Financial Regulatory Focus: Expected Developments in the Year of the Rat

As we move into the year of the rat, Allen & Overy partners Matt Bower and Charlotte Robins consider some of the key areas of financial regulatory development that are expected this year in the Asia-Pacific region. This bulletin considers developments regarding (i) virtual banks, virtual assets and fintech; (ii) the asset management and funds industry; (iii) private banking; (iv) data/outsourcing/cloud storage; (v) corporate governance; and (vi) enforcement.


In our view, the momentum in the development of the FinTech market in 2019 will only increase in 2020.

  • Virtual banks – One of the most notable developments in the Asia-Pacific region in 2019 was the widespread introduction of digital banking. In Hong Kong, the HKMA granted licences to eight virtual banks, in Taiwan, the FSC issued three virtual bank licences whilst in Australia APRA granted licences to five digital banks. It is likely that the MAS will issue five digital banking licences in June 2020, and the BNM has announced plans to issue up to five licences in Malaysia. The launch of digital banking services this year is highly anticipated; we expect that this will be accompanied by various updates from relevant regulators – for example, guidelines with a focus on virtual bank operations and non-face-to-face banking services in general.
  • Virtual asset trading platforms – Notwithstanding the initial challenge to define these new financial offerings under existing securities regulations, the meteoric rise of virtual assets (defined by the SFC as “a digital representation of value… [including] ‘cryptocurrencies’, ‘crypto-assets’ and ‘digital tokens’”) has been met by the incremental expansion and adaptation of regulations in the region. In Hong Kong, the SFC is expected to continue to extend its regulatory ambit across various facets of the virtual assets industry.

In November 2019, the SFC issued a position paper8 setting out a new regulatory framework for virtual asset trading platforms. The framework applies to the extent any of the virtual assets amount to “securities”. The paper illustrates the SFC’s hard-line position with regard to futures contracts in this space with the paper clearly stating that futures contracts linked to virtual assets are not permitted. We do not expect that position to change any time soon.

It will be interesting to see how many participants “opt-in” to such frameworks, which would boost investor confidence, but may also potentially restrict the business (and target clients) of some trading platforms.

The spotlight is also shining on Singapore. The start of the year has seen the MAS’ first approval of a digitized securities trading platform, the introduction of the Payment Services Act implementing the regulation of cryptocurrency exchanges, and the release of a consultation paper by the MAS on its proposed regulatory approach for derivative contracts on payment tokens.

On 12 February 2020, IOSCO published a report that describes the issues and risks associated with crypto-asset trading platforms and sets out key considerations to assist regulatory authorities in addressing these issues. As the market waits to see the extent to which this paper influences actions taken by regulators in the region during the course of the year, we would expect the risks identified within this report to be the main drivers of their approach, not least because regulatory authorities from Australia, Hong Kong and Singapore were involved in writing the report.

  • Stablecoins – In a survey conducted by the BIS, central banks representing a fifth of the World’s population say they are likely to issue the first central bank digital currencies in the next few years. Developments in this area will come not only from the SFC but most certainly as a concerted push by regulators across jurisdictions, who have been closely involved with central banks, regulators and governments, for example, the MAS released a consultation paper in December 2019, seeking views on, inter alia, the regulation of stablecoins. Notably, the BIS established two out of the three initial Innovation Hub Centres in the region (being Hong Kong and Singapore, with the third one in Switzerland) to explore multijurisdictional macro issues in financial technology currently faced by central banks, notably the development of stablecoins.


