LE Paper 1 · Topic 4
This topic is where the Paper 1 examiners test whether you can apply Part V of the SFO and the rules made under it to a real firm. Expect scenarios: which regulated activity a described business needs, whether an incidental exemption applies, how many responsible officers a firm must have, what a provisional or temporary licence allows, and when a change must be notified. The second half covers the subsidiary legislation that runs a licensed corporation day to day: the Financial Resources Rules, the Client Money and Client Securities Rules, record keeping, contract notes and statements, audit, OTC derivative reporting and clearing, and open-ended fund companies. Most questions turn on a precise number (two officers, 180 days, 7 business days, 10 CPT hours), so learn the figures with the rule they belong to.
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Checked October 2026 against: SFO (Cap. 571) Part V and Schedules 1 and 5; SFC Licensing Handbook (July 2025); SFC Fit and Proper Guidelines (January 2022); SFC Guidelines on Competence (October 2024); SFC Guidelines on Continuous Professional Training (January 2022). Part B checked October 2026 against: Securities and Futures (Financial Resources) Rules (Cap. 571N), (Client Securities) Rules (Cap. 571H), (Client Money) Rules (Cap. 571I), (Keeping of Records) Rules (Cap. 571O), (Accounts and Audit) Rules (Cap. 571P), (Contract Notes, Statements of Account and Receipts) Rules (Cap. 571Q), OTC derivative reporting rules (Cap. 571AL) and clearing rules (Cap. 571AN), Open-ended Fund Companies Rules (Cap. 571AQ), SFO Parts IIIA, IVA and VI; SFC webpage 'OFC structure'. Independent prep, not endorsed by HKSI Institute or the SFC.
Schedule 5 to the SFO defines 13 types of regulated activity. A corporation carrying on a business in one in Hong Kong, or actively marketing such a service to the Hong Kong public from anywhere (s.115), must be licensed (s.114, s.116) unless an exemption applies. The SFC Licensing Handbook (July 2025) para 1.1.1 shows Types 11 and 12 as not yet in operation for licensing; check the SFC website for any later commencement.
| Type | Activity | Typical business |
|---|---|---|
| 1 | Dealing in securities | Stockbroker; fund distributor |
| 2 | Dealing in futures contracts | Futures broker |
| 3 | Leveraged foreign exchange trading | Retail FX dealer (not banks) |
| 4 | Advising on securities | Research house; investment adviser |
| 5 | Advising on futures contracts | Futures adviser |
| 6 | Advising on corporate finance |
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| IPO sponsor; takeovers adviser |
| 7 | Providing automated trading services | Electronic matching platform |
| 8 | Securities margin financing | Stand-alone margin lender (not banks) |
| 9 | Asset management | Discretionary fund or portfolio manager |
| 10 | Providing credit rating services | Rating agency publishing or selling ratings |
| 13 | Providing depositary services for relevant CISs | Trustee or custodian of an SFC-authorised fund |
Incidental exemptions (Licensing Handbook para 1.3.3-1.3.7) save a firm from holding a second licence when the extra activity is wholly incidental and not a distinct, separately charged service:
Trap: an AUM-based fee, or dealing for a portfolio the firm does not manage, shows a distinct service and ends the incidental exemption. A 75%-owned affiliate is not a wholly owned group company.
Takeaway: Name the activity first, then ask: wholly incidental, no separate fee, own clients or own funds? If not, add the licence.
Only corporations are licensed; a sole proprietorship or partnership cannot be (Licensing Handbook para 1.2.4). A bank, restricted licence bank or deposit-taking company registers instead under s.119, for any activity except Types 3 and 8, which it never needs. The SFC registers it having regard to HKMA advice.
| Licensed corporation | Registered institution (bank) | |
|---|---|---|
| Firm status | Licensed by SFC (s.116) | Registered with SFC (s.119) |
| Supervisors | At least 2 responsible officers per activity, approved by SFC (s.126) | At least 2 executive officers per activity, HKMA consent (Banking Ordinance s.71C) |
| Front-line staff | Licensed representatives accredited to the firm (s.120) | Relevant individuals on the HKMA register (Banking Ordinance s.20) |
For each activity, at least one responsible officer must be an executive director and one must be available at all times (s.125). Every executive director, meaning a director who actively participates in or directly supervises the regulated business, must be a responsible officer (s.113, s.125). A responsible officer need not be an employee or a board member, but must have sufficient authority. If all are briefly abroad, being contactable with controls in place suffices as an interim measure (para 9.3.1).
| Licence | Who it is for | Limits |
|---|---|---|
| Provisional (s.120(2)) | New representative awaiting a full licence | No fixed expiry; ends when the full application is approved or refused. No provisional responsible officer approval. |
| Temporary (s.117, s.121) | Overseas-regulated firm or individual visiting Hong Kong | Types 1, 2, 4, 5, 6, 10 only; no client assets; up to 3 months a time, 6 months in any 24 |
| Transfer of accreditation (s.122) | Representative moving to a new principal | Apply within 180 days of leaving; SFC cannot extend. Re-apply within 3 years without re-sitting exams. |
Anyone becoming a substantial shareholder of a licensed corporation (broadly over 10% of shares or voting power, Schedule 1) needs SFC approval first (s.132). Approval is initially valid for six months. If the threshold is crossed without approval, apply within 3 business days of becoming aware.
Trap: provisional and temporary licences are different. Provisional is for local newcomers and has no expiry date; temporary is for overseas visitors and is capped at three months.
Takeaway: Two officers per activity, one an executive director, one always reachable. Over 10% of a licensed corporation needs approval first.
