The Arrangement of Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters, signed by Hong Kong and the Mainland on 14 July 2006 (“2006 Arrangement“), was implemented through the Mainland Judgments (Reciprocal Enforcement) Ordinance (Cap. 597) (“Existing Regime“).

This was succeeded by the 2019 Arrangement, signed on 18 January 2019, set to be implemented through the new Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) (“Ordinance“) and relevant rules (Cap. 645A) (“Rules“) on 29 January 2024. Please click here for the Gazetted Ordinance and here for the Gazetted Rules.

The Supreme People’s Court will promulgate a judicial interpretation for implementation, but it is not yet announced.

Importantly, the new Ordinance and Rules will not apply retrospectively and will only apply to judgments given after 29 January 2024. The Existing Regime will continue to apply to judgments dated before 29 January 2024 (if applicable as outlined below).

Please click here for a table analysing and comparing the two Arrangements.

The 2019 Arrangement, along with the forthcoming implementation of the Ordinance and Rules, substantially broadens mutual judgment recognition between the Mainland and Hong Kong, enhancing judicial support in civil and commercial areas, and bolstering the legal appeal of both regions.

On 20 October 2023, the Securities and Futures Commission (“SFC“) and the Hong Kong Monetary Authority (“HKMA“) issued a joint circular (“Joint Circular“) to provide updated guidance to intermediaries conducting virtual asset (“VA“) related activities, including (a) distribution of VA-related products[1], (b) VA dealing services, (c) VA asset management services; and (d) VA advisory services. The Joint Circular supersedes the previous joint circular issued on 28 January 2022.

Background

The SFC’s initial regulatory approach was to impose a “professional investors only” restriction on various types of VA-related activities. However, in light of the rapid growth of the VA landscape , and the new licensing regime for VA trading platforms which came into effect on 1 June 2023 which allows VA trading platforms to provide services to retail investors, retail investors now have increased exposure to VA activities. Although VAs are becoming more popular globally, the regulatory landscape in different jurisdictions remains varied, and the SFC and the HKMA are of the view that risks associated with VAs and VA-related products may be difficult for retail investors to understand. Hence, it is necessary for the SFC and the HKMA to review and update their policies to provide further guidance on intermediaries conducting VA-related activities.

A. Distribution of VA-related Products

The SFC and the HKMA will impose the following investor protection measures specifically relating to the distribution of VA-related products, in addition to the requirements under the complex product regime[2]:

Selling restrictions – Subject to certain exceptions, VA-related products which are considered to be complex products should only be offered to professional investors. Intermediaries should also observe specific selling restrictions in Hong Kong and other jurisdictions which are applicable to a particular VA-related product.

VA knowledge test – Before effecting a transaction on behalf of a client (other than institutional professional investors[3] and qualified corporate professional investors[4] (“Exempt Investors“)), intermediaries should assess whether such client has knowledge of investing in VAs or VA-related products, for instance, whether the client has undergone training or attended courses, or has had other work or trading experience in relation to VAs or VA-related products. If a client lacks such knowledge, the intermediary may only proceed after it has provided adequate training to such client on the nature and risks of the VAs and VA-related products.

Suitability obligations – Intermediaries should observe the suitability obligations as supplemented by the Suitability FAQs, including:

(a) ensuring that any recommendations or solicitations made are suitable for or are otherwise in the best interests of the client in all circumstances, taking into account, among other things, the nature and features of the VA-related product, the client’s risk tolerance and financial situation;

(b) where the VA-related product is a derivative product, ensuring that the client understands the nature and risks of the product and has sufficient net worth to be able to assume the risks and bear potential losses of trading in such product; and

(c) conducting proper due diligence on the products, including, among other things, understanding the products’ risks and features and regulatory status, and the targeted investors.

Providing financial accommodation – Before intermediaries provide any financial accommodation to the client, it should ensure that the client has the financial capacity to meet the obligations arising from leveraged or margin trading in VAs and VA-related products.

Warning statements – Apart from Exempt Investors, intermediaries should provide to clients (a) information and warning statements in relation to VA-related products, and information on the underlying VA investments, in a clear and easily comprehensible manner; and (b) risk disclosure statements specific to VAs.

B. VA Dealing Services

Intermediaries must be licensed or registered for Type 1 (dealing in securities) regulated activity to provide VA dealing services, and may only partner with SFC licensed VA trading platforms (“SFC-licensed platforms“) to provide such services, either by (i) introducing clients to the SFC-licensed platforms for direct trading; or (ii) establishing an omnibus account with the SFC-licensed platforms.

