Hong Kong: A Leading Financial Centre

Hong Kong maintains its place as a leading financial centre and continues to adapt to market conditions with new regulatory and legislative developments.  In the first few months of 2016, we have seen amendments to the law to allow for the enforcement of contractual terms by third parties; the introduction of a revised Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission; a revamped process for fund authorisation; and an expansion on the scope of short position reporting. In addition, Hong Kong's government proposed amendments to the Securities and Futures Ordinance to allow for the establishment of open-ended fund companies and there has been an increase of focus on cybersecurity.

Reform of Third Party Rights 

On 1 January 2016, the Contracts (Rights of Third Parties) Ordinance (Cap 623) (the Ordinance) came into effect, reforming the doctrine of privity of contract in Hong Kong. Under the previous law, a third party could not acquire and enforce a right under a contract to which he was not a party. The Ordinance reforms the law by providing that the third party may enforce a term of the contract if either of the following two limbs are satisfied: (i) the contract expressly provides that the third party may enforce a term of the contract; or (ii) the contract contains a term which purports to confer a benefit on the third party.

The Ordinance only applies to contracts entered into on or after 1 January 2016, and the third party must be expressly identified in the contract, either by name, as a member of a class or as answering a particular description. Further to the Ordinance, a third party who satisfies one of the above limbs, is now entitled to any remedy that would have been available to the third party in an action for breach of contract if the third party had been party to the contract. If contracting parties wish to contract out of the Ordinance, then an express provision should be included in the contract.

New Hong Kong Fund Vehicle Takes Shape

Earlier this year, Hong Kong's government gazetted proposed amendments to the Securities and Futures Ordinance to allow for the establishment of open-ended fund companies (OFCs) for both public and private funds. The Securities and Futures (Amendment) Bill 2016 follows from the public consultation conducted in 2014. 

Publicly offered OFCs, which are required to be authorised by the Securities and Futures Commission (the SFC) in the ordinary course, will enjoy a level playing field with existing authorised funds in terms of tax concessions: the existing profits tax exemption for public funds will apply to publicly offered OFCs.

For privately offered OFCs, the government recognises the importance of tax considerations in deciding where a fund is to be domiciled. Initially, the profits tax exemption will be available under the existing regime for offshore funds provided the OFC's central management and control is located outside Hong Kong. However, the government has also indicated that it will further review the existing profits tax exemption with a view to placing onshore privately offered OFCs on a level playing field with offshore privately offered OFCs.

Expansion of Short Position Reporting

On 24 February 2016, the SFC published conclusions to its consultation released in late November 2015 on expanding the scope of short position reporting under the Securities and Futures (Short Position Reporting) Rules (SPR Rules).

The proposed changes to the existing short position reporting regime include:

• the scope of short position reporting will be expanded to all securities that are determined by The Stock Exchange of Hong Kong Limited (SEHK) to be “Designated Securities” (ie, listed securities that can be short sold under the rules of SEHK);

• for collective investment schemes, the reporting threshold trigger will be set only at the US$30 million threshold;

• for the purposes of determining the value of a net short position and whether applicable under the SPR Rules, if the closing price of a Designated Security is in a foreign currency, it must be converted into Hong Kong dollars at a specified rate of exchange for that foreign currency;

• in a contingency situation, daily reporting will apply to those Designated Securities determined by the SFC which the SFC will list out on a public notice; and

• the SFC may designate more than one electronic system for short position reporting.

To give the market reasonable lead time for preparation, the SFC plans for the amended rules to come into effect on 15 March 2017, subject to the legislative process.

Revamped Fund Authorisation Process

In November 2015, the SFC launched a six month trial of a revamp of the authorisation process for public funds. After the successful pilot, the SFC announced the revamped process for fund authorisation was to be formally adopted with effect from 9 May 2016.  

The revamped process was introduced with a view to promoting fund providers' compliance and reducing the overall processing time for new fund applications without compromising investor protection. 

The revamped process is extended to applications of Mainland funds under the mutual recognition arrangement.  

Revised Professional Investor Regime 

In March 2016, the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code) was amended to include a new paragraph 15 in relation to professional investors, to ensure that specified categories of professional investors who previously were not covered by the Code’s suitability protections are now covered. A key objective is to ensure that these protections extend to all individual clients of intermediaries (including those who use corporate vehicles) regardless of their financial resources. This means that intermediaries will, among other obligations, be bound by the suitability requirements specified in the Code, in relation to these clients. Intermediaries must comply with important new Code requirements governing the contents of all client agreements on or before 9 June 2017.

SFC Adopts Principles of Responsible Ownership 

On 7 March 2016 the SFC published its consultation conclusions on the Principles of Responsible Ownership (Principles) which aim to provide guidance on how investors should fulfil their ownership responsibilities in relation to investments in Hong Kong listed companies. 

The Principles encourage investors to establish policies, in particular voting policies, and to monitor and engage with Hong Kong listed companies in which they invest.

The Principles are voluntary and are intended to apply to persons who invest money, or hold shares, on behalf of clients and other stakeholders. They are not intended to apply to persons investing for their own account. Investors who hold or receive funds from the public that are invested in shares of Hong Kong listed companies are encouraged to adopt the Principles and disclose to their stakeholders in accordance with the Principles. 

Investors who do not think that the Principles are relevant or suitable for them are encouraged to explain to their stakeholders why the Principles have not been adopted at the outset and, if applicable, explain what alternative measures they have in place.

The Principles aim to strengthen the corporate governance culture in Hong Kong, on the basis that effective engagement by investors generally leads to better-run companies. 

Whilst they are in general aimed at investors of Hong Kong listed companies, investors based in Hong Kong are encouraged to observe similar principles in relation to their foreign investments. Similarly, foreign investors are encouraged to observe the Principles for their investments in Hong Kong listed companies as the Principles’ success lies in all investors playing their part. 

Focus on Cybersecurity

Cybersecurity is increasingly being viewed by the SFC and the Hong Kong Monetary Authority (the HKMA) as a matter of priority given the ongoing occurrences of cyber-attacks and cybersecurity incidents being reported globally across the financial services industry. The frequency and sophistication of cyber-attacks appear to be increasing. The SFC has recently conducted a series of reviews of the cybersecurity within selected larger sized licensed corporations (LCs).

On 23 March 2016, the Securities and Futures Commission in Hong Kong (SFC) issued a circular to LCs on cybersecurity. While the SFC’s reviews revealed that most of the larger sized LCs have prioritised resources dedicated to strengthening their cybersecurity control frameworks and to anticipating cybersecurity threats in a pro-active manner, there are still deficiencies within LCs in fully recognising that cybersecurity risks constitute genuine and significant threats to their businesses, and in addressing these threats.

On 18 May 2016, at the Cyber Security Summit 2016, the HKMA announced the launch of a cybersecurity fortification initiative (CFI). The CFI is a new, comprehensive initiative which aims to raise the level of cybersecurity of the banks in Hong Kong through a three-pronged approach:

• First, a central element of the CFI is a Cyber Resilience Assessment Framework, which seeks to establish a common risk-based framework for banks to assess their own risk profiles and determine the level of defence and resilience required;

• Second, there will be a new Professional Development Programme, which is a training and certification programme in Hong Kong which aims to increase the supply of qualified professionals in cybersecurity; and 

• Third, a new piece of infrastructure namely the Cyber Intelligence Sharing Platform will be developed to allow sharing of cyber threat intelligence among banks in order to enhance collaboration and uplift cyber resilience. 

The CFI programme is scheduled to launch by the