HKSI Paper 1: 10 Traps That Cost Marks
Updated · 7 min read
Paper 1 distractors are rarely absurd. Most are the right rule with the wrong number, or a number from a neighbouring rule. These ten traps come from the patterns our question authors see most often when checking Paper 1 material against the SFO, its subsidiary rules and the SFC’s guidelines. Each gives the rule, the trap and a one-line takeaway, with the source. Figures were checked in October 2026.
1. Three shareholder thresholds
Rule: Becoming a substantial shareholder of a licensed corporation (more than 10%) needs the SFC’s approval first. Separately, a holder of 5% of a listed company must disclose under Part XV of the SFO, within 3 business days. And for insider dealing, a substantial shareholder who is a connected person holds 5% or more.
Trap: Borrowing the 5% disclosure figure for a licensed corporation, or thinking the 10% approval can follow the purchase.
Takeaway: Licensed corporation: over 10%, approval before. Listed company: 5%, disclose within 3 business days.
Source: SFO (Cap. 571) ss.131-132, Part XV, s.247; SFC Licensing Handbook (July 2025).
2. Provisional versus temporary licences
Rule: A provisional licence (s.120(2)) is for a local applicant waiting for a full representative licence. It has no fixed expiry and ends when the full application is decided. A temporary licence (s.121) is for an individual regulated overseas, covers only certain activities, and lasts up to three months at a time.
Trap: Giving the provisional licence the three-month limit, or assuming a temporary licensee can hold client assets.
Takeaway: Provisional: local, no expiry date. Temporary: overseas visitor, three months at a time.
Source: SFO (Cap. 571) ss.117, 120, 121; SFC Licensing Handbook (July 2025) paras 5.3.1-5.3.6.
3. CPT hours do not roll over
Rule: Representatives need at least 10 CPT hours a calendar year, responsible officers 12 (the extra 2 on regulatory compliance). At least 5 must relate directly to your licensed activities. First-year licensees are pro-rated.
Trap: Carrying 15 surplus hours into next year. Excess hours cannot be carried forward.
Takeaway: 10 for representatives, 12 for responsible officers, 5 relevant, reset every 1 January.
Source: SFC Guidelines on Continuous Professional Training (January 2022) paras 5.2-5.8.
4. Before or after: notification timing
Rule: Most changes are notified to the SFC within 7 business days after they happen, for example a director joining or leaving. Ceasing a regulated activity and moving business premises are notified at least 7 business days before.
Trap: Applying “7 business days after” to a closure or an office move.
Takeaway: Most changes: 7 business days after. Closing an activity or moving office: 7 business days before.
Source: SFO (Cap. 571) s.135; SFC Licensing Handbook (July 2025) para 9.8.1.
5. Record-keeping periods
Rule: Different laws, different clocks. Telephone order recordings: at least 6 months. Most licensed corporation records under the Keeping of Records Rules: 7 years. AML customer records: 5 years after the business relationship ends. CRS records: 6 years. Electronic trading system records: 2 years.
Trap: Applying the AML five-year period to every record, or counting AML records from account opening.
Takeaway: 6 months phone, 7 years books, 5 years AML after the relationship ends, 6 years CRS.
Source: Code of Conduct (Jan 2026) para 3.9 and Sch. 7; Cap. 571O; AMLO (Cap. 615) Sch. 2 s.20; Inland Revenue Ordinance (Cap. 112) ss.50B, 50D.
6. Professional investor thresholds
Rule: Under the Securities and Futures (Professional Investor) Rules (Cap. 571D), an individual needs a portfolio of at least HK$8 million. A corporation or partnership needs a HK$8 million portfolio or HK$40 million in total assets. A trust corporation needs HK$40 million in total assets.
Trap: Giving an individual the HK$40 million total-assets test, or treating any wealthy client as a professional investor without evidence.
Takeaway: Individual HK$8m portfolio. Corporation HK$8m portfolio or HK$40m assets. Trust corporation HK$40m.
