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- Year in Review 2019 and Year to Come 2020 - Hong Kong Law
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Hong Kong Law: Year in Review 2019 and Year to Come 2020 summarises some of the major developments in Hong Kong SAR last year, and a selection of key changes that we anticipate over the coming year. There are links to further reading, where available.
Explore our overview of key developments below.
Key updates to
25
pieces of legislation in 2019 and 2020
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Year in Review 2019 and Year to Come 2020 - Hong Kong Law
Download a PDF overview of our Year in Review 2019 and Year to Come 2020 for Hong Kong SAR
We saw important legal and regulatory developments in our core practice areas in 2019. Our year in review gives a snapshot of these developments. We also look ahead in our year to come where we highlight the main legal and regulatory changes in 2020.
Nathalie Hobbs, Regional Managing Partner, Asia
Significant legal and regulatory events in 2019
Key developments in 2019 focused on regulatory requirements for the capital and financial markets in Hong Kong SAR, as well as legislative changes in corporate and employment law.
Capital Markets
HKMA provided guidance on margin requirements for non-centrally cleared derivatives: In March and August, the HKMA issued circulars to banks on the HKMA’s approach to guidance published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions on margin requirements for non-centrally cleared derivatives. Specifically, (i) genuine amendments to existing derivative contracts to give effect to interest rate benchmark reforms will not be considered as new contracts subject to HKMA margin requirements; (ii) there is no requirement for initial margin (IM) documentation, custodial or other related operational arrangements to be in place before a covered entity crosses the HK$375 million IM threshold and (iii) the phase-in schedule for IM shall be revised according to BCBS/IOSCO guidance.
Sale and distribution of debt instruments with loss-absorption features and related products in Hong Kong: The HKMA has published FAQs providing clarity on its Circular relating to the requirements imposed on registered institutions for the sale and distribution of debt instruments with loss-absorption features and related products and extending the deadline for compliance to 6 September 2019. The requirements aim to enhance investor protection measures on the sale and distribution of debt instruments with loss-absorption features and related products given that these products are inherently complex and high-risk and are therefore generally not suitable for retail investors.
HKMA and HK government provide clarification on the application and scope of Hong Kong’s LAC rules: Hong Kong’s loss absorbing capacity rules for in-scope banks came into effect on 14 December 2018 (click here for background information). The market welcomed timely clarification from the HKMA and the Hong Kong government on the application and scope of the LAC rules. Key takeaways include clarification on the scope of authorised institutions subject to the LAC rules, timing for compliance and eligibility of certain instruments to count towards the minimum one-third debt requirement for LAC instruments.
Competition
First two judgments of the Hong Kong Competition Tribunal: In May 2019, the Competition Tribunal handed down its judgments in the first two competition cases relating to cartel conduct in Hong Kong. In the first case, four IT companies were found to have arranged “dummy bids” in response to an IT tender by the YWCA. In the second case, 10 decoration contractors were found to have engaged in market allocation and price fixing. These first decisions of the Tribunal have shed significant light on a range of fundamental issues relating to the application of the Competition Ordinance (including the application of a criminal standard of proof and the evidential burden of the economic efficiency exclusion).
Cooperation and Settlement Policy in cartel investigations: In April 2019, the Competition Commission published a new cooperation policy to incentivise alleged cartelists to self-report their illegal conduct. Prior to the introduction of this policy, only the first cartel member who reports to the Competition Commission is immune from a pecuniary penalty under the existing Leniency Policy. Under this new cooperation policy, cartelist who are not eligible for leniency may consider cooperation in exchange for a maximum 50% discount on the potential pecuniary penalty. This policy is a welcomed and overdue development that enhances procedural transparency. However, there remain some concerns on how it operates in practice and whether it will be sufficiently attractive.
Corporate
Takeovers Panel rules against an offeror deducting from the offer price a dividend paid by the offeree company: The Takeovers Panel ruled that the offeror of the mandatory general offer for Dalian Port (under the chain principle) may not deduct a final dividend proposed to be declared by Dalian Port during the offer period from the offer price because the offeror had failed to refer to the proposed dividend or how it intended to exercise its right to receive the dividend in the offer announcement. Note that the Panel mentioned in its decision that, had the offeror consulted the Takeovers Executive in advance, the Executive would have agreed to the deduction and an express statement would have been made in the offer announcement.
SFC imposes record fines for sponsor failures in IPO due diligence process: In the first half of 2019, the Securities & Futures Commission (“SFC”) reprimanded and imposed record fines totalling HK$ 813.7 million on four investment banks for IPO due diligence failures in their sponsorship applications to list China Forestry Holdings Group, Tianhe Chemicals Group and China Metal Recycling (Holdings) on the Hong Kong Stock Exchange. A number of sponsors were fined up to HK$375 million. The fines were imposed as part of the SFC’s continued focus on the role of sponsors as important gatekeepers for the capital markets, and the amount of the fines reflect the ongoing trend in Hong Kong of increasing fines being imposed on financial institutions.
