A Quick Guide To Hong Kong’s Financial System And Services

A Quick Guide toHong Kong’s FinancialSystem and Serviceswww.thechinfamily.hk

1ContentsAbout The Chin FamilyThe Chin Family is an independent and impartial financial education platformproviding free information, resources and programmes. We help people in HongKong plan and manage their finances by making financial learning simple andenjoyable. The Chin Family is managed by the Investor Education Centre, which issupported by the Education Bureau and all four financial regulators.Financial Regulatory System2Markets and Products8Investing and Trading18Safeguards22Getting Useful Information28

3A Quick Guide toHong Kong’s Financial Systemand ServicesFinancialRegulatorySystemAs an international financial centre,Hong Kong offers a sound regulatoryframework and a raft of safeguards tofinancial consumers. Understandinghow our markets and market playerswork is essential before you makedecisions on how to plan and manageyour money here.The Financial Services and theTreasury Bureau of the Hong KongSpecial Administrative RegionGovernment works closely withmarket regulators and participantsto strengthen Hong Kong’s role as aninternational financial centre, assetmanagement centre and offshorerenminbi (RMB) business centre.The four financial regulators arethe Hong Kong Monetary Authority(HKMA), the Insurance Authority(IA), the Mandatory Provident FundSchemes Authority (MPFA)and theSecurities and Futures Commission(SFC). They oversee the banking, theMandatory Provident Fund (MPF),insurance as well as securities andfutures industries respectively, andhelp maintain the financial stability ofHong Kong.As part of Hong Kong’s overallregulatory infrastructure for thefinancial services industries, theInvestor Education Centre’s role infinancial education is complementaryto the work of the regulators.

45Financial RegulatorsHong Kong Monetary AuthorityMandatory Provident Fund Schemes AuthorityThe HKMA was established on 1 April 1993 by merging the Office ofthe Exchange Fund with the Office of the Commissioner of Banking.Its main functions and responsibilities are governed by the ExchangeFund Ordinance and the Banking Ordinance. The HKMA reports tothe Financial Secretary and is the government authority responsiblefor maintaining monetary and banking stability.The MPFA is a statutory body set up in 1998 under theMandatory Provident Fund Schemes Ordinance to assist HongKong’s workforce to accumulate savings for their retirement,through regulating and supervising privately managed MPFschemes and overseeing the operation of occupationalretirement (ORSO) schemes.Insurance AuthorityOn 7 December 2015, the independent IA was established under theSecurities and Futures CommissionInsurance Companies (Amendment) Ordinance 2015. The IA is a newEstablished in 1989, the SFC is an independent statutory bodyset up to regulate the securities and futures markets. With itspowers derived from the Securities and Futures Ordinance anda subsidiary legislation, it maintains and promotes the fairness,efficiency, competitiveness, transparency and orderlinessof the securities and futures industry, and offers protectionand education to the public investing in financial products.Its investor education mandate has been transferred to theInvestor Education Centre.insurance regulator independent of the Government. The IA tookover the regulatory functions of the then Office of the Commissionerof Insurance, which was a Government department, on 26 June 2017.Empowered by the Insurance Ordinance, the IA protects the interestsof policyholders and promotes the general stability of the insuranceindustry. Its work is to authorise and supervise insurers. It is expectedthat the IA will take over the regulation of insurance intermediariesfrom the three Self-Regulatory Organizations, and implement a newstatutory regulatory and licensing regime within two years thereafter.

67Regulation of Financial Markets, Products andIntermediaries in Hong KongSecurities andFutures CommissionHong Kong MonetaryAuthorityMandatory Provident FundSchemes AuthorityInsurance Authority1 Regulates and authorises1 Regulates and supervises banks1 Regulates and supervises MPF1 Authorises and supervises2 Regulates intermediaries ie2 Acts as the registrar of the2 Regulates intermediaries iepublicly offered investmentproducts and their offeringdocuments eg unlistedinvestment products and listedexchange-traded funds (ETFs)and real-estate investmenttrusts (REITs) offered to thepublic in Hong Kong2 Licenses and supervisesintermediaries eg brokers,investment advisers and fundhouses3 Directly regulates takeovers andmergers of listed companies4 Oversees market operatorie Hong Kong Exchangesand Clearing Limited whichregulates listed companies andlisted structured productsand deposit-taking companiesbanks and bank staff whoare registered with the SFCfor carrying on businesses insecurities and futuresschemes / trusteesORSO schemes3 Registers MPF intermediarieswho are regulated by the HKMA,IA and SFC for carrying onbusiness in banking, insuranceand securities respectivelyinsurance companiesinsurance agents and brokersthrough overseeing selfregulatory organisations(The IA took over the regulatoryfunctions of the Office of theCommissioner of Insurance on 26 June2017. It is expected that the IA willtake over the regulation of insuranceintermediaries from the three SelfRegulatory Organizations, and implementa new statutory regulatory and licensingregime within two years thereafter.)