For intermediaries providing VA dealing services under an omnibus account, as a licensing or registration condition, such intermediaries must comply with the terms and conditions prescribed by the SFC, which include, among other things, that:

(a) before providing VA dealing services to retail investors, intermediaries should: (i) assess each retail investor’s knowledge of VAs and risk tolerance level; (ii) set a reasonable exposure limit for each retail investor, with reference to such retail investor’s financial situation (including net worth) and personal circumstances; (iii) ensure that the VA dealing services are conducted through an omnibus account established and maintained with an SFC-licensed platform that is not subject to the licensing condition that it can only serve professional investors; and (iv) implement adequate controls to ensure that retail investors can only trade in VAs that are made available for trading by retail investors by the SFC-licensed platforms; and

(b) any deposit of VAs by a client, or any withdrawal of VAs by a client, must be dealt with through the intermediary’s segregated account(s) established and maintained with (i) the intermediary’s partnered SFC-licensed platforms; or (ii) authorised financial institutions (or their local subsidiaries) which meet the expected standards of VA custody issued by the HKMA. Intermediaries should also comply with the relevant anti-money laundering and counter-terrorist financing requirements with respect to VAs when handling these VA deposits and withdrawals.

There are also additional requirements and licensing or registration conditions for intermediaries who provide VA dealing services when acting as introducing agents of a SFC-licensed platform.

C. VA Asset Management Services

Intermediaries must be licensed or registered for Type 9 (asset management) regulated activity to provide asset management activities relating to VAs which meet the de minimis threshold (that is, a stated investment objective of a portfolio to invest in VAs or an intention to invest 10% or more of the gross asset value of a portfolio in VAs). As a licensing or registration condition, such intermediaries must comply with additional requirements under the terms and conditions prescribed by the SFC relating to the management of such asset portfolios.

If a Type 1 (dealing in securities) intermediary is authorised by its clients to provide ancillary VA dealing services on a discretionary basis, the intermediary should only invest less than 10% of the gross asset value of the client’s portfolio in VAs (that is, below the “de minimis threshold”).

D. VA Advisory Services

Intermediaries must be licensed or registered for Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activity to provide VA advisory services, and are expected to comply with all the regulatory requirements (including to observe the suitability obligations) imposed by the SFC and the HKMA when providing advisory services, irrespective of the nature of the VAs.

When recommending any VAs to retail investors, intermediaries should take all reasonable steps to ensure that (a) the VA is of high liquidity and is an eligible large-cap VA (that is, it is included in a minimum of two acceptable indices issued by at least two different index providers), and (b) the VA is made available for trading by retail investors by the SFC-licensed platforms.

Implementation

There will be a 3-month transition period before the full implementation of the updated requirements under the Joint Circular. Hence, intermediaries may continue to provide VA-related services to their existing clients who have been assessed to possess knowledge of VAs based on the results of the VA knowledge tests conducted before 20 October 2023.

If intermediaries intend to further expand their VA-related services, particularly to retail investors, or make any changes to their existing activities, they should notify the SFC and the HKMA (where applicable) in advance.

Takeaway

The Joint Circular has introduced additional investor protection measures and other updates to the policies in light of the latest market developments, and has clarified the standard of conduct expected from intermediaries’ conducting VA-related activities, which demonstrates the Hong Kong Government and the regulators’ joint commitment to enhance the level of responsibility and accountability of key players in the VA industry in Hong Kong. We look forward to the SFC and the HKMA issuing further regulatory guidelines and updates as the VA industry continues to expand and develop in the future.

For the full text, please refer to the Joint Circular and Appendices.

[1] “VA-related products” refer to investment products which (a) have a principal investment objective or strategy to invest in virtual assets; (b) derive their value principally from the value and characteristics of virtual assets; or (c) track or replicate the investment results or returns which closely match or correspond to virtual assets.

[2] The complex product regime refers to the requirements in paragraph 5.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct“) and Chapter 6 of the Guidelines on Online Distribution and Advisory Platforms.

[3] “Institutional professional investors” is defined under paragraph 15.2 of the Code of Conduct as persons falling under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO.

[4] “Qualified corporate professional investors” refers to corporate professional investors which have passed the assessment requirements under paragraph 15.3A and gone through the procedures under paragraph 15.3B of the Code of Conduct.