Changes to the Listing Rules to crackdown on backdoor listing: In October, the Exchange amended the Listing Rules on reverse takeovers, continuing listing criteria and ancillary rule changes. The proposals contained in the consultation paper were adopted with very minor modifications.
Takeovers Panel rules whether different levels of SASAC are parties acting in concert under the Takeovers Code: The subject matter involved a proposed transfer by a provincial SASAC of a 51% interest in the controlling shareholder of Hong Kong listed Maanshan Iron to a company controlled by the Central SASAC. When completed, a mandatory general offer for Maanshan Iron would be triggered under the chain principle. The Panel decided that, prima facie, two different levels of SASAC will not be considered parties acting in concert and there would be a change in control in Maanshan Iron upon completion of the proposed transfer.
Employment
Meaningful enhancements to employee benefits and employee protection against discrimination: Since 18 January 2019, male employees have been entitled to five days of paid statutory paternity leave (subject to certain conditions). The statutory minimum wage was also increased to HK$37.50 per hour with effect from 1 May 2019. The Court of Final Appeal ruled that the Hong Kong Government’s exclusion of a civil servant’s legally unionised same-sex spouse from employment benefits and the right to benefit from joint tax assessment was unlawful.
Financial Regulation
New Code of Conduct requirements on licensed corporations conducting OTC derivatives: Key changes (which came into effect in June) sought to address risks posed by group affiliates. Amongst others, an LC adopting an overseas booking model for its OTC derivatives business will only be able to book its OTC derivatives in a client-facing affiliate which is a regulated institution (an LC, a bank or an overseas entity similarly regulated in a comparable jurisdiction). Certain exemptions are available when the client is a regulated institution. Transitional arrangements apply to dealings with existing client-facing affiliates. Risk mitigation requirements for non-centrally cleared OTC derivatives became effective in September as new conduct requirements on LCs.
Virtual bank licences granted: Following the publication of the updated Guideline on the Authorisation of Virtual Banks in 2018, the HKMA has forged ahead with the introduction of virtual banks, granting a total of eight virtual banking licences. The first virtual banks, which deliver banking services through the internet or other electronic delivery channels instead of physical branches, are expected to commence operations in late 2019 or 2020.
SFC suitability on complex products and HKMA investor protection: Following a three-month delay to the start date, the SFC’s additional measures for online and offline sales of “complex products” came into force on 6 July. The measures include performing a suitability assessment on all transactions in complex products, regardless of whether there has been any solicitation or recommendation. The HKMA extended some of these proposals to certain non-SFO regulated products and also issued a circular containing refinements to and guidance on investor protection for investment, insurance and MPF products.
Read more on the SFC and complex products.
New insurance intermediaries regime comes into force: September saw the new statutory regime for insurance brokers and insurance agents, referred to as insurance intermediaries, come in to force. Under the new regime, insurance intermediaries will need to be licensed by the Insurance Authority (unless they fall into one of a limited number of exemptions), and will be subject to the Insurance Authority’s supervision and enforcement regime.
SFC and ICAC strengthen cooperation in fighting financial crime: The SFC and the Independent Commission Against Corruption (“ICAC”) entered into a Memorandum of Understanding (“MOU”) to formalise and strengthen cooperation between the two agencies in combating financial crime. The MOU came after informal and successful cooperation between the two agencies in relation to joint investigations. The ICAC has the power to charge parties with criminal offences, unlike the SFC. It is anticipated that the MOU will assist with the more efficient and effective regulation of the financial markets and detection and prevention of financial crime.
FATF Evaluation Report on Hong Kong: The Financial Action Task Force published the mutual evaluation report of Hong Kong. The report generally finds that there is a good level of understanding of the risks of, and a strong legal framework to combat, money laundering and terrorist financing. The report is also generally positive on the larger financial institutions, as well as on the HKMA, SFC and IA. Areas identified for further work include money service operators and moneylenders and the Register of Moneylenders, reviewing the threats arising from corruption and tax evasion and stand-alone financial leasing companies.
Significant legal and regulatory events in 2020
2020 will bring changes to various regulatory requirements in Hong Kong SAR.
Arbitration and Disputes
The Supreme People’s Court of the PRC and the Hong Kong Government enter into an Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters
In January 2019, the Supreme People’s Court of the PRC and the Hong Kong Government entered into an Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters (the “Arrangement”). The Arrangement seeks to establish greater clarity and certainty for the recognition and enforcement of judgments between Hong Kong SAR and the Mainland, through a bilateral legal mechanism, and for a wider range of civil and commercial matters than previously provided for. It will be implemented by local legislation in Hong Kong and will come into effect when both jurisdictions have implemented the necessary procedures to enable implementation. It will apply to judgments made on or after the commencement date. Until then, the existing Choice of Courts Arrangement will continue to apply and including any choice of court agreement in writing made before the commencement of the Arrangement.