In the last 18 months, there have been a number of new types of domestic investment vehicles introduced in the region – for example the open-ended fund company structure in Hong Kong, the Variable Capital Companies in Singapore and Australia’s forthcoming Collective Corporate Investment Vehicle. These have expanded the investment opportunities in these markets. As these jurisdictions compete to become the preferred fund domicile we can expect developments in this space to continue. Some of the things to expect in Hong Kong in 2020 are:


  • Limited liability partnerships – The turn of the decade was marked by a complete overhaul of the century-old limited partnership regime. Following industry consultation, the Hong Kong Government intends to introduce new legislation to create a limited partnership regime for private equity funds; the bill is currently targeted to be introduced into the Legislative Council in the first half of 2020. This new legislation would create a framework for establishing private equity funds in Hong Kong, with elements such as flexibility in capital contributions and distribution of profits, which Hong Kong’s current archaic Limited Partnership Ordinance does not have.
  • Open-ended fund companies (OFCs) – Following the introduction of the OFC-regime in July 2018 (allowing for the incorporation of variable capital companies), the SFC is proposing to enhance the regime with the intention of expanding its scope and usefulness, especially to the private fund industry. This follows (and is in response to) on-going dialogue with the industry.

Current proposals include (amongst others): (a) expanding the scope of eligible custodians; (b) removing the current 10% investment limit on loans and Hong Kong private company shares and debentures; and (c) introducing a statutory mechanism to facilitate the re-domiciliation of overseas corporate funds to Hong Kong using the OFC structure. The consultation period runs to 20 February 2020.

The continued focus on enhancing asset management centres extends beyond the introduction of new investment vehicles. Other areas of development that we can expect in the coming year are:

  • Depositaries – In 2019, the SFC has proposed a new regulated activity under the SFO (Type 13) for persons who carry on business acting as a depositary (trustee/custodian) of SFC-authorized collective investment schemes. Trustees and custodians of public funds in Hong Kong are currently not subject to any specific licensing regime, which the SFC has noted is not in line with other international fund centres such as the UK and Singapore. The consultation period ended on 31 December 2019 and the SFC’s response is pending.
  • OTC derivatives regulation – The SFC’s most recent Annual Report noted that they are “working on refinements to the scope of regulated activities under the OTC derivatives licensing regime and are conducting a review of the need for “masking” relief, which allows certain counterparty information to be redacted where there are legal or regulatory obstacles to reporting”.
  • Tax treatment – In April 2019, Hong Kong introduced a unified fund tax exemption regime such that all privately offered onshore and offshore funds operating in Hong Kong (regardless of their structure, size or purpose) can enjoy profits tax exemption for transactions in specified assets, subject to meeting certain conditions.


The SFC has been increasing its focus on the private fund industry, for example, its thematic review of prime brokers in October 2017 that has become necessary “amid the growth of the hedge fund industry as well as the asset management business in Hong Kong”. We expect the SFC to continue this interest in 2020:

  • Private equity (PE) – In January 2020, the SFC published guidance on the licensing obligations of PE fund managers and advisers operating in Hong Kong. This publication confirmed views expressed in various forum to the industry during the course of 2019.

The SFC had identified that many PE managers and advisers were not licensed in Hong Kong, instead of relying (correctly or incorrectly) on licensing exemptions. The SFC’s guidance confirms the availability (where the requisite criteria are met) of exemptions, however expressly states where it would expect licences to be held and what those might be – for example where a Type 1 (dealing in securities) licence might apply for syndication/co-investment activity or where this might be covered by a Type 9 (asset management) licence, if held. Further, with an eye (implicitly) on the incoming legislation to establish Hong Kong as a preferred PE fund domicile (see Limited liability partnerships above), the SFC stated their licensing expectations for general partners - that they would not need to be licensed for Type 9 (asset management) regulated activity where they fully delegate all asset management functions to an appropriately licensed or registered entity.

With the SFC’s renewed focus on ensuring that PE market players are properly licensed, it is expected that there may be an increase in the number of firms looking to obtain licences. PE funds would be well advised to conduct a review of their existing licensing arrangements and their reliance on any exemptions in light of current and future business activities.

  • Liquidity and credit risk – The SFC published a Circular in August 2019 on deficiencies and inadequacies noted in fund managers’ liquidity risk management practices, particularly on open-ended funds. This was followed by a compliance bulletin in January 2020 once again highlighting the importance of liquidity and credit risk management for fund managers, particularly around the distribution of illiquid open-ended funds and non-investment grade corporate bonds.

