Concern Over Hong Kong Exposure To Mainland Products

By Editorial 04 March, 2014

Following a question in the Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, has confirmed that Hong Kong investors are being protected from the risks associated with the range of products being offered by Mainland financial intermediaries.

His questioner pointed out the risks of financial products offered by Mainland financial institutions are "uncertain due to inadequate regulation of such products and related financial institutions," but that a number of Hong Kong individuals and financial institutions have been attracted by their high returns and have invested directly or indirectly in such products.

It was asked whether the Hong Kong Monetary Authority (HKMA) and/or the Securities and Futures Commission (SFC) have plans to introduce measures to protect the interests of Hong Kong investors in those products, and whether they have assessed if they pose short-term and long-term risks to Hong Kong's financial system, including whether Hong Kong's financial institutions are becoming over-exposed.

Chan pointed out that the offer of securities, collective investment schemes and structured products to the public of Hong Kong is subject to authorization requirements by the SFC. Specifically, it is a criminal offence for any person, including any Mainland or overseas financial institution, to issue any offering document or marketing material for such investment products to the Hong Kong public, unless such issuance is authorized by the SFC.

Intermediaries carrying on regulated activities must also be licensed or registered. If investment products are marketed to the public of Hong Kong, then the intermediaries may be regarded as conducting a regulated activity and may be required to be licensed by or registered with the SFC.

The conduct of those intermediaries is governed by a Code of Conduct, which includes a suitability requirement that would apply whenever an intermediary makes a recommendation or solicitation to a client in relation to an investment product. The SFC and the HKMA supervise the intermediaries by conducting ongoing off-site monitoring and on-site inspections regularly.

In addition, Chan added, under the existing bilateral arrangements, the SFC can seek the assistance of the China Securities Regulatory Commission (CSRC) in investigating Mainland entities and, in appropriate cases, refer cases involving suspected improper conduct of Mainland financial institutions to CSRC for further action.

The regulators have also been making efforts to enhance investor education, reinforcing the message that investors should understand the nature and risks of an investment product, as well as their rights in case of default, before making an investment decision.

With regard to financial institutions in Hong Kong investing with their own funds in financial products offered by their counterparts from the Mainland, Chan stressed that they are required to make full provision for the risks of the investment against their regulatory capital upfront, since onshore renminbi is subject to remittance control. All licensed corporations are also required to prudently manage their financial risks by closely monitoring and managing their concentration exposures.

He confirmed that the HKMA has collected information from Hong Kong banks and communicated with the Mainland banking authorities to ascertain the situation of the selling to them of Mainland financial products. It has assessed the associated risks posed to Hong Kong banks, but, so far, the information available does not give rise to supervisory concerns or indicate material risks to them. However, the SFC and the HKMA will continue to maintain close dialogue with the regulatory authorities in the Mainland and closely monitor the situation.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at and a description of the report can be seen at

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