Hong Kong’s New Incentives for Family Offices (Updated)
We delve into the latest measures adopted by the Hong Kong government to attract more family offices to the city. Also, family offices that do not engage in profit-generating or regulative business activities will no longer require a license. The new policy regime is expected to boost Hong Kong’s appeal for the global private wealth management industry and opens up opportunities for the business support and financial services sector at large.
Due to its status as a prominent financial center, Hong Kong has long been a favored destination for family offices. Its deep liquidity, diversified asset classes, and investible products have attracted 18 of the world’s largest 500 family entries to the territory, the highest number in Asia-Pacific. Overall, there are about 400 family offices operating in Hong Kong.
Despite its traditional appeal as a hub for family offices, Hong Kong has faced a mix of challenges in recent years, including political turmoil and the pandemic management, leading some family businesses to relocate to neighboring Singapore.
However, recognizing the crucial role played by family offices as key investors, the Hong Kong government is stepping up its efforts to attract more of them in 2023, especially as the city makes a rapid recovery in the post-COVID era.
On March 21, 2023, the Securities and Futures Commission (SFC) of Hong Kong issued a few quick reference guides to address frequently asked questions about licensing requirements, with one specifically catering to family offices. Under the new guidelines, single-family offices will no longer require a license, as long as they do not engage in a regulated business activity in Hong Kong.
This decision is part of a broader strategy by the SFC to attract more private wealth management firms to Hong Kong and establish the city as a premier destination for managing private wealth. In line with this, on March 24, 2023, the Hong Kong government issued a Policy Statement on Developing Family Office Businesses in Hong Kong to foster a competitive environment for global family offices and asset owners, outlining a series of measures to develop family office businesses in the city.
SFO clarified licensing requirements for single-family offices
In the latest set of guidelines, the SFC has clarified eligibility of licensing exemption for those single-family offices that are not operating as a business will be eligible for the licensing exemption – a measure that will bring about a positive change for Hong Kong’s wealth management industry.
Indeed, the policy is expected to boost the development of family offices in Hong Kong, particularly those catering to high-net-worth individuals, and support the government’s broader strategy to strengthen the city’s position as a premier financial center in Asia. By reducing the regulatory burden, the exemption will make it easier for single-family offices to operate in Hong Kong.
Moreover, the SFC hopes that the move will attract more private wealth management firms to the city, which has witnessed a surge in demand for family office services in recent years. This exemption is likely to encourage more firms to establish themselves in Hong Kong, tapping into the potential opportunities offered by its thriving wealth management industry.
The development is also expected to foster competition among family offices and traditional wealth management firms, ultimately benefiting investors through improved services and more competitive pricing. In addition, more private wealth management firms may consider establishing family offices in Hong Kong to leverage the exemption. Overall, the SFC’s decision marks a significant milestone in Hong Kong’s wealth management landscape, with potentially far-reaching implications for the industry.
When does a family office need a license?
Under the SFO, a family office in Hong Kong requires a license if it engages in regulated activities and carries out business within the city. These regulated activities are divided into ten different categories:
- Dealing in securities
- Dealing in futures contracts
- Leveraged foreign exchange trading
- Advising on securities
- Advising on futures contracts
- Advising on corporate finance
- Providing automated trading services
- Securities margin financing
- Asset management
- Providing credit rating services
The specific definition of individual activities and their applications can be found here.
Additionally, family offices that carry on businesses in Hong Kong are subject to mandatory licensing. The specifics of it will need to be determined by reference to the facts of each case, including whether:
- the person is performing an occupation or a duty that requires attention; the activity involves continuity;
- the activity is capable of making a profit; and
- the activity was carried out for the purpose of making a profit.
However, there are two carve-outs that could exempt a family office from licensing for asset management under the SFO. The first carve-out applies to services provided exclusively to the office’s group company regarding the group’s assets. The second carve-out pertains to activities incidental to the trust service of a registered entity under the Trust Ordinance.
What are the conditions for licensing exemption?
A single-family office can be exempted from licensing under the Securities and Futures Ordinance (SFO) if it meets the below requirements:
- it does not carry on business in Hong Kong; and
- does not perform any of the regulated activities.
