The Year to Come and Year in Review summarise a selection of major developments you should be aware of from 2021, and a selection of key developments expected in 2022.
Key updates to
18
pieces of legislation in 2021 and 2022
In 2021, changes have been made to strengthen the connection of the financial markets and enhance cross border capital flow between Hong Kong SAR and the mainland China. These developments are likely to continue into 2022 with the opportunities brought about by the development of the Greater Bay Area. We look forward to working with you at this exciting time.
William Liu, Regional Managing Partner, Asia
Focus on digital market and commitment policy:
The Competition Commission is anticipated to continue its vigorous enforcement targeting a wide range of conduct, as well as proactively using alternative enforcement tools to address competition concerns, rather than resorting to litigation as a default outcome. This is in line with the Commission’s new Commitment Policy published in November 2021. The Policy clarifies the process and sets out the types of commitments likely to be accepted by the Commission instead of taking parties to the Tribunal. Apart from enforcement activities, the Commission is also anticipated to launch a market study to examine the competition landscape of online retailers in Hong Kong. This will be the second market study by the Commission since the Competition Ordinance came into force and is in line with agencies across the globe, where competition authorities are increasingly scrutinising the conduct of digital platforms.
HKMA’s guidance to the industry on entering into new USD LIBOR-linked contracts:
As confirmed by the UK Financial Conduct Authority in March 2021, all LIBOR settings are expected to either cease to be provided by any administrator or no longer be representative:
- immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
- immediately after 30 June 2023, in the case of the remaining US dollar settings.
The HKMA has communicated its expectations for the industry particularly in relation to USD LIBOR exposures. The industry is expected to cease entering into new USD LIBOR contracts by 31 December 2021, except for certain hedging transactions, market making transactions and novations in connection with USD LIBOR contracts entered into before 1 January 2022, and certain transactions required in a central counterparty’s auction procedure in case of a member default.
HKEX to increase the profit requirement for listing eligibility to HK$80 million:
The HKEX will increase the profit requirement for listing eligibility to HK$80 million, comprising HK$35 million for the most recent financial year and HK$45 million in total for the two preceding financial years. The change will take effect from 1 January 2022. This will be the first increase to the profit requirement since it was introduced in 1994.
HKEX proposes a listing regime for SPACs:
In September 2021, the HKEX released a consultation paper on proposals to create a new listing regime for SPACs. The key areas which differentiate the proposed Hong Kong SPAC regime as compared with other major financial markets include:
- Only professional investors may subscribe for and trade SPAC securities.
- At least one of the promoters of the SPAC has to meet SFC licensing and qualification requirements (being a firm that holds a type-6 licence or a type-9 licence).
- The need for safeguards combined with the goal of attracting high-quality SPACs means that the HKEX is proposing very high entry thresholds that are tailored to the specific risks and requirements of this market.
HKEX proposes to bring share award plans under the regulation of the Listing Rules:
In November 2021, the HKEX released a consultation paper on proposals to bring share award schemes under the regulation of the Listing Rules and place more responsibility on the remuneration committee in overseeing the operation of share schemes.
HKEX will simplify and streamline the listing regime for overseas companies:
In November 2021, the HKEX released its consultation conclusions to the proposed changes to the listing regime for overseas issuers. The changes will take effect from 1 January 2022.
Key changes include:
- Streamlining the shareholder protection standards requirement currently scattered in the Listing Rules and the joint policy statement, which will be replaced by one set of core standards and applicable to all issuers (new or already listed) regardless of their jurisdiction of incorporation.
- Expanding the secondary listing regime for overseas-listed Greater China companies which operate in traditional sectors without WVR structures. This will include dis-applying the “innovative” requirement for these Greater China issuers.
- Allowing Grandfathered Greater China Issuers and Non-Greater China Issuers with non-compliant WVR and/ or VIE structures to dual-primary list in Hong Kong and retain those structures if they are de-listed from the exchange of their primary listing (NYSE, NASDAQ and LSE).
HKEX to adopt FINI at the earliest in 2022 Q4:
In November 2020, HKEX published a concept paper that proposed the adoption of a new “FINI” platform to modernise the HK IPO settlement process. This platform aims to address various bottlenecks and pain points in the “last mile” of a new listing: namely, the mechanics and technology of IPO subscription, allotment, regulatory review, settlement and admission to trading. In the conclusions published in July 2021, the HKEX said FINI has received overwhelming support from market stakeholders and it will be adopted with modifications based on market suggestions and feedback. The baseline IPO settlement timetable will be T+2, T being the date of price determination and +2 “business days” being the commencement of trading. IPO issuers may, in advance, seek a longer settlement period for a T+3 or longer settlement timeline.
