HKSI Paper 1 Licensing, registration and subsidiary legislation question: When a Type 1 broker needs Type 9

HKSI Paper 1Licensing, registration and subsidiary legislation

Kowloon Pearl Securities Ltd, licensed for Type 1, launches a discretionary portfolio service for its retail clients, marketed as a separate product, with an annual fee of 1% of assets under management on top of brokerage. What should the firm do?

A Apply to add Type 4, because managing client portfolios is classed as advising on securities
B Nothing, provided every client signs a written discretionary authority before the first trade
C Apply to add Type 9, because an AUM-based fee shows a distinct asset management service
D Nothing, because discretionary management by a stockbroker is always incidental to dealing

Show the answer and explanation

Answer: C. Apply to add Type 9, because an AUM-based fee shows a distinct asset management service

A Type 1 firm may manage discretionary accounts without a Type 9 licence only where this is wholly incidental to its dealing business. The SFC Licensing Handbook (July 2025) para 1.3.4 gives the example that the exemption may not apply where clients of discretionary account management are charged a fee based on assets under management, because that indicates a distinct service. Kowloon Pearl therefore needs Type 9. The exemption is not automatic for stockbrokers. Portfolio management is Type 9 asset management, not Type 4 advising. A written discretionary authority is good practice but does not change whether the activity is incidental. Source: SFO (Cap. 571) Sch. 5 Pt 2 (definition of asset management); SFC Licensing Handbook (July 2025) para 1.3.3-1.3.4 (as at October 2026).

Common mistake

Candidates learn that brokers can run discretionary accounts under Type 1 and forget the condition. A separate AUM fee is the SFC's own example of a distinct service.

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Related HKSI Paper 1 questions

Lion Rock Asset Management Ltd is licensed for Type 9 only. It manages two SFC-authorised unit trusts; its dealers place the funds' orders with brokers and its analysts research listed companies for its portfolio managers. Does it need any further licence?Lion Rock Asset Management Ltd, licensed for Type 9 only, is approached by the trustee of a pension plan managed by another firm to execute that manager's Hong Kong equity orders as the trustee's agent, for a fee per trade. What is the licensing position?Harbourview Securities Ltd is licensed for Type 1 regulated activity only. When taking orders by phone, its representatives tell clients which Hong Kong stocks look like good buys, for brokerage only and purely to support dealing. What is the licensing position for this advice?

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Original study material mapped to the public HKSI Paper 1 syllabus. Unofficial, not endorsed by HKSI Institute or the SFC. Verify figures and rules against current guidance before relying on them.