With liquidity and credit risk of particular importance in times of market uncertainty and slower economic growth, senior management, who have the primary responsibility in risk management control of their firms, should expect this area to be closely monitored by the SFC.

  • Dubious private fund and discretionary account arrangements – The SFC has been increasingly focused on “dubious arrangements and transactions involving private funds or discretionary accounts”. Their concern relates to circumstances where asset managers do not exercise independent discretion but instead just follow investors’ instructions when structuring private funds or discretionary accounts and where effecting transactions on behalf of these funds. These arrangements could raise red flags around possible market misconduct, disclosure of interest breaches, unlicensed activity or fraudulent activity. It is expected that the SFC will continue to focus on assessing asset managers’ businesses to ensure that they are not being used as a cover for illegal or risky activity.

In relation to related senior management accountability, please also see Enforcement: Senior managers, below.

Private banking

There have been a series of reforms in the last few years relating to suitability, which should already be embedded in an intermediary’s business process. However, there are still questions from the industry as to whether the suitability regime is appropriate in the private banking space. We have seen in the past that the HKMA has allowed some flexibility for private banks in the adoption of enhanced regulatory measures. It could be time for the regulators to step back and have a serious think about whether some additional conduct relaxations should be granted, especially when dealing with non-institutional but highly sophisticated and experienced professional investors.

All of this should be read in light of the HKMA’s on-going efforts to further enhance Hong Kong’s competitiveness as a family office hub through a three-pronged approach, namely: talent development, platform building and outreaching. With the HMKA noting that Hong Kong’s regulatory framework with respect to family offices needs to “keep in pace with industry development”, the market could look forward to a more balanced and progressive regulatory environment in this area.

In relation to suitability, please also see Enforcement: Suitability, below.



  • External electronic data storage: 2020 will be a busy year for licensed corporations in relation to data. In October 2019, the SFC published a circular setting out the regulatory requirements and expectations on the use of external electronic data storage. This has been the subject of much debate within the industry and with the SFC. Although some of the requirements are established practice, others raise some challenging issues which will require careful thought. Interestingly, the SFC has now indicated that it is willing to approve the use of overseas data storage providers.  

Currently, various industry groups are working on both discussions with the SFC as well as, where appropriate, establishing a guide to compliance. We expect that the SFC will appreciate that compliance will take time, especially where data is to be stored offshore. Nevertheless, the SFC expects that licensed corporations will not wait for the outcome of the discussion but will actively review their practices and policies to consider how best to comply.

Reform to legislation relating to personal data

  • Launch of 5G in Hong Kong and Data Security Issues: The roll-out of 5G services by mobile network operators in Q2 of 2020 enhances connectivity and aims at higher bandwidth together with lower latency. Accordingly, it is expected that more personal data will be collected and therefore more privacy protections will be warranted. Further, as more data will be collected, it is anticipated that the outsourcing of data processing activities, as well as the risk of data breaches, will increase. However, under the current Hong Kong data privacy regime, data processors are not directly regulated. Statistics provided by the Office of Privacy Commissioner for Personal Data, show that complaints relating to inadequate data security increased by 8% from 2018 to 2019. The launch of 5G services poses additional privacy challenges.

In a presentation given by the Privacy Commissioner for Personal Data in November 2019 (which was confirmed by a discussion paper published by the Constitutional and Mainland Affairs Bureau in January 2020), the Commissioner discussed the possible reform of the PDPO in light of new digital challenges. This includes introducing a mandatory requirement on data users to disclose their personal data retention policy, prescribing a maximum data retention period, regulating data processors directly, introducing mandatory breach notifications and conferring additional powers on the Office of Privacy Commissioner (such as the power to conduct criminal investigations or prosecutions, the power to impose administrative fines and the power to make prohibitive orders). Click here for our article which further examines this discussion paper.