SFC investor identification and OTC reporting:
The launch of the identification regime for the Hong Kong securities market (HKIDR) will take place in 2022. The SFC consulted on the HKIDR and a separate regime regarding OTC securities reporting (OTCR) during 2020 and 2021. Under the HKIDR, intermediaries will have to assign a Broker-Client Assigned Number (BCAN) to each of their clients and tag their clients’ securities orders with the correct BCAN. The OTCR regime will require the submission of information to the SFC on certain OTC transactions (ordinary shares and real estate investment trusts), as well as on the deposits and withdrawals of physical share certificates. The SFC has said that the HKIDR is likely to be launched in the second half of 2022, with the OTCR following in 2023, subject to all systems testing being completed by the market.
HKMA’s guidance to the industry on entering into new USD LIBOR-linked contracts:
As confirmed by the UK Financial Conduct Authority in March 2021, all LIBOR settings are expected to either cease to be provided by any administrator or no longer be representative:
- immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
- immediately after 30 June 2023, in the case of the remaining US dollar settings.
The HKMA has communicated its expectations for the industry particularly in relation to USD LIBOR exposures. The industry is expected to cease entering into new USD LIBOR contracts by 31 December 2021, except for certain hedging transactions, market making transactions and novations in connection with USD LIBOR contracts entered into before 1 January 2022, and certain transactions required in a central counterparty’s auction procedure in case of a member default.
SFC Code of Conduct on new requirements for bookbuilding and placing activities and sponsor coupling:
In October 2021, the SFC released its consultation conclusions to the proposed Code of Conduct on bookbuilding and placing activities in equity and debt capital market transactions (ECM/DCM) and sponsor coupling. The new requirements under the proposed Code of Conduct will be effective from 5 August 2022, providing for a nine-month implementation period to allow SFC licensed or registered persons to prepare for adoption.
The new requirements are aimed at addressing areas of concern which came out of the SFC’s thematic review of ECM and DCM practices, including issues around the effectiveness of the price discovery process, conflicts of interest, inflated demand, fluid syndicate membership, as well as the role of fees and incentives and their effects on bookbuilding and placing activities. The new requirements under the proposed Code of Conduct are expected to have a significant impact on various aspects of ECM and DCM offerings in Hong Kong including the role and responsibilities of financial intermediaries, new standards of conduct, fee arrangements, management of the order book and enhanced record-keeping requirements.
Additional statutory holidays:
The Employment (Amendment) Bill 2021 passed on 7 July 2021 will gradually increase the number of statutory holidays under the Employment Ordinance (EO) from 12 to 17 days, with one extra statutory holiday every two years starting from 2022 to 2030. The number of statutory holidays (which employees covered by the EO are entitled to) and general holidays (which are observed by an estimated 60% of employers in Hong Kong including banks, educational establishments, public offices and government departments) will be aligned by 2030. The first new statutory holiday will be the Birthday of the Buddha in May 2022, followed by the first weekday after Christmas Day, Easter Monday, Good Friday and the day following Good Friday.
Discussions on the abolishment of the Mandatory Provident Fund (MPF) offset mechanism:
The Chief Executive's 2021 policy address announced that a draft bill to abolish the MPF offsetting mechanism (the Bill) will be introduced into the Legislative Council in the next legislative session. The Bill would put an end to the employer-friendly mechanism which allows employers to offset an employee’s statutory severance or long service payment from the accrued benefits derived from the employer’s contributions to the employee’s MPF scheme. The MPF offsetting mechanism has long been controversial. Business groups strongly resisted the move when the Chief Executive first proposed the abolition of the offset mechanism in 2018. It will be interesting to see how this is received by the public next year, particularly since it has come under enhanced scrutiny given the redundancies brought about by Covid-19. Nonetheless, the abolition of the mechanism is predicted to only come into effect in/around 2025.
SFC Code of Conduct on new requirements for bookbuilding and placing activities and sponsor coupling:
In October 2021, the SFC released its consultation conclusions to the proposed Code of Conduct on bookbuilding and placing activities in equity and debt capital market transactions (ECM/DCM) and sponsor coupling. The new requirements under the proposed Code of Conduct will be effective from 5 August 2022, providing for a nine-month implementation period to allow SFC licensed or registered persons to prepare for adoption.
