Today is a Big Day!  After waiting for almost 4 years 8 months since the “Arrangement on Reciprocal Recognition and Enforcement of Civil Judgments in Matrimonial and Family Cases by the Courts of the Mainland and of the Hong Kong Special Administrative Region” was signed between the Supreme People’s Court and the Hong Kong Government on 20 June 2017, the Mainland Judgments in Matrimonial and Family Cases (Reciprocal Recognition and Enforcement) Ordinance (Cap.639) (“the Ordinance”) and the Mainland Judgments in Matrimonial and Family Cases (Reciprocal Recognition and Enforcement) Rules (Cap.639A) are to come into effect today – 15 February 2022.

The Ordinance is split into 3 parts dealing with (i) Registration in Hong Kong of Mainland Judgments Given in Matrimonial or Family Cases, (ii) Recognition in Hong Kong of Mainland Divorce Certificates and (iii) Facilitation of Recognition and Enforcement in Mainland of Hong Kong Judgments Given in Matrimonial or Family Cases.

I.  Registration in Hong Kong of Mainland Judgments Given in Matrimonial or Family Cases

Care-related orders, Status-related orders and Maintenance-related orders in matrimonial or family cases made in a Mainland Judgment on or after 15 February 2022 can be registered in Hong Kong, after which they can be enforced/recognised as valid in Hong Kong as if they were originally made by the Hong Kong Court on the date of registration, subject to an application to set aside the registration.  An application for registration may be made to the Family Court by way of Originating Summons with an affidavit in support.  Once a registration order is made, the applicant shall draw up the registration order, and serve a notice of registration on all other parties to the Mainland Judgment.

II.  Recognition in Hong Kong of Mainland Divorce Certificates

Mainland divorce certificates issued on or after 15 February 2022 can also be recognised as valid in Hong Kong with a recognition order, subject to such recognition being set aside.  An application for recognition may be made to the Family Court by way of Originating Summons with an affidavit in support.  Once a recognition order is made, the applicant shall draw up the recognition order, and serve a notice of the recognition order on the other party to the divorce.

III.  Facilitation of Recognition and Enforcement in Mainland of Hong Kong Judgments Given in Matrimonial or Family Cases

The last part of the Ordinance provides for certification of Hong Kong Judgments for purposes of recognition and enforcement in the Mainland.  A party in a matrimonial or family case (meaning a case where specified orders are made, such as maintenance orders, transfer or sale of property orders, custody/access orders, decree absolute of divorce/nullity, or injunction granted under the Domestic and Cohabitation Relationships Violence Ordinance, etc.) in which a Hong Kong Judgment is given on or after 15 February 2022 and effective in Hong Kong, may apply to the appropriate Hong Kong Court which gave the Hong Kong Judgment for a certified copy of the Judgment, such certified copy Judgment will be issued together with a Certificate.  The certified copy Judgment and the Certificate can then be produced in the Mainland court for recognition and enforcement.

The Ordinance aims to solve the historical difficulty faced by cross-border families by offering a more costs-and-time-effective mechanism for enforcing and recognizing matrimonial and family judgments between the two jurisdictions.  It should be particularly noted that the orders in relation to custody under a Hong Kong Judgment can cover an order for the return or delivery of a child who has been wrongfully removed (or abducted) from Hong Kong to the Mainland.  This is a welcomed development, as previously there was no direct and immediate relief available to order the return of a child wrongfully removed to the Mainland, since Mainland China is not a contracting state under the Convention on the Civil Aspects of International Child Abduction.

We will keep a close eye on developments in this area and will share such developments with you in the near future.

This article is co-authored by our experienced SW Private Team –Partners Catherine Por, Wendy Lam, and Calvin Lo. Please contact Catherine Por,  Wendy Lam or Calvin Lo for any further enquiries or information.

This newsletter is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage.