Source: Securities and Futures (Professional Investor) Rules (Cap. 571D), version of 13 July 2018.
7. Beneficial owner: more than 25%
Rule: For anti-money laundering checks, a beneficial owner of a corporate customer is an individual who owns or controls, directly or indirectly, more than 25% of the shares or voting rights.
Trap: Reading the test as “25% or more”. Exactly 25% does not meet it.
Takeaway: More than 25%, looked through every corporate layer.
Source: AMLO (Cap. 615) Sch. 2 s.1; SFC AML/CFT Guideline (June 2023) para 4.3.
8. Criminal penalty versus SFC fine
Rule: Carrying on a regulated business without a licence is a crime: up to HK$5 million and 7 years on indictment. When the SFC disciplines a licensee, the fine can reach the greater of HK$10 million or three times the profit gained or loss avoided.
Trap: Capping the SFC’s disciplinary fine at HK$10 million and forgetting the three-times alternative.
Takeaway: Unlicensed: HK$5m and 7 years. SFC fine: greater of HK$10m or 3x the gain.
Source: SFO (Cap. 571) ss.114(8), 194(2).
9. The Market Misconduct Tribunal is civil
Rule: Each of the six forms of market misconduct has a civil route before the Market Misconduct Tribunal (Part XIII) and a criminal route in the courts (Part XIV). The Tribunal cannot imprison. Since 4 May 2012, the SFC can bring proceedings before it directly.
Trap: Giving the Market Misconduct Tribunal power to jail, or saying only the Financial Secretary can start a case.
Takeaway: Tribunal: civil orders, no prison. Court: criminal, prison possible.
Source: SFO (Cap. 571) Parts XIII and XIV, as amended by the Securities and Futures (Amendment) Ordinance 2012.
10. Investor Compensation Fund limit
Rule: The Investor Compensation Fund pays up to HK$500,000 per investor per default, for defaults on or after 1 January 2020. It covers exchange-traded products in Hong Kong when an intermediary defaults.
Trap: Expecting compensation for unlisted products or for ordinary investment losses.
Takeaway: HK$500,000 per investor per default, exchange-traded products, intermediary default only.
Source: SFO (Cap. 571) Part XII; SFC investor compensation FAQs.
The figures side by side
| Figure | Rule |
|---|---|
| Over 10% | Substantial shareholder of a licensed corporation: SFC approval first |
| 5% | Part XV disclosure; insider-dealing substantial shareholder |
| More than 25% | AML beneficial owner |
| 10 / 12 / 5 | CPT hours: representative / responsible officer / relevant |
| 7 business days | After most changes; before a closure or office move |
| HK$8m / HK$40m | Professional investor portfolio / total assets |
| HK$500,000 | Investor Compensation Fund, per investor per default |
How to use this list
Every trap above is drilled in the Paper 1 topic banks, and the cheat sheet collects the figures for revision. For depth, read the notes on licensing, business conduct and market misconduct, or the study method. Then test yourself on the free mock. The AML rules are in the AMLO (Cap. 615) on eLegislation.
Takeaway
HKSI Prep is an independent study tool, not affiliated with or endorsed by HKSI Institute or the SFC. Rules change; confirm current figures on sfc.hk and exam details on hksi.org.
Frequently asked questions
What are the most common mistakes in HKSI Paper 1?
Mixing up neighbouring figures: the more-than-10% licensed corporation shareholder test versus 5% Part XV disclosure, notifications due before versus after, CPT hours, record-keeping periods and professional investor thresholds.
What is the professional investor threshold in Hong Kong?
Under the Securities and Futures (Professional Investor) Rules (Cap. 571D), an individual needs a HK$8 million portfolio; a corporation or partnership a HK$8 million portfolio or HK$40 million in total assets; a trust corporation HK$40 million in total assets.
Can the Market Misconduct Tribunal send someone to prison?
No. The Market Misconduct Tribunal is a civil tribunal under Part XIII of the SFO. Imprisonment is possible only on criminal prosecution under Part XIV.
Go deeper: the study notes
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