The Securities and Futures Commission (SFC) is the main independent regulator of Hong Kong’s securities and futures markets. Established in 1989, the SFC is responsible for supervising, regulating and developing Hong Kong’s securities and futures markets. It aims to ensure fair and orderly markets and reduce systemic risks.
Key Responsibilities and Powers of the SFC
The SFC has wide-ranging powers and responsibilities to:
- Regulate listing and takeover activities – Approve listing and takeover activities on the Stock Exchange of Hong Kong. Ensure compliance with listing rules and codes.
- License intermediaries – License and regulate securities brokers, asset managers, advisors and other intermediaries. Ensure licensing requirements and standards are met.
- Authorize investment products – Approve and regulate investment products like unit trusts and mutual funds. Ensure products meet authorization requirements.
- Enforce laws and regulations – Investigate suspected market misconduct and take disciplinary action. Impose sanctions including reprimands, fines and suspension of licenses.
- Promote proper conduct – Issue codes and guidelines to maintain market integrity. Educate investors and promote proper conduct of regulated persons.
- Monitor markets – Oversee trading, clearing and settlement on exchanges and intermediaries. Detect market manipulation and insider dealing.
- Cooperate on policy – Advise the government on securities and futures policy matters. Cooperate with other regulators locally and overseas.
The SFC has a high degree of autonomy and does not need government approval for performing its day-to-day functions. It has the power to inspect persons and seize evidence when investigating offenses.
Organization and Management of the SFC
The SFC consists of a chairman and up to ten non-executive directors appointed by Hong Kong’s Chief Executive. There is an Executive Director in charge of daily operations. The SFC Chairman is Mr Tim Lui, with Mr Julia Leung as Executive Director.
There are several specialized divisions and departments within the SFC:
- Corporate Finance – Oversees listings, takeovers and corporate disclosure.
- Intermediaries – Regulates intermediaries like brokers, advisors and asset managers.
- Investment Products – Authorizes and regulates investment products.
- Enforcement – Investigates market misconduct and imposes sanctions.
- Supervision of Markets – Monitors trading, clearing and settlement. Detects market manipulation.
- Legal Services – Provides legal support and represents SFC in proceedings.
- Policy, China & Investment Products – Advises on policy matters and works with mainland regulators.
To ensure high standards, the SFC recruits experienced professionals and industry experts. As of March 2022, the SFC had 884 authorized staff positions. It operates with funding from fees and charges levied on regulated persons.
Major Functions and Key Priorities of the SFC
As an independent regulator, the SFC performs many important functions. Some of its major ongoing responsibilities and recent priorities include:
Corporate Finance Activities
- Reviewing listing applications for IPOs and ensuring compliance with Listing Rules. Over 200 listings raise over HK$500 billion annually.
- Regulating takeovers, mergers and share repurchases under the Takeovers Code.
- Monitoring corporate disclosures and accounts to ensure transparency.
- Implementing a new listings regime for special purpose acquisition companies (SPACs).
Licensing Intermediaries
- Licensing securities brokers, asset managers, advisors and other intermediaries.
- Supervising intermediaries for compliance through routine inspections.
- Taking disciplinary action for misconduct and breaches. Recent fines on large brokers like UBS and Morgan Stanley.
- Introducing new licences like the Virtual Asset Service Provider licence.
Authorization of Products
- Authorizing and regulating investment products like SFC-authorized funds.
- Enhancing regulation of exchange-traded funds (ETFs) and unlisted structured products.
- Strengthening disclosure standards for bond offerings.
- Developing an “open-ended fund company” structure for investment funds.
Enforcement against Misconduct
- Prosecuting market manipulation, insider dealing, fraud and other market misconduct.
- Imposing disciplinary sanctions on regulated persons like reprimands, fines, license suspension and more.
- Banning directors and executives found guilty of misconduct from working again in the industry.
- Seeking court orders to freeze assets and compel information disclosure.