Introduction

On 28 January 2022, the Securities and Futures Commission (the “SFC”) and the Hong Kong Monetary Authority (the “HKMA”) issued a joint circular (the “Joint Circular”) providing guidance to banks and SFC-licenced intermediaries intending to engage in virtual asset (“VA”)-related activities (the “VA-related activities”).

Indeed, we are seeing enormous development in the Hong Kong regulatory landscape.  In late 2019, the SFC introduced its new opt-in regulatory framework of virtual asset trading platforms (see our news update).  In May 2021, the Financial Services and the Treasury Bureau (the “FSTB”) issued consultation conclusions on implementing a licensing regime for virtual asset service providers (“VASP licensing regime”) (see our news update).  More recently, in mid-January 2022, the HKMA issued a discussion paper on crypto-assets and stablecoins (see our news update).

The Joint Circular has three main focuses: (a) the distribution of VA-related products; (b) the provision of VA dealing services (the “VA dealing services”); and (c) the offering of VA advisory services (the “VA advisory services”).

A.    Distribution of VA-Related Products

VA-related products (the “VA-related products”) are likely to be considered complex products, due to their inherent risks which may not be easily understood by a retail investor. Thus, intermediaries distributing VA-related products should comply with the following additional requirements as appropriate.

Complex products requirements

Intermediaries should comply with the SFC’s requirements which govern the sale of complex products, including ensuring the suitability of VA-related products, minimum information and warning statements.[1]

“Professional investors only” selling restriction

VA-related products which are considered complex products should only be offered to “professional investors”[2] only.  For example, an overseas VA non-derivative ETF would very likely be considered a complex product and it should only be offered to professional investors.

However, it is noted that there is a limited suite of VA-related derivative products traded on regulated exchanges as specified by the SFC and, in the case of exchange-traded VA derivative funds, authorised or approved for offering to retail investors in designated jurisdictions  (including Australia, United Kingdom and United States of America).  The “professional investors only” restriction is not imposed on the distribution of these products.  Nevertheless, given such products are considered complex exchange-traded derivatives, they are still subject to derivative product requirement and VA knowledge test requirement.

It should be noted that the provisions under Part IV of the Securities and Futures Ordinance (Cap. 571) (the “SFO”) continue to apply, which prohibit the offering of investment products which have not been authorised by the SFC to the Hong Kong public. Where the VA-related products are distributed on an online platform, it must be properly designed and have appropriate access rights and controls to ensure compliance with the selling restrictions in Hong Kong and other jurisdictions and exchange, as appropriate.

VA knowledge test

Other than institutional professional investors and qualified corporate professional investors[3], intermediaries should assess whether their clients have knowledge of investing in VAs or VA-related products prior to effecting a transaction in VA-related products on their behalf.  If not, intermediaries may only proceed if it acts in the client’s best interests and shall provide requisite training and sufficient information to ensure that the clients understand the VA-related products and are able to assume the related risks before making an investment decision.

Suitability obligation requirements

Intermediaries should ensure the suitability of VA-related products, including ensuring that any recommendations or solicitations made are suitable for clients in all circumstances and in their best interests, taking into account, among others, the clients’ risk tolerance and financial situation.  Intermediaries should ensure that the aggregate amount to be invested in VA-related products is reasonable considering the clients’ net worth.

In addition, intermediaries should conduct proper due diligence on the products to understand their risks and features, the targeted investors and the products’ regulatory status.  For an unauthorised VA fund, this means to conduct due diligence on the fund’s constitution, fund managers, operation, trading and custodian services providers and others.

Disclosure

Intermediaries should provide information to clients in relation to VA-related products and the underlying VA investments in a clear and easily comprehensible manner, together with warning statements specific to VAs.

Derivative products

Where the VA-related product is a derivative product, intermediaries are required to conduct additional know-your-client procedures pursuant to paragraphs 5.1A and 5.3 of the Code of Conduct, including to assess the clients’ knowledge of derivatives and characterize the clients based on their knowledge of derivatives and to ensure that the clients understand the nature and risks of the products and have sufficient net worth to be able to assume the risks and bear the potential losses.

