Through the Securities and Futures Commission (SFC) and other institutions, Hong Kong’s regulators seek to address risks while promoting innovation. In addition, Hong Kong’s robust and deep private sector provides consultancy and advisory services to help companies navigate rapidly changing global and local regulatory developments.
“The SFC strives to ensure that Hong Kong has both the financial infrastructure and policy framework to enable responsible innovation as we nurture new growth in the financial markets,” says Julia Leung, the regulator’s chief executive. She says the SFC keeps its “regulatory approach agile to embrace new opportunities while we remain steadfast to protect investors and ensure an orderly market”.
One realignment has been towards high technology. “A major focus in recent years has been to provide a regulatory framework for high-quality, new-economy companies to list in Hong Kong to give investors a broader range of choices whilst safeguarding their interests and maintaining high standards of corporate governance,” says Leung.
Key initiatives included the introduction in 2018 of a regulatory framework for innovative companies with a weighted voting rights (WVR) structure, making Hong Kong one of the first jurisdictions to regulate WVR listings, and a new listing route for pre-revenue biotech companies.
According to Leung, new-economy stocks now account for about 40 per cent of both the equity market’s capitalisation and market turnover, a proportion that has doubled since 2017. As a result, Hong Kong has become one of the leading IPO destinations for biotech firms. The SFC processed four pre-profit biotech companies among 39 new listing applications in the third quarter of 2023, according to its most recent quarterly report.
The boom has not come without concerns over risks. “In the case of the specialist technology listing regime that took effect in March 2023, we have put in place various guardrails, such as minimum ratios for research and development expenditure before an initial public offering, minimum investments from sophisticated independent investors and longer post-IPO lock-up periods for controlling shareholders,” says Leung.
Hong Kong has also pursued its own way with cryptocurrencies. Applications for licences to run trading platforms and exchanges were opened to retail traders from June 2023.
Leung says Hong Kong’s welcoming of crypto, which comes amid global regulatory headwinds for the industry, is backed by safeguards for investors. “At a time when the global regulatory landscape is uncertain, the SFC has come up with a comprehensive policy response to virtual asset-related activities to provide regulatory clarity and consistency,” she says.
Advisory companies welcomed the move. “The SFC’s regulatory framework for virtual asset exchanges is widely recognised as one of the most extensive and comprehensive in the world,” says Mitchell Brown, chief executive of Heinbro, which provides consultation services to 400 companies on compliance, capital management, government liaison and investor relations.
Brown says the SFC has a wide range of tools available to monitor market compliance. “The SFC's robust tools to investigate potential misconduct and discipline individuals for breaches are essential in ensuring investor protection and discouraging misconduct,” he says. “Hong Kong could have a competitive advantage as a forerunner in establishing a comprehensive regulatory framework for virtual-asset exchanges.”
Hong Kong is a uniquely positioned fundraising centre that can help drive China's economic transformation, Brown says, adding that the city has proved to be “fertile ground” for technology start-ups. “The city's adaptation of listing rules to facilitate more mainland enterprise listings and the launch of new listing regimes have helped finance China's booming new economy.”
He adds that from local investors’ perspectives, greater access to mainland markets and investment opportunities can only be positive. “By deepening connectivity with mainland markets and enhancing Hong Kong's role in renminbi internationalisation, local investors may be able to gain more efficient access, which could help to drive investment returns.”
Brown urges further steps to ensure stability and competitiveness, such as taking advantage of the technological evolution. “Regulators must stay ahead of the curve and embrace technology. For example, artificial intelligence-powered tools enable regulators to detect and prevent financial crimes, including fraud and money laundering, with greater efficiency.” He adds that blockchain technology provides “tamper-proof records of financial transactions that enhance transparency and accountability” in the financial system.
Leung stresses that the financial sector and its regulation are at a pivotal moment. As sustainability moves to centre stage in the financial and investment sectors, the SFC has become more focused on the potential risks and rewards associated with environmental, social and governance issues and how they affect companies’ valuations. “This has spurred demand for high-quality disclosure of ESG information,” she says.
Leung said the SFC will work to develop a comprehensive roadmap for adoption of the International Financial Reporting Standards Sustainability Disclosure Standards published by the International Sustainability Standards Board (ISSB). "The ISSB standards are a common language for companies, regulators and investors to address the opportunities and risks of climate and other areas of ESG," she says. "Hong Kong should adopt these standards and set an example for other jurisdictions, thereby bolstering our position as a leading finance hub."
