware of the inability

Section 21(5)(a) of the SFO requires a recognized exchange company to notify the SFC immediately if it becomes aware that an exchange participant is unable to comply with its rules or any financial resources rules. A three-business-day period does not appear in the section, waiting for a remedy is not permitted, and the notification is made to the SFC, not to the Financial Secretary.

19. Which ONE of the following may provide automated trading services in Hong Kong without separate authorisation under section 95(2) of the SFO?

1. An intermediary licensed or registered for Type 7 regulated activity
2. An intermediary licensed or registered for Type 1 regulated activity
3. An intermediary licensed or registered for Type 4 regulated activity
4. An intermediary licensed or registered for Type 9 regulated activity

Section 95(1)(iii) of the SFO exempts an intermediary licensed or registered for Type 7 regulated activity (providing automated trading services) from the need for authorisation under section 95(2). Intermediaries licensed for Type 1 (dealing in securities), Type 4 (advising on securities) or Type 9 (asset management) are not named in section 95(1) and would need authorisation or a Type 7 licence.

20. Which ONE of the following best describes an issuer in the securities market?

1. A firm that is licensed to buy and sell securities on behalf of clients
2. A body that clears and settles securities transactions after each trade
3. A company or entity that raises funds by issuing securities to investors
4. A person who invests in securities with the aim of earning returns

An issuer is the company or entity that raises funds by offering its shares, bonds or other securities to investors. A firm licensed to deal for clients is an intermediary, a body that clears and settles trades is a clearing house, and a person who invests in securities is an investor.

21. Which ONE of the following statements about the recognition of a clearing house under section 37 of the SFO is CORRECT?

1. The SFC must consult the investing public as well as the Financial Secretary
2. The HKMA recognizes a company as a clearing house after consulting the SFC
3. The SFC recognizes a clearing house after consulting the Financial Secretary
4. Recognition takes effect on the date on which the company first clears a trade

Under section 37(1) of the SFO the SFC may, after consultation with the Financial Secretary, recognize a company as a clearing house by notice in writing, with effect from a date specified in the notice. Consultation with the public is required for the recognition of an exchange company under section 19(2) but not for a clearing house, the HKMA has no power to recognize a clearing house, and the effective date is the one stated in the notice, not the date of the first trade.