Provision of financial accommodation

Intermediaries should be cautious in providing any financial accommodation. They should assure that the clients have the financial capacity to meet the obligations arising from leveraged or margin trading in VA-related products, including in a worst-case scenario.

B.     Provision of VA Dealing Services

Currently, the SFC and the HKMA are only prepared to allow intermediaries licensed or registered for Type 1 (dealing in securities) regulated activity to provide VA dealing services.  Accordingly, intermediaries are expected to comply with all the regulatory requirements imposed by the SFC and the HKMA when providing VA dealing services, irrespective of whether or not the virtual assets involved are securities.  To ensure adequate investor protection, intermediaries wishing to provide VA dealing services are also subject to the following conditions/requirements:

SFC-licensed VA trading platforms only

Intermediaries are required to partner only with SFC-licensed VA trading platforms[4] (the “SFC-licensed platforms”) for provision of VA dealing services, either by way of acting as introducing agent (introducing clients to the platforms for direct trading) or establishing an omnibus account with the platform (acting as agent on behalf of the clients to execute instructions).  These services should only be provided to professional investors.

Introducing agent

Where intermediaries are acting as introducing agents, they should only introduce professional investor clients to SFC-licensed platforms.  They should not relay any orders on behalf of their clients to the platforms or hold any client assets for the introducing services.

Omnibus account

Intermediaries providing VA dealing services through operating an omnibus account established and maintained with an SFC-licensed platform shall comply with expected conduct requirements imposed by the SFC as licensing or registration conditions.  One of the conditions is to adhere to the prescribed terms and conditions, which include the following:

1. Maintain in Hong Kong at all times excess liquid capital equivalent to at least 12 months of its actual operating expenses calculated on a rolling basis, in addition to the requirements under the Securities and Futures (Financial Resources) Rules (Cap. 571N).

2. Only permit clients to deposit or withdraw fiat currencies, instead of VAs, from their accounts.

3. Fully disclose the nature and risks that the clients may be exposed to when dealing in VAs in a clear and fair manner which is not misleading.

4. Not engage in VA market making activities on an SFC-licensed platform through which it provides to its clients the VA dealing services.

5. Establish and implement policies for preventing market manipulation or abusive trading activities.

6. Ensure that its anti-money laundering and counter-financing of terrorism systems can adequately manage the money laundering and terrorist financing risks.

C.    Provision of VA Advisory Services

Intermediaries should comply with all the regulatory requirements imposed by the SFC and the HKMA when providing advisory services, irrespective of the nature of the VAs.  Furthermore, such services should only be provided to intermediaries’ existing clients who are “professional investors” to which they provide services in Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activities.

Where an intermediary provides advisory services in VA-related products, it should observe the same requirements as highlighted in section “Distribution of Virtual Asset-Related Products” above, which includes the professional investors selling restriction, VA knowledge test and suitability obligation requirements, and at the same time, it must ensure the suitability of its recommendations.

Transitional arrangements

The new regulatory regime is immediately applicable to new market entrants upon their engagement in VA-related activities. For market participants providing existing VA-related activities to clients, there is a 6-month transition period before this regime is implemented in full.

Analysis and Takeaways

Virtual assets are gaining popularity around the world.  Nevertheless, the global regulatory landscape largely remains uneven.  In light of the market’s growing interest in VA-related products, we see the Joint Circular as a big step in providing clarity and certainty for intermediaries involved or interested in distributing VA-related products or providing VA dealing services.  Indeed, the Joint Circular does contextualise the principal requirements for intermediaries for the distribution of VA-related products, such as complex products, “professional investor only”, VA knowledge test and derivative product requirements, and their interaction and application thereon.  Furthermore, the SFC and the HKMA have expressed their general stance that only Type 1 regulated activity licensed or registered intermediaries can provide VA dealing service.