The new requirements are aimed at addressing areas of concern which came out of the SFC’s thematic review of ECM and DCM practices, including issues around the effectiveness of the price discovery process, conflicts of interest, inflated demand, fluid syndicate membership, as well as the role of fees and incentives and their effects on bookbuilding and placing activities. The new requirements under the proposed Code of Conduct are expected to have a significant impact on various aspects of ECM and DCM offerings in Hong Kong including the role and responsibilities of financial intermediaries, new standards of conduct, fee arrangements, management of the order book and enhanced record-keeping requirements.
SFC investor identification and OTC reporting:
The launch of the identification regime for the Hong Kong securities market (HKIDR) will take place in 2022. The SFC consulted on the HKIDR and a separate regime regarding OTC securities reporting (OTCR) during 2020 and 2021. Under the HKIDR, intermediaries will have to assign a Broker-Client Assigned Number (BCAN) to each of their clients and tag their clients’ securities orders with the correct BCAN. The OTCR regime will require the submission of information to the SFC on certain OTC transactions (ordinary shares and real estate investment trusts), as well as on the deposits and withdrawals of physical share certificates. The SFC has said that the HKIDR is likely to be launched in the second half of 2022, with the OTCR following in 2023, subject to all systems testing being completed by the market.
Regulating Virtual Asset Exchanges:
The journey toward regulation of exchanges trading any type of virtual asset continued in 2020, with the publication of the Financial Services and Treasury Bureau’s (FSTB) conclusion paper looking at this and other matters under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). The conclusion paper confirmed that the proposed new regime will mean an exchange trading any type of virtual asset will require a licence from the SFC to operate in Hong Kong. It will be a criminal offence to carry on the regulated activity of operating a virtual asset exchange without obtaining a licence from the SFC. The changes will need to be made by way of an amendment bill for AMLO, and the FSTB is aiming to introduce the bill into the Legislative Council in the 2021-2022 legislative session, with further consultation on the regime expected by the SFC later in 2022. The regime is expected to commence in 2023.
The insolvency regime in Hong Kong:
Cross-border insolvency co-operation between Hong Kong and mainland China took a major step forward in 2021 with the two jurisdictions announcing an arrangement concerning mutual recognition of and assistance to insolvency proceedings between their respective courts (the Arrangement). From the perspective of Hong Kong‘s insolvency practitioners, the Arrangement applies where the debtor’s centre of main interests is in Hong Kong and have principal assets, or a place of business or a representative office in Shanghai, Xiamen or Shenzhen. Shortly afterwards, the Hong Kong Court issued its first letter of request to the Shenzhen Intermediate People’s Court, and also granted a recognition and assistance order to a Mainland administrator under the Arrangement. In 2022, all eyes will be on the draft Companies (Corporate Rescue) Bill, which may be put to the Legislative Council soon.
SFC Code of Conduct on new requirements for bookbuilding and placing activities and sponsor coupling:
In October 2021, the SFC released its consultation conclusions to the proposed Code of Conduct on bookbuilding and placing activities in equity and debt capital market transactions (ECM/DCM) and sponsor coupling. The new requirements under the proposed Code of Conduct will be effective from 5 August 2022, providing for a nine-month implementation period to allow SFC licensed or registered persons to prepare for adoption.
The new requirements are aimed at addressing areas of concern which came out of the SFC’s thematic review of ECM and DCM practices, including issues around the effectiveness of the price discovery process, conflicts of interest, inflated demand, fluid syndicate membership, as well as the role of fees and incentives and their effects on bookbuilding and placing activities. The new requirements under the proposed Code of Conduct are expected to have a significant impact on various aspects of ECM and DCM offerings in Hong Kong including the role and responsibilities of financial intermediaries, new standards of conduct, fee arrangements, management of the order book and enhanced record-keeping requirements.
More diverse competition enforcement cases:
2021 began with the Competition Tribunal handing down the first penalties under the Competition Ordinance. Fines totalling HK$9.6 million were imposed against 10 companies accused of cartel conduct. There has also been a marked increase in the type and nature of competition enforcement cases, covering cartels, other horizontal issues and abuse of significant market power. We have seen the Competition Commission issued its first infringement notices to six hotel groups for facilitating an alleged cartel arrangement between two travel service providers. The Commission also brought its first case of significant market power abuse in the healthcare sector. Trade associations’ admission procedures and criteria have also appeared on the Commission’s radar – both with a policy paper outlining areas of concern and an enforcement investigation into certain sporting organisations alleged to have excluded some potential members from competing.
