HK financial licences a proven QFII path to foreign investors

By Zhang Kainan and Wang Qingjian, Haiwen & Partners
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The QFII programme permits licensed international investors to trade on China’s stock exchanges and Hong Kong financial licences are popular for trading under the scheme

With a goal to further open up the financial industry and attract overseas investors to China’s capital market, the China Securities Regulatory Commission (CSRC) and the People’s Bank of China launched the Qualified Foreign Institutional Investor (QFII) programme in 2002. Overseas fund managers, insurance companies, securities companies and asset management institutions could apply for QFII licences and quotas to invest in China’s securities market.

QFII has rapidly developed in recent years, with expanded investment scope, cancellation of the investment quota, relaxed entry requirements, simplified applications, and shortened review periods. By January 2023, more than 700 QFIIs from more than 40 countries and regions had entered China’s capital market.

This article introduces the QFII application eligibility and considerations, taking into account the existing laws and regulations and the authors’ experience. It also discusses applications for types 4 and 9 of Securities and Futures Commission (SFC) licences in Hong Kong – often a step to applying for QFII.

QFII ELIGIBILITY

QFII applicants should submit their documents to the CSRC through a custodian. Documents should include the application form, qualification criteria, proof of whether they have received significant penalties from regulators in the past three years or since their establishment, and power of attorney for the custodian and authorised representatives.

In general, QFII applicants should satisfy the following conditions:

    • QFII application and relevant HK financial licences
      Julia Zhang
      Partner
      Haiwen & Partners
      Tel: +86 10 8560 6939
      E-mail: zhangkainan@haiwen-law.com

      Be financially sound and creditworthy, with experience in securities and futures investment;

    • Persons primarily responsible for domestic investment should meet the qualification requirements of the applicant’s origin country or region, if any;
    • Have a sound and effective governance structure, internal control and compliance management system, with designated inspectors to oversee the legal compliance of the applicant’s domestic investment practices;
    • Show sound business conduct without significant penalties by a regulator in the past three years or since inception; and
    • Show there is no circumstance that would have a significant impact on the operation of the domestic capital market.

While these requirements do not exactly describe eligibility, according to the authors’ own experience:

    • The first condition corresponds to the applicant’s net assets, paid-in capital, contingent liabilities, accumulated net profit for the past three years, corporate credit rating, and information related to its prior securities and futures investment experience;
    • The fourth condition is satisfied by a legal opinion issued by the law firm in the applicant’s jurisdiction or a certificate issued by a competent authority; and
    • For the fifth condition, the proposed QFII investment plan and its compliance and risk management arrangements should be submitted.

The CSRC will issue a decision within 10 working days of receiving the application files. In practice, as the CSRC often has feedback requiring supplementary explanation, the entire process may take one to three months, or even longer.

After obtaining a securities and futures business permit, the QFII should entrust the custodian to submit a business registration to the State Administration of Foreign Exchange. A custody agreement is usually made with the custodian, who will assist in the opening of basic accounts, foreign currency/renminbi special deposit accounts, and securities and futures accounts according to the currency to be remitted, and the scope of the proposed investment.

SFC TYPES 4 AND 9

QFII application and relevant HK financial licences
Wang Qingjian
Partner
Haiwen & Partners
Tel: : +852 9679 1485
E-mail: wangqingjian@haiwen-law.com

Given Hong Kong’s advantages in geographical proximity and close regulatory co-operation with mainland China, many institutions opt to apply for SFC licences to carry out type 4 (advising on securities) and/or type 9 (asset management) regulated activities, and then apply for QFII as holders of these licences.

The applicant must be a company incorporated in Hong Kong, or an overseas company that is registered with the Companies Registry of Hong Kong. It should appoint at least two responsible officers (ROs) to directly supervise its regulated activities, with at least one RO available at all times to supervise the business.

At least one of the proposed ROs should be an executive director as defined under the SFO. The applicant should also assign at least one licensed representative, who may or may not be an RO, to carry out one or more regulated activities for its licensed corporation.

Finally, the applicant should appoint managers-in-charge (MICs) of core functions, including overall management oversight, key business lines, operational monitoring and review, risk management, finance and accounting, information technology, compliance, and anti-money laundering and counter-terrorist financing.

There should be an MIC for each core function, and an MIC may be appointed to multiple core functions. Notably, the MICs for overall management oversight and key business lines must also be ROs.

Applicants may submit their application via the SFC website. The applications for licensed representatives and ROs should be handed in at the same time as the corporation. In the authors’ experience, the application process takes at least six months and usually lasts nine to 12 months, with the SFC review taking about 15 weeks.

The SFC usually will have one or two rounds of feedback, with more after the application is formally accepted. For each round, the applicant usually has one or two weeks to prepare a response, during which it should steer its business towards a state of readiness.

In most cases, the applicant should open its bank accounts while addressing the first two rounds of SFC feedback. By round four, it should finalise the office address and arrange paid-in capital (not less than HKD1 million).

After the fifth or sixth round of feedback is addressed, the SFC will issue an approval in principle if its requirements are met. With approval in principle, the applicant should sign the conditional offer within 14 days, and submit its management accounts and bank statements to disclose its source of assets.


Julia Zhang is a partner at Haiwen & Partners. She can be contacted by phone at +86 10 8560 6939 and by email at zhangkainan@haiwen-law.com

Wang Qingjian is a partner at Haiwen & Partners. He can be contacted by phone at +852 9679 1485 and by email at wangqingjian@haiwen-law.com

Haiwen & Partners

Haiwen & Partners
20/F, Fortune Financial Centre
5 Dong San Huan Central Road
Chaoyang District, Beijing 100020, China
Tel: +86 10 8560 6888
Fax: +86 10 8560 6999
Email:

zhangkainan@haiwen-law.com
wangqingjian@haiwen-law.com

www.haiwen-law.com

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