The Court of First Instance has granted the petitioner in Re Shandong Chenming Paper Holdings Limited [2023] HKCFI 2065 (“Re Shandong Chenming“) leave to appeal to the Court of Appeal from its decision to stay the winding-up petition pending resolution of an arbitrable cross-claim by the company (see our earlier news update here).

The decision followed the Court of Final Appeal’s decision in Re Guy Kwok-Hung Lam [2023] HKCFA 9 (“Re Guy Lam“), in which our highest Court dismissed a bankruptcy petition in light of an exclusive jurisdiction clause. Since the CFA’s decision, there have been various cases discussing whether the ratio of Re Guy Lam applies to winding-up proceedings where the subject companies have contended that the dispute should be referred to arbitration.

Harris J granted leave to appeal to the petitioner in Re Shandong Chenming. He reasoned that there were two other recent decisions by the Court of First Instance (namely Re Simplicity & Vogue [2023] HKCFI 1443 and Re Inversion Productions Limited [2023] HKCFI 2400) which were decided differently from Re Shandong Chenming, with both of them holding that Re Guy Lam did not apply to arbitration clauses. It was thus desirable for the Court of Appeal to reconcile the conflicting decisions by the Court of First Instance.

Harris J further reasoned that this would be a good opportunity for the Court of Appeal to clarify the application of the Lasmos approach (from Re Southwest Pacific Bauxite [2018] 2 HKLRD 449), which was noted in the his judgement in Re Shandong Chenming.

Please see here for the full decision.

Only a few months since the new dual licensing regime for virtual asset (“VA“) trading platform (“VATP“) operators came into effect on 1 June 2023 (see our previous article), the Securities and Futures Commission (the “SFC“) has issued two statements (see Warning statement on unregulated virtual asset trading platform and Statement on JPEX) expressly warning the public about certain suspicious features of JPEX (the “Warning Statements“), a VATP which has been placed on the SFC’s Alert List since July 2022, and stepped up its information dissemination and investor education.

In the meantime, upon receiving complaints about failure to withdraw assets from JPEX, the Hong Kong Police has arrested a total of 36 suspects, some of which are social media influencers, on suspicion of conspiracy to defraud.

What are the relevant offences?

As of 1 June 2023, a person commits an offence under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (the “AMLO“) if the person:

• carries on a business of providing any VA service, or holds itself out as carrying on a business of providing any VA service, without a licence under the AMLO;
• actively markets to the Hong Kong public, whether by itself or another person on its behalf and whether in Hong Kong or from a place outside Hong Kong, any services which it provides or purports to provide, and the provision of such services, if done in Hong Kong, would constitute providing a VA service without a licence under the AMLO;
• issues, or has in its possession for the purpose of issue, to its knowledge (a) an advertisement in which the advertised person holds itself out as being prepared to provide a VA service, or a document that contains such advertisement; and (b) the advertised person is not licensed under the AMLO;
• directly or indirectly, in a transaction involving any VA (a) employs any device, scheme or artifice with intent to defraud or deceive; or (b) engages in any act, practice or course of business that is fraudulent or deceptive, or would operate as a fraud or deception; or
• makes any fraudulent misrepresentation or reckless misrepresentation for the purpose of inducing another person to enter into, or offer to enter into, an agreement to acquire, dispose of, subscribe for or underwrite any VA.

The SFC indicates that it is empowered by section 53ZTH of the AMLO to take action against any persons who are knowingly or unknowingly involved in contravention-related conduct under the AMLO.

What seems to be wrong with JPEX?

In its Warning Statements, noting that JPEX has been actively promoting its products and services to the Hong Kong public through key opinion leaders (“KOLs“) and over-the-counter VA money changers (“OTC Shops“), the SFC warned the public about, among other things, certain suspicious features about JPEX and the persons actively promoting it to the Hong Kong public:

• JPEX falsely states on its website that it is “a licensed and recognised platform to facilitate the trading of digital asset and virtual currency” and claims on its website and local advertorials to have obtained licences from certain overseas regulators to operate VATP. In fact, there are currently only two SFC-licensed VATPs, namely OSL Digital Securities Limited and Hash Blockchain Limited, both of which are licensed VATPs under the Securities and Futures Ordinance (Cap. 571) (the “SFO“) regime only;
• JPEX offers very high returns for some of its products, which the SFC describes as “investment opportunities that seem too good to be true”;
• the SFC has received complaints from (and notes media reports of) retail investors who were unable to withdraw VAs from their accounts with JPEX, or found their account balances having been reduced and altered;
• JPEX appears to offer products involving VA “deposits”, “savings” or “earnings” which are not allowed under the SFC’s regulatory regime for VATPs; and
• KOLs and OTC Shops have made false or misleading statements on social media to suggest that JPEX has applied for a VATP licence in Hong Kong, in respect of which the SFC clarifies that no entity in the JPEX group has submitted any VATP licence application to the SFC.