9A Quick Guide toHong Kong’s Financial Systemand ServicesMarkets andProductsHong Kong has an integrated network of institutions and markets providingwide-ranging products and services to consumers and investors. Its financialmarkets are characterised by1a high degree of liquiditywith effective andtransparent regulations3a low and simple taxpolicy that allows room forbusiness initiatives5a stable currency regimewith the exchange rate ofthe Hong Kong dollar tothe US dollar kept at aboutHKD7.8 against USD12minimum intervention bythe government4a strong emphasis on therule of law and fair market6no exchange controls andrestrictions on capitalinflows and outflows

1011Products and servicesMarketsHong Kong Exchanges and Clearing Limited (HKEx)operates the securities and derivatives markets inHong Kong and is the frontline regulator of listedcompanies. Its stock exchange regulates listed issuersand administers listing, trading and clearing rules.Financial institutions such as banks, fund managers,brokerages and insurance companies offer a widerange of banking, investment and insurance productswhich include funds and investment-linked assuranceschemes (ILAS).Key points to noteBankingConsumers can apply for creditcards and borrow loans from banks.Through opening savings, current,time deposits, non-HKD, integratedand investment accounts, they cantransfer money, receive interestand conduct transactions offinancial products.1Avoid over-borrowing.2Keep loan paymentsto a level you cancomfortably repay.3Stay on track with yourcredit commitments.1Ensure that youunderstand the risks ofinvesting in ILAS.2ILAS are generallydesigned for consumerswho have a long-terminvestment horizonand a dual objective ofinvestment and estateplanning; intend and areable to pay the premiumsfor the whole policy term;and accept that theirdeath benefits under theILAS are subject toinvestment risks.Some institutions also provide trading andsettlement services.The staff of banks and brokerages, insurance agents,insurance brokers, and investment advisers act asintermediaries to sell, distribute and advise on thefinancial products.InsuranceA full product range comprises lifeinsurance policies (including ILAS),and non-life insurance policies(including medical, critical illness,accident, home, travel and motor)to cater for your needs.ILAS is a long-term investmentcum-life insurance product,with its policy value determinedby the insurer based on theperformance of the “underlyingor reference funds”. The insurer,not the policyholder, owns ILAS’sunderlying assets.

1213Products and servicesKey points to noteProducts and servicesKey points to note100InvestmentStocks1When you invest in Hong Kong’sstock market, it is important tounderstand the risks and knowyour limits. While you might makegains, you could also lose.Watch out market risk,interest rate risk, globaland macroeconomic risk,business risk, uncertaintiesabout corporate earningsand mis-governance,trading suspension andliquidity risk.Bonds1A bond is a public or private debtinstrument issued for fund-raisingpurpose. The range of productofferings, the open access forissuers and investors, and theincreasing significance of offshoreRMB bond issuances are conduciveto developing Hong Kong into aninternational bond market.Bonds carry credit risk,interest rate risk, exchangerate risk, liquidity risk,inflation risk and event risk.2High-yield bonds andbonds with special featuresbear additional risks.Funds1SFC authorisation is nota recommendation orendorsement of a productnor does it guarantee thecommercial merits of aproduct or its performance.2An unauthorised fundis not subject to theregulation of the SFC, itsstructures and operationsmay not be governed byany rules or regulationsin Hong Kong and theoffering document maynot have been vetted byHong Kong’s authorities.Funds must be authorised by theSFC before they can be offered tothe Hong Kong public.To be authorised, funds must meetthe requirements in the SFCHandbook for Unit Trusts andMutual Funds, Investment-LinkedAssurance Schemes and UnlistedStructured Investment Products,covering investment restrictions,fund manager / custodian / trusteeeligibility, information disclosureand operational matters.Unauthorised funds can bedistributed privately to professionalinvestors and the onus is on thefund manager to ensure that lawsare not contravened.

1415Products and servicesKey points to noteProducts and servicesKey points to note100InvestmentETFs1An exchange traded fund (ETF)tracks, replicates or corresponds tothe performance of an underlyingindex or benchmark which canbe on a stock market, a specificsegment of a stock market, a groupof stock markets or on bonds orcommodities.Tracking errors arisingfrom charges and indexchanges, counterparty riskand currency risk.Leveraged foreign exchange(forex) contract is a “geared”investment in which you investin one currency on margin in theexpectation that its exchange rateagainst another currency will riseor fall. Whether you make a profitor suffer a loss depends on thedifference between the exchangerates at which you open and closeyour position.A structured product is aninvestment product embeddedwith a derivative under whichthe return is typically linked tothe performance of the referenceunderlying eg securities, index;they may be listed or unlisted.Listed structured products inHong Kong include derivativewarrants and callable bull/bearcontracts (CBBC).In some cases, an ETF tracks anindex of a market where accessis restricted (such as the ChinaA-share market and the Indianmarket), thus giving investorsindirect access to that market.Leveraged forexStructured products1Leveraged forex may bringsubstantial profits, but alsoequally, substantial losses,in a short period of time.2It is only suitable for thedisciplined investor whocan afford the loss whenthe currency movesagainst the expectation.Unlisted structured products aretraded over the counter at banksand brokerages, and include equitylinked investments (ELI), equitylinked deposits (ELD) and currencylinked investment products.1Risks related to listedstructured products areexplained on the HKExwebsite.2Related risks includethe product may not beprincipal-protected.its maximum potentialgain may be capped.issuer credit risk.