Expanding liability - individuals and parent companies:
The Competition Commission continued to focus its enforcement efforts against individuals. Following the first director disqualification order last year, the Competition Tribunal handed down its first penalty judgment against individuals involved in cartel conduct with fines of up to HK$800,000. The Commission has also sought to hold parent companies liable for the alleged anti-competitive behaviour of associated entities. Proceedings have been launched against a holding company located outside Hong Kong which has had no direct participation in the alleged anti-competitive behaviours. This potentially marks a very significant expansion of the ambit of Hong Kong’s competition law – and it remains to be seen whether the Tribunal will agree with the Commission’s approach in respect of parental liability.
HKMA requirements for contractual recognition of stay came into operation:
In August, the Financial Institutions (Resolution) (Contractual Recognition of Suspension of Termination Rights – Banking Sector) Rules came into operation, with an initial phase-in period to ease compliance. The rules require in-scope “covered entities” to include in their non-Hong Kong law financial contracts which are “covered contracts” a provision to the effect that the contractual parties agree as a contractual matter that they will be bound by the power of the HKMA (as the resolution authority for the banking sector) to temporarily suspend the termination right of a counterparty to the contract.
ISDA published the Hong Kong Jurisdictional Module to the ISDA Jurisdictional Modular Protocol in September to facilitate compliance by the derivatives industry.
ICMA is expected to publish standard language to facilitate compliance by in-scope underwriter covered entities for use in debt capital markets transactions.
The APLMA is also expected to publish language that can be inserted into general banking APLMA documentation to facilitate compliance by members of the APLMA.
Further milestones in the development of mutual access between Hong Kong and Mainland capital markets:
In September 2021, we saw two further milestones in the development of mutual access between the capital markets of Hong Kong and mainland China with the launch of Wealth Management Connect and Southbound Bond Connect.
Wealth Management Connect facilitates cross-boundary investment by individual residents in the Guangdong-Hong Kong-Macau Greater Bay Area by allowing GBA residents to open and operate cross-boundary investment accounts directly with banks in the GBA and invest in eligible investment products distributed by these banks. Southbound Bond Connect allows investors in mainland China to trade in the Hong Kong bond markets through a linkage between the financial infrastructure services institutions in mainland China and Hong Kong.
HKMA requirements for contractual recognition of stay came into operation:
In August 2021, the Financial Institutions (Resolution) (Contractual Recognition of Suspension of Termination Rights – Banking Sector) Rules came into operation, with an initial phase-in period to ease compliance. The rules require in-scope “covered entities” to include in their non-Hong Kong law financial contracts which are “covered contracts” a provision to the effect that the contractual parties agree as a contractual matter that they will be bound by the power of the HKMA (as the resolution authority for the banking sector) to temporarily suspend the termination right of a counterparty to the contract.
ISDA published the Hong Kong Jurisdictional Module to the ISDA Jurisdictional Modular Protocol in September to facilitate compliance by the derivatives industry.
ICMA is expected to publish standard language to facilitate compliance by in-scope underwriter covered entities for use in debt capital markets transactions.
The APLMA is also expected to publish language that can be inserted into general banking APLMA documentation to facilitate compliance by members of the APLMA.
HKMA guidelines on the Green and Sustainable Finance Grant Scheme:
In May 2021, the HKMA published its guidelines on the Green and Sustainable Finance Grant Scheme (the Scheme), which consolidated and replaced the Pilot Bond Grant Scheme and the Green Bond Grant Scheme and provides subsidies for eligible bond issuers and loan borrowers to cover their Hong Kong-based expenses on green and sustainable bond and loan financings.
The introduction of the Scheme reflects the Government’s recognition of the increasing importance of green and sustainable development and investment, particularly in light of the goal to achieve carbon neutrality by 2050, and the need for robust green and sustainable financial services to support this. The Scheme commenced on 10 May 2021 and will last for three years.