The SFC began making enquiries into the suspected false and misleading representations and unlicensed activities in March 2022, and deeply regretted that JPEX has publicised confidential correspondence between the SFC’s Enforcement Division and JPEX in breach of the secrecy/confidentiality obligations under section 378 of the SFO and section 76B of the AMLO.

The SFC to step up information dissemination and investor education

In light of the JPEX incident, the SFC stated in its news article that it is putting in place the following measures to disseminate information in a clear, transparent and timely manner, and to educate and warn investors about the risks of trading on unregulated VATPs:

• publishing VATP lists on its website to inform the public of the regulatory status of VATP operators which are operating in Hong Kong or actively marketing their services to Hong Kong investors. The VATP lists were launched on 29 September 2023, being (a) a list of licensed VATPs; (b) a list of VATP applicants (accompanied by a list of applicants whose licence applications have been returned, refused or withdrawn); (c) a list of closing-down VATPs; and (d) a list of VATPs which are deemed to be licensed;
• enhancing and issuing a dedicated list of suspicious VATPs on its website;
• launching a public campaign, in partnership with the Investor and Financial Education Council, to raise awareness in guarding against fraud; and
• strengthening the SFC’s intelligence gathering process towards VA-related businesses and continuing its efforts to take follow-up and enforcement actions against suspicious VATPs.

The SFC also encourages the public to file complaints via its Online Complaint Form regarding any suspicious VA-related activities they may encounter.

On 4 October 2023, the SFC announced that it has established a dedicated working group with the Hong Kong Police Force to enhance collaboration in monitoring and investigating illegal activities related to VATPs.  The working group is set up to (a) facilitate the sharing of information on suspicious activities of and breaches of VATPs; (b) implement a mechanism to assess the risks of suspicious VATPs; and (c) enhance coordination and collaboration in related investigations.

The Securities and Futures Commission (“SFC“) has recently banned a former responsible officer (“RO“) of Changjiang Corporate Finance (HK) Limited (“CJCF“) from re-entering the industry for seven years as he failed to discharge his duties as a sponsor principal in charge of five listing applications. A sponsor principal is an individual appointed by a sponsor to supervise the transaction team in respect of a listing assignment, and he/she should be involved in the making of the key decisions in the work carried out by the transaction team and should be aware of and responsible for addressing the key risks.

Some of the notable failures of the RO in this case include: in the listing application of Pacific Infinity Resources Holdings Limited (“Pacific Infinity“), CJCF effectively performed no due diligence on a Philippines legislative bill which would adversely affect Pacific Infinity’s core business (which accounted for over 90% of its revenue) in a material way. On another occasion, CJCF advised Perpetual Power Holdings Limited (“Perpetual Power“) to submit a listing application where Perpetual Power obviously lacked the requisite land title certificates in Mainland China to operate its hydropower plants.

Upon investigation, the SFC came to a conclusion that CJCF’s failures in the five listing applications were attributable to the RO’s neglect in discharging his duties as a sponsor principal, an RO and a member of CJCF’s senior management. According to the SFC, the RO failed to:-

(a). exercise due skill, care and diligence in handling the five listing applications, in breach of General Principle 2 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct“);

(b). diligently supervise the transaction teams in carrying out the sponsor work, in breach of paragraph 4.2 of the Code of Conduct and paragraph 1.3.3 of the Additional Fit and Proper Guidelines for Corporations and Authorised Financial Institutions applying or continuing to act as Sponsors and Compliance Advisers; and

(c). ensure the maintenance of appropriate standards of conduct by CJCF, in breach of General Principle 9 of the Code of Conduct.

It is observed that the SFC has continued to focus its enforcement efforts on sponsors and sponsor principals in relation to IPO misconduct. The seven-year ban is the longest ban the SFC has ever imposed on an individual for sponsor principal failures and represents a strong message to the industry that failures of sponsor and sponsor principal will not be tolerated by the SFC.