One of the most notable developments within the past three years not only in the Asia-Pacific region but also globally has been the focus by the regulators on the standards of conduct expected of directors of listed companies, banks and other financial institutions.

  • Banks: Culture reform has continued to feature prominently in regulators’ rhetoric. In Singapore, the Culture and Conduct Steering Group was established in 2019 to promote sound culture and raise conduct standards among banks and insurers in Singapore whilst Australia’s BEAR has increased in scope; the Australian government is now looking to extend the regime to superannuation funds, insurers and even the financial services industry more broadly. In Hong Kong, HKMA senior officials have spoken publicly about the importance of culture reform at least five times since January 2019 and in May, the HKMA consulted on revising its Guideline on a Sound Remuneration System - remuneration systems being seen as key to inducing conduct. In 2020, the HKMA will share details of its observations following its review of the self-assessments with the industry and will commence “focused reviews in 2020 with an aim to dive deeply into certain key areas of bank culture; for example, incentive systems of front offices in specific business streams of retail banks”.
  • Listed companies: In mid-2019, in addition to the SFC’s statement commenting on the conduct and duties of directors when considering corporate acquisitions or disposals, the new Chairman of the SFC spoke publicly about board leadership (and reiterated in February 2020 their front-loaded approach to addressing market quality and corporate conduct issues).

The Chairman also highlighted the issue of sustainability – referring to the recently implemented legislation requiring companies to disclose their environmental policies and performance in their annual directors’ reports. In closing, the SFC Chairman commented that “senior management accountability and board leadership will be key not only to good corporate governance, but also to ensuring sustainable economic growth and protecting the environment”. In this respect, SEHK also issued its consultation on its review of the Environmental, Social and Governance Reporting Guide and related Listing Rules – proposed changes, including mandatory disclosure of a statement containing board oversight of ESG issues, will take effect in respect of financial years commencing on or after 1 July 2020.

  • Other financial institutions: In continuation of the SFC’s “strong emphasis” on senior management accountability and corporate governance of intermediaries, industry participants should expect the SFC to maintain their front-loaded approach through on-site thematic inspections and offsite monitoring. Please also see Enforcement: Senior managers, below. In particular, the SFC commented in February 2020 that they will focus on intermediaries’ financial soundness and how they conduct business – on specific topics such as securities margin financing, anti-money laundering, brokers’ internal controls and the supervision of account executives, cybersecurity selling practices, and complex and opaque financing arrangements. Intermediaries should take heed of the SFC’s foreshadowing. These areas of risks definitely deserve the undivided attention of senior management, not least because of the SFC’s focus but also in light of the economic uncertainty markets face.

With ESG investing being an increasingly common topic for, and expectation of, boards and senior management, the SFC released its survey findings48 on ESG factors and climate risks in asset management in December 2019; expected standards, practical guidance and best practices regarding ESG risks from the SFC are scheduled to follow on from this survey.


  • Corporate misconduct: Tackling misconduct by listed companies remains a “top priority” for the SFC in 2020. 2019 saw the high profile SFC-ICAC-Police joint investigations, dawn raids, arrests, and charges laid against the “Enigma Network” or what the SFC refers to as the “nefarious networks”. More enforcement actions and court proceedings will follow in 2020. In 2020 the SFC indicated that it would use a multi-pronged approach, including the exercise of its enforcement powers, to address the following areas of corporate misconduct:
  1. concealed share ownership and control through, for example, nominee accounts, margin financing, third-party financing arrangements or the use of private funds;
  2. suspect valuations, where listed companies and directors unduly rely on valuation reports and allow them to override their own professional judgment, potentially in breach of the listed company directors’ fiduciary duties in the valuation of corporate transactions; 
  3. warehousing of shares which has been used to disguise actual control through the use of nominees, and where nominee arrangements are used for vote-rigging and market manipulation. In this regard the SFC reminded intermediaries to identify potential red flags and to report suspicious transactions promptly;
  4. highly dilutive rights issues and open offers structured in a manner which appeared to the SFC to be against the interests of minority shareholders; and
  5. breach of directors’ duties which underpins the above areas of corporate misconduct. The SFC has emphasised that directors and senior officers who fail to discharge their duties should expect tough enforcement action including criminal prosecution, citing the charges laid against the four former executive directors of Convoy Global Holdings Limited.