The PCPD publishes guidance on Ethical Development and Use of AI (AI Guidance):
In light of the increased use of AI technologies, the Office of the Privacy Commissioner for Personal Data (PCPD) has issued an AI Guidance to help organisations understand and comply with the relevant requirements of the Personal Data (Privacy) Ordinance (PDPO) and balance the risk and privacy concerns involved in the development and use of AI. The AI Guidance recommends a series of data stewardship values and ethical principles that should underpin the use of AI in an organisation such as accountability and the need for human oversight. These principles are largely in line with international standards such as the European Commission’s Proposal for Regulation of AI and UNESCO and OECD Recommendations on AI. The accompanying practice guide within the AI Guidance provides practical examples of how organisations should approach AI governance through the life cycle of implementing AI in their operations, from inception to implementation and ongoing management.
Breastfeeding Discrimination and Harassment law comes into force:
Further amendments to the Sex Discrimination Ordinance and the Discrimination Legislation (Miscellaneous Amendments) Ordinance 2020 came into force on 19 June 2021. In the employment context, these amendments protect women who are breastfeeding from unlawful direct or indirect discrimination and harassment (including harassment by fellow employees and other individuals within the workplace such as contract workers, commission agents, firm partners, interns or volunteers). An employer can be held liable for the discriminatory acts of its employees committed in the course of their employment, unless the employer can prove that they took reasonably practicable steps to prevent the employee from committing the acts. Employers should review their anti-discrimination and anti-harassment policies to ensure that they remain compliant under the amended legislation.
HKMA guidelines on the Green and Sustainable Finance Grant Scheme:
In May 2021, the HKMA published its guidelines on the Green and Sustainable Finance Grant Scheme (the Scheme), which consolidated and replaced the Pilot Bond Grant Scheme and the Green Bond Grant Scheme and provides subsidies for eligible bond issuers and loan borrowers to cover their Hong Kong-based expenses on green and sustainable bond and loan financings. The introduction of the Scheme reflects the Government’s recognition of the increasing importance of green and sustainable development and investment, particularly in light of the goal to achieve carbon neutrality by 2050, and the need for robust green and sustainable financial services to support this. The Scheme commenced on 10 May 2021 and will last for three years.
The SFC and the HKMA on climate risk and sustainable finance:
In addition to the HKMA‘s Green and Sustainable Grant Scheme, 2021 saw several developments focused on climate risks from the financial regulators. The HKMA issued its first publication on its supervisory expectations in the area of sustainable finance, with a consultation proposing a new module for the Supervisory Policy Manual on climate risk management. The SFC has also been focused on climate risk, specifically in relation to funds and fund managers. It has updated its circular to management companies of SFC-authorised unit trusts and mutual funds which incorporate ESG strategies which are reflected in the fund’s name. This updated circular requires enhanced disclosure to clients and provides additional guidance specifically for ESG funds with a climate-related focus. The updates must be complied with from 1 January 2022. The SFC also published a conclusions paper on amendments to the Fund Manager Code of Conduct (FMCC) to introduce measures related to managing and disclosing climate-related risk in four areas: governance, investment management, risk management and disclosure. The changes were developed based on the Task Force on Climate-related Financial Disclosures. A separate circular setting out additional baseline and enhanced standards in relation to complying with the new FMCC measures supplements the conclusion paper. Fund managers need to comply with the new FMCC measures by August or November 2022 depending on their size.
Focus on AML/CFT developments:
AML/CFT continues to be an area of attention for regulators. In September 2021, the SFC issued its amended AML guidelines, which consolidated information from previously issued SFC circulars but also included new AML/CFT requirements, for example, for securities firms in relation to correspondent relationships. The FSTB also ran a consultation on changes to the AMLO for which conclusions were published in 2021. The amendments included changes to the definition of a PEP and relaxing the requirements around the use of non-face-to-face situations for customer identification and verification purposes.
HKMA & SFC spreads charges review results:
The HKMA and SFC published a circular following their joint thematic review of intermediaries’ spreads charges, trading capacity and monetary benefits disclosures under the Code of Conduct. The circular sets out good and bad practices, and firms should now be reviewing their own measures in light of the regulators’ observations.
Hong Kong implements the Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong SAR (the Supplemental Arrangement) in full:
In May 2021, the Arbitration (Amendment) Ordinance 2021 came into force implementing the Supplemental Arrangement in full. All mainland China awards rendered pursuant to the PRC Arbitration law are now enforceable in Hong Kong. In addition, awards can now be concurrently enforced in both Hong Kong and mainland China so long as the total amount recovered does not exceed the award amount. This should enhance the prospects of the successful enforcement of awards against parties who have assets in both jurisdictions, reinforcing Hong Kong’s status as an international arbitration hub and a preferred seat of arbitration for resolving China-related disputes.