Competition
Vigorous competition law enforcement in 2020: Emboldened by the Competition Commission’s successes in its first two proceedings in 2019, vigorous enforcement by the agency is set to continue. We expect the Competition Commission to bring a more diverse set of cases to the Tribunal or to obtain alternative enforcement outcomes (e.g. commitments) in the coming year. In particular, the exclusive focus of enforcement proceedings to date has been on cartel conduct (and three of four cases involving the decorating sector). The Tribunal’s hearing in early 2020 in relation to financial penalties to be imposed on respondents in the Competition Commission’s second case will provide a clear indication of just how aggressive the regime in Hong Kong will be and whether there will be a sufficient deterrence message in the future.
Corporate
Proposed Hong Kong corporate rescue legislation:
After many years of consultation and discussion, including an initial draft of legislation in 2003, the Financial Services and Treasury Bureau has received drafting instructions from the Official Receiver and is in the process of preparing another draft amendment bill to introduce a statutory corporate rescue procedure for Hong Kong. The amendment bill is also expected to include a wrongful trading law to incentivise directors to address financial difficulties earlier by making directors potentially liable for debts incurred without reasonable prospect of payment. The timing had been expected in the 2018/2019 legislative year but this has now been delayed due to the technical complexities involved and the differing opinions of market participants. The current timeline anticipates a bill will be introduced into the Legislative Council in the latter part of the 2019/2020 legislative year.
Employment
Promises to enhance employee benefits remain pending:
In 2018, the Chief Executive proposed to abolish the MPF-offset mechanism (i.e. the statutory right of an employer to offset statutory severance or long service payment against the benefits derived from the employer’s contributions to the employee’s retirement scheme) and to provide four more weeks of paid statutory maternity leave (i.e. a total of 14 weeks). These promises have yet to be implemented and we are expecting to see more progress in 2020. Further, in 2020, we expect to see the introduction of legislative amendments to provide construction workers that are injured at work with rehabilitation services to facilitate their recovery, as proposed by the Chief Executive in her 2019 policy address.
Financial Regulation
Conclusion of the SFC’s consultation on the new type 13 Regulated Activity: The SFC will publish the conclusions to its 2019 consultation which proposes a new Regulated Activity type 13 to cover the activities of depositaries of publicly offered collective investment schemes. The new Regulated Activity would bring trustees and custodians of public funds under the Securities and Futures Ordinance regime of licensing, supervision and enforcement. The proposals would capture the entity at the top of the custodial chain, e.g. trustees for unit trusts and global/top custodians for open-ended fund companies or mutual fund corporations. The SFC proposes a transition period of at least 12-18 months following publication of the conclusions.
OTC Derivatives Regime – Conclusion of the SFC’s consultation on refinements to the new type 11 and type 12 Regulated Activities: The SFC published a wide-ranging consultation paper on various elements of the OTC Derivatives Regime in December 2017, which included proposed refinements to the scope of the new type 11 (dealing in OTC derivative products and advising on OTC derivative products) and type 12 (providing client clearing services for OTC derivative transactions). Although the SFC has published some conclusions to this December 2017 consultation, it has not yet provided final details on the type 11 and type 12, and we expect consultation conclusions on this to be published in 2020.
HKEX’s consultation paper on the Chapter 37 Professional Debt Regime: The Hong Kong Exchanges and Clearing Limited (HKEX) has just published a consultation paper with proposals relating to Chapter 37 of the Main Board Rules (the Professional Debt Regime). The Professional Debt Regime has been in place since 2011 and offers an expedient and streamlined listing process for debt securities offered to professional investors only. The HKEX is now putting forward a number of proposals for market consultation which seek to balance the need to safeguard investors while maintaining an effective and appropriate listing platform for the continued development of the bond market in Hong Kong. The submission deadline is 7 February 2020.
Click here for further information…
Interest rate benchmark reform
HKMA expected to step up its supervisory efforts in monitoring authorised institutions’ preparedness for transition to alternative reference rates: In March and October 2019, the HKMA published two circulars requesting AIs to make preparations for the transition from interbank offered rates (IBORs) to alternative reference rates (ARRs). The HKMA indicated that it will conduct a regular survey of AIs’ progress on transition and will take suitable follow-up actions on individual institutions with reference to the information collected from the survey.
In March 2019, the Treasury Market Association published a consultation paper with industry stakeholders to refine the methodology for calculating the HKD Overnight Index Average (HONIA), the nearly risk-free overnight interbank funding rate identified as the ARR for the Hong Kong dollar, in order to enhance HONIA’s robustness and representativeness. Although Hong Kong will adopt a multiple-rate approach under which HIBOR will co-exist with HONIA, the HKMA encourages all market participants to start exploring ways to incorporate HONIA into their businesses. On the documentation front, global industry groups have proposed fallback language for different product types and, for those market participants who are ready to transition to the new risk-free rates, new documentation referencing the new rates (for example the “exposure drafts” of the LMA SONIA and SOFR-based loan agreements launched in September 2019 and the new SOFR “floating rate option” definition in the ISDA 2006 Definitions).
Read our client alert or visit our global Benchmark Rate Reform page.
Key contacts for Hong Kong SAR
Please contact your usual Linklaters contact if you would like to discuss any of these matters further.
Explore our Year in Review 2019 and Year to Come 2020 series across 20+ jurisdictions and a number of topics.
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