- Cooperating with the Department of Justice and police on criminal prosecutions.
Monitoring Markets
- Overseeing trading, clearing and settlement to reduce counterparty and systemic risks.
- Detecting market manipulation through surveillance systems and investigation.
- Assessing risks and recommending trading suspensions when necessary.
- Inspecting exchange participants for financial soundness and regulatory compliance.
Investor Education
- Promoting understanding of markets and products through campaigns, seminars and publications.
- Warning investors of potential risks like cryptocurrencies and improperly authorized funds.
- Maintaining a public register of licensed persons and advising on how to avoid fraud.
- Operating an enquiry and complaint service to protect investor interests.
Major Recent Developments
Some noteworthy recent developments involving the SFC include:
- COVID-19 impact – Providing relief measures for licensed firms and investors impacted by COVID-19. Monitoring risks from remote working and online transactions.
- Green finance – Issuing requirements for climate-related fund disclosures and restrictions on “greenwashing”.
- Cryptocurrencies – Warning that most cryptocurrencies are unregulated. Developing a new licence for exchanges.
- Fintech – Launching a new regulatory sandbox for fintech. Considering online trading and robo-advisors.
- Stock Connect – Expanding Stock Connect schemes connecting Hong Kong and mainland China markets.
- Enforcement – Record fines in 2021 of over HK$3.3 billion. High profile bans of Goldman Sachs and UBS bankers related to IPOs.
Oversight of the SFC
While independent in its powers and functions, the SFC ultimately remains accountable to the Hong Kong government and legislature. Oversight mechanisms include:
- The Chief Executive appoints SFC Board members based on recommendations of the Financial Secretary.
- The SFC Chairman reports annually to the Chief Executive on the SFC’s work.
- The Financial Secretary can give the SFC written directions in public interest.
- The SFC Annual Report and accounts are tabled in the Legislative Council.
- LegCo’s Panel on Financial Affairs can summon SFC executives to answer questions on its work.
- The Audit Commission audits the SFC annually, tabling its report in LegCo.
- The Ombudsman investigates complaints of maladministration against the SFC.
- Court judges can judicially review SFC decisions and hold it accountable for abuses of power.
Assessing the Performance of Hong Kong’s Securities Regulator
The SFC is widely regarded as an effective securities regulator that maintains efficient and orderly markets according to international standards. It scores strongly on the following aspects:
Regulatory framework – The SFC has robust powers under the Securities and Futures Ordinance to regulate markets and intermediaries. Regulatory guidelines are clear and regularly updated.
Enforcement effectiveness – The SFC actively investigates offenses and has successfully prosecuted many cases of market misconduct. Fines and bans send a strong deterrent message.
Oversight of intermediaries – Extensive licensing ensures only fit and proper parties can operate. Compliance inspections safeguard clients and market integrity.
Product regulation – Investment products are subject to authorization requirements and sales restrictions that protect investors.
Corporate governance – SFC governance structures and accountability mechanisms ensure independence and consistency in decision-making.
International cooperation – The SFC collaborates well with Mainland China and global regulators for cross-boundary oversight.
Public confidence – Overall, investors have continued confidence in the integrity of Hong Kong’s financial markets. The SFC plays an important role in maintaining this.
However, some observers also see room for improvement in the SFC’s resourcing, transparency and use of technology:
- Budget and staffing have not kept pace with its growing responsibilities. More resources would strengthen its supervision capabilities.
- Some critics perceive a lack of transparency and consistency in SFC decisions. Clearer communication of policies and rationales would help.
- As an analogue regulator, its adoption of technology like suptech and regulatory sandboxes lags behind other major markets.
Conclusion
Over the past three decades, the SFC has steadily grown in stature and effectively regulated Hong Kong’s financial markets. It has broad investigative and enforcement powers that deter misconduct, whilealso promoting good corporate governance. With adequate resourcing, appropriate transparency and quicker adoption of technology, the SFC can consolidate its position among the world’s leading securities regulators.