Licensing of Family Offices

Over the past 2 decades, family offices have become more influential in the wealth management industry. Ultra HNWIs are no longer satisfied with the services of traditional private banks. They need an in-house professional team.

But shall family offices in Hong Kong, which make investment decisions on behalf of one or more families, be licensed by SFC?

On 7 January 2020, SFC issued a circular on the licensing obligations of family offices. It provides general guidance for family offices intending to carry out asset management or other services in Hong Kong. On 8 September 2020, SFC published a FAQ to provide additional guidance on the implications of the licensing regime to single family offices and multi-family offices. I reproduce the questions (Q) and answers (A) and give my comments (C) below:

Q1:
Is there a definition for “family” or “family office” under the licensing regime?
A2:
No, the Ordinance does not define “family” or “family office”. It is noteworthy that the licensing regime does not hinge on whether an entity is called a family office or whether its clients are families. A family office operator will have more flexibility to determine its legal form and operational structure with respect to its services to be provided.
C1:
A family office ("FO") is most likely deemed as an asset management firm because it usually conducts discretionary trading for the client (family). Thus licensing for RA9 is required. But if the client occasionally places dealing orders to the FO, then licensing for RA1 or RA2 may also be required.

Q2:
What constitutes a single family office for the purposes of the Circular?
A2:
It typically refers to an arrangement (often structured through a corporate vehicle owned or controlled by the family) under which the assets, investments and long-term interests of members of a single family are managed. The SFC has not sought to define what relationships of blood or of law would constitute family membership because the licensing obligations under the Ordinance do not hinge on whether the clients of a family office are family members or not.
C2:
SFC reiterated that members of a single family don't need to be strict "family members". In the Circular, SFC stated that "the family office will not need a licence because it will not be providing asset management services to a third party". I wonder if such licensing exemption could be abused, e.g. a so-called FO attempts to group a number of actually unrelated clients into a "single family".

Q3:
Is a single family office required to be licensed under the Ordinance?
A3:
The issue of whether a single family office is required to be licensed under the Ordinance is determined by reference to three key factors, all of which must be present in order to give rise to a licensing obligation: firstly, the services provided by the family office constitute one or more regulated activity as defined under the Ordinance; secondly, the family office is carrying on a business in the provision of such services; and thirdly, the business is carried on in Hong Kong.
In determining whether certain asset management activities amount to a regulated activity, the definition of Type 9 regulated activity contains an intra-group carve-out for a single family office where it provides such services solely to its related entities, which are defined as its wholly owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly owned subsidiaries.
What amounts to “carrying on a business in Hong Kong” is not defined in the Ordinance and will need to be determined by reference to the facts of each case, including whether the person is performing an occupation or a duty which requires attention; the activity involves continuity; the activity is capable of making profit; and the activity was carried out for the purpose of making profit. A genuine single family office arrangement, established to serve the investment needs of members of a single family, which is not being run as a business (i.e. not receiving any income, other than reimbursement of operating expenses from the family) or have the pursuit of profit as its business objective, should not in the ordinary course be considered as carrying on a business from a licensing perspective. It is also not the SFC’s intent to extend its regulatory oversight to this type of single family office setup.
C3:
A single FO is typically low key, not being run like a business. I think not many single FOs would be licensed by SFC in foreseeable future.

Q4:
If two or more single family offices co-operate together for the purposes of sharing a common administrative infrastructure in order to reduce operating overheads, would such arrangements trigger a licensing obligation?
A4:
The discussion in the response to Q3 above on the types of factors required to be present in order to give rise to a licensing obligation under the Ordinance would apply equally in these circumstances.
The sharing of office premises and administrative infrastructure by two or more family offices would not of itself automatically trigger a licensing obligation for such single family offices. However, where two or more single family offices make arrangements for the sharing of human resources involved in investment related matters, research or the investment process, this may be regarded as a multi-family office structure (see also the response to Q5 below) and, where the provision of services is carried on as a business, increases the likelihood of a licensing obligation arising.
C4:
If the different single FOs share not only administrative team but also investment team and they are required to be licensed, there is a potential conflict of interest problem - a licensed person (investment staff) is generally disallowed by SFC to carry out a regulated activity for 2 or more licensed corporations if they are not within the same group.

Q5:
What constitutes a multi-family office for the purposes of the Circular and is a multi-family office required to be licensed?
A5:
As mentioned in the Circular, “a multi-family office by definition serves more than one high net worth family” and such arrangements are likely to be evident.
Multi-family offices are typically established and run as commercial ventures. The issue of whether a multi-family office is required to be licensed under the Ordinance will be primarily determined by the three key factors set out in the response to Q3.
C5:
I envisage multi-FOs are more likely to be licensed by SFC. When the number of family clients increases, a multi-FO is akin to a private bank.