In relation to the standards of conduct expected of senior management of listed companies, banks and other financial institutions, please also see Corporate Governance, above.

  • Book building process: In 2019 the SFC conducted a thematic review of book building processes in equity and debt capital markets. The SFC indicated that conflicts of interest may arise at various stages of the book-building process, including when underwriting syndicates produce connected research, or when they submit fictitious and inflated orders or provide inducement to investors. In 2020 we expect to see investigations and enforcement actions in this area.
  • Suitability: The SFC has said time and again that the suitability requirement is the cornerstone of investor protection. In this connection, selling practices is a key priority for the SFC and in particular compliance with the suitability requirement on the traditional offline sales channels as well as the online sales channels. In December 2018 the SFC published a survey result which found that more complex products were being sold but their terms, features and risks were not well understood by retail investors. In December 2019 the SFC announced the launch of a joint product survey with the HKMA to better understand market trends and to identify risks associated with the selling activities of intermediaries for the period January to December 2020. In 2020 we expect that any shortcomings in compliance with the suitability requirement will be the focus of investigations and enforcement actions.

In relation to suitability in private banking, please also see Private Banking, above.

  • Senior managers: The SFC places a strong emphasis on senior management accountability under the Manager-In-Charge (MIC) regime. Whilst the SFC had initially said that it did not see the MIC regime as an enforcement tool, it is clear that this position has changed. The SFC now sees the MIC regime as the means to allow the SFC to “quickly identify the individuals to whom we could communicate our supervisory concerns and who could be held accountable for control failures or conduct issues”. This is reflected in the SFC’s enforcement records, including in particular the disciplinary actions against IPO sponsor principals as part of the SFC’s high profile enforcements against IPO sponsor failures in 2019. Further, the SFC’s “Circular on Dubious Private Fund and Discretionary Account Arrangements or Transactions” has put the responsibility for screening and approving any dubious or suspicious private funds and transactions squarely on senior management. In 2020 we expect the SFC’s enforcement actions to target senior managers, in line with the SFC’s stated purpose to drive proper conduct and increase awareness of individual responsibility and accountability.

In relation to management of private funds, please also see Asset Management and Funds Industry: Oversight – Dubious private fund and discretionary account arrangements, above.

Partner, Allen & Overy

Matt Bower is a partner in Allen & Overy's litigation and dispute resolution team in Hong Kong. Matt advises financial institutions and corporates in connection with internal and regulatory investigations as well as litigation before the High Courts in Hong Kong and England and Wales.  
Matt has substantial experience of advising clients on the conduct of regulatory investigations across Asia-Pacific, having advised on some of the most high profile benchmark investigations in the region concerning financial services conduct and competition issues and a number of investigations regarding the assessment of client suitability for financial products.

Partner, Allen & Overy

Charlotte Robins is the Head of Allen & Overy’s Hong Kong regulatory practice. She acts for a wide range of national and international financial institutions including investment and private banks, asset and wealth managers (including hedge fund and private equity managers and advisors) and insurance companies.
Her practice includes advising on setting up regulated businesses in Hong Kong, on-going compliance with regulatory laws, codes and guidelines and the impact of regulatory change. Some selected areas of expertise include licensing, product offering, regional and global cross border issues, regulatory corporate governance, ESG, anti-money laundering and data privacy. She has been actively involved in responding to regulatory consultations; recent examples include client suitability requirements, manager in charge regimes, amendments to the SFC Fund Manager Code of Conduct and the HKMA regulation and supervision of Trust Business.