We believe Hong Kong should leverage its position and expertise as the leading international finance hub in developing its emerging Fintech ecosystem.  The Joint Circular issued by the SFC and HKMA, together with the FSTB’s proposal for a VASP licensing regime, as well as the HKMA discussion paper on crypto-assets and stablecoins, are proactive initiatives thereby enabling a regulatory framework with sufficient protection and safeguard in place, where investors, VA operators, intermediaries and other stakeholders can venture into and utilise VAs and the blockchain technology as a whole.

Please contact our Partner Mr. Rodney Teoh and associate Ms. Angela Lau for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

[1] See more discussion in the subsections headed “Suitability obligation requirements” and “Disclosure” below.
[2] The term “professional investor” is as defined in section 1 of Part 1 of Schedule 1 to the SFO (as defined below).
[3] “Institutional professional investors” is defined under paragraph 15.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”) as persons falling under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO.  “Qualified corporate professional investors” refers to corporate professional investors which have passed the assessment requirements under paragraph 15.3A and gone through the procedures under paragraph 15.3B of the Code of Conduct.
[4] VA trading platforms which are licensed pursuant to section 116 of the SFO under the 2019 regulatory framework for VA trading platforms.

As one of the founding members of INTERLAW in 1982 and the only Hong Kong representative, we are delighted to announce that INTERLAW has again been awarded the highest ranking, Band One in the Leading Law Firm Networks category by Chambers Asia Pacific 2022.

Chambers and Partners recognises INTERLAW as “an extensive network of practitioners who offer cross-border support to clients with business interests throughout the Asia-Pacific region. This strong alliance aims to cultivate networking and the sharing of knowledge through regional and annual meetings. Additionally, it encourages members to form practice-specific groupings, thereby offering specific expertise across jurisdictions. The quality of its membership is ensured through peer reviews, and mentors are assigned to new members, while existing member firms build relationships, share insights and host workshops and webinars with and for each other.”

About INTERLAW

INTERLAW is an elite global law firm network of top-tier independent corporate and commercial law firms in 150 cities worldwide. The network distinguishes itself by its longevity, quality of client service, and the strong professional and personal relationships of its lawyers. For over 38 years, Interlaw has been refining its provision of global legal services and continues to grow worldwide, offering clients unrivalled high quality legal advice, wherever in the world they want to do business.

Members of INTERLAW are selected after a comprehensive due diligence process that identities full-service law firms with a solid reputation for impeccable professional and ethical standards.

For more information, please contact our Partner Mr. Willy Cheng .

We are pleased to announce that our SW Private Client Practice and head of the department, Partner Catherine Por, has again, been ranked by Chambers and Partners in their Greater China 2022 guide.

• Family/ Matrimonial (International Firms)

Chambers’ Review:
Stevenson, Wong & Co houses a solid family law practice handling a range of complex, contentious matters involving high-value assets. Especially skilled in ancillary relief cases. In addition to advising on divorce law, the team is also well versed in succession planning, probate applications and wardship issues. Also notable for non-contentious work, such as prenuptial and postnuptial agreements.

Strengths:
Considering it to be a “very well-established team with very well-respected practitioners,” one market source affirms: “They’re straight down the line and protect their clients very well.”

• Notable practitioners- Catherine Por; Family/ Matrimonial (International Firms)

Chambers’ Review:
Catherine Por is well recognised for her expertise handling family and matrimonial matters. She is regularly sought out by clients to advise on post-separation financial and child issues, as well as trust and estate matters. “She’s had some hard-fought cases and is highly respected,” says an interviewee.

About Chambers and Partners

Chambers is known for its objectivity and rigor and is a trusted, authoritative reference for clients around the world seeking exceptional legal services. It is also widely regarded as one of the most important rating guides in the legal profession. Chambers’ dedicated research team selected the top law firms and lawyers by conducting market analysis on the legal fields in Greater China and interviews with a large number of in-house counsels and lawyers.

For more information, please contact our Partners and Heads of SW Private Client, Catherine Por and Wendy Lam, or visit Chambers and Partner’s Greater China 2022 guide.