Following on from a circular that it issued in January, the Hong Kong Securities and Futures Commission has issued some questions and answers on the subject of the licensing obligations of family offices and multi-family offices. These so-called FAQs provide additional guidance, in line with the Securities and Futures Ordinance.
'FAQ' stands for 'frequently asked question,' although it is quite possible that no practitioner asked the SFC these questions before it published the answers. The FAQs and their answers are as follows.
Q1: Does the licensing regime contain a definition of phrases such as “family” or “family office”?
Q2: What constitutes a single family office for the purposes of January's circular?
A: It typically refers to an arrangement (often structured through a corporate vehicle owned or controlled by the family in question) by which someone manages the assets, investments and long-term interests of members of a single family. The SFC has no list of relationships of blood or of law that constitute family membership because the licensing rules (sanctioned by the Ordinance) do not hinge on whether the clients of a family office are members of the family or not.
Q3: Is a single family office required to be licensed under the Ordinance?
A: This is determined by reference to three key factors, all of which must be present in order to give rise to a licensing obligation.
- The services that the family office provides must consist of regulatable activities.
- The family office must do business that provides such services.
- It must do the business in Hong Kong.
The Ordinance does not say what amounts to “carrying on a business in Hong Kong.” A genuine single family office arrangement, established to serve the investment-related needs of members of a single family, which is not being run as a business (i.e. not receiving any income, other than reimbursement of operating expenses from the family) or have the pursuit of profit as its business objective, should not in the ordinary course be considered as carrying on a business from a licensing perspective. It is also not the SFC’s intent to extend its regulatory oversight to this type of single family office set-up.
Q4: If two or more single family offices save money and co-operate by sharing an administrative infrastructure, would this oblige them to acquire a new licence?
A: Not in and of itself, but the discussion in the response to Q3 above about the types of factor that must be present in order to give rise to a licensing obligation under the Ordinance would apply equally in these circumstances. They may, after all, be regarded as a multi-family office structure.
Q5: What constitutes a multi-family office for the purposes of the January circular and does a multi-family office have to be licensed?
A: As mentioned in the circular, “a multi-family office by definition serves more than one HNW family” and such arrangements are likely to be evident.
Multi-family offices are typically established and run as commercial ventures. The issue of whether an MFO ought to be licensed under the Ordinance depends mainly on the three key factors set out in Q&A3.
MFOs in general
If the regulator grants an MFO full discretionary investment authority, its asset management activity is generally similar to that of a licensed asset management company and therefore probably requires a licence for Type 9 regulated activity (asset management). If it lacks this authority and only provides securities investment advice and executes securities transactions, it may have to be licensed for other types of activities, perhaps Type 1 (dealing in securities) and Type 4 ("advising on" securities). If the assets include futures contracts, it may also have to be licensed for Type 2 (dealing in futures contacts) and Type 5 ("advising on" futures contracts).