However, multi-family offices, which typically operate as commercial entities, are more likely to require a license.
Additional measures to attract family offices in Hong Kong
As mentioned earlier, the Hong Kong government released a Policy Statement following the announcement of the new licensing rule. The new policy measures aim to create a competitive environment for global family offices and asset owners in Hong Kong. These include:
- A new Capital Investment Entrant Scheme (CIES): This scheme will include permissible assets for the scheme, such as equities listed in Hong Kong, debts issued by companies listed in Hong Kong, subordinated debts issued by authorized institutions, and eligible collective investment schemes. Applicants who are approved can reside and pursue development in Hong Kong with their spouse and dependent unmarried children.
- Tax concessions: Profits tax exemption will be provided to family-owned investment holding vehicles managed by single-family offices in Hong Kong. The government will also review existing preferential tax regimes for funds and carried interest.
- Market facilitation measures: These include the SFC licensing requirements, and in particular those catering to family offices. The regulatory body has established a dedicated communication channel maintained by its licensing team for family office-related enquiries.
- The Hong Kong Academy for Wealth Legacy: The government will fund the setup of a new academy under the Financial Services Development Council, offering talent development services to industry practitioners and next-generation wealth owners.
- Art storage facilities at the airport: The Hong Kong Airport Authority is exploring the establishment of storage, display, and appreciation facilities for art and treasures at Hong Kong International Airport.
- Hong Kong as a philanthropic center: The government plans to develop Hong Kong into a philanthropic center for global family offices and philanthropists to deploy charitable capital benefiting Hong Kong, the Chinese Mainland, and overseas.
- A dedicated FamilyOfficeHK team in InvestHK: The dedicated FamilyOfficeHK team will expand its role to also cover services like facilitating philanthropic endeavors of wealth owners and assisting in education-related matters.
- A new Network of Family Office Service Providers: The FamilyOfficeHK team will convene and launch a new network of family office service providers, providing a two-way channel between the government and the industry to communicate on the latest policy development.
Implications for the wealth management industry in Hong Kong
The new capital investment scheme, along with other measures, are expected to be a game-changer for the wealth management industry, as it will offer family offices a more streamlined and efficient process for obtaining residency and work permits in the city. This will not only make it easier for them to set up and manage their operations in Hong Kong but also enable them to access the vast pool of talent and expertise available in the city.
In addition, the new tax concessions and incentives announced by the government will help reduce the operating costs of family offices and boost their profitability. The provision of art storage facilities at the international airport is a unique offering that is likely to appeal to family offices, given the high value of art collections that many of them manage.
Overall, the Hong Kong government’s focus on attracting family offices is a strategic move that recognizes the importance of this segment to the wealth management industry in the region. Indeed, family offices are known for their long-term investment horizons, and their presence in Hong Kong is likely to attract other wealthy individuals and institutions to the city. This will create a virtuous cycle of growth for the wealth management industry, as more assets under management translate into more business opportunities for wealth managers.
Can Hong Kong continue to be a leading hub for family offices?
With its advanced financial services and banking industries, Hong Kong is primed to strengthen its position as a global player in this field. In his inaugural policy speech, Chief Executive John Lee Ka-Chiu expressed his goal of attracting at least 200 of the world’s most prominent family offices to establish or expand their operations in Hong Kong by 2025.
This move will enable the city to compete with Singapore, which currently has around 400 family offices helping affluent families worldwide invest their wealth, plan their succession, and support charitable initiatives.
This is why Hong Kong is working on more unique value propositions for family offices, beyond tax incentives and favorable regulation. Hong Kong will also need to continue to invest in its infrastructure, including its legal and financial systems, to ensure that it remains a desirable destination for family offices over the long term.
The newly introduced measures should also boost the financial and professional services industry in Hong Kong. The Secretary for Financial Services and the Treasury, Christopher Hui, noted that the government’s measures showcase the full charm of Hong Kong as an international cosmopolitan city from multiple dimensions.
This article was originally published on April 20, 2023, and last updated on May 9, 2023.
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