SFC Guidelines for Merging License Type 1 (Dealing in Securities) and License Type 4 (Advising on Securities): Synergies and Cost-Saving Strategies
Why do securities firms need to apply for both Type 1 and Type 4 licenses simultaneously?
Type 1 licenses allow licensees to engage in securities trading, placement, underwriting, and brokerage services; Type 4 licenses authorize licensees to provide clients with securities investment advice, publish research reports, or offer asset allocation solutions. If a brokerage firm holds only a Type 1 license and charges clients for advice, it may be in violation of SFC regulations. However, holding only a Type 4 license does not allow for securities trading. The combination of the two forms the SFC Type 1 4 license service loop, covering the two core functions of "brokerage execution" and "advisory analysis," and is a "standard configuration" for brokerage firms, wealth management institutions, and family offices.
Cost-saving effect of combining Type 1 and Type 4 regulated activities: Comparison table
The following breakdown examines the synergistic effects across two main dimensions: capital and personnel:
比較維度 Comparison Dimensions | 獨立申請 1 號牌 Independent application for 1 | 獨立申請 4 號牌 Independent application for 4 | 合併申請 1＋4 號牌 Merged application for 1 & 4 |
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Minimum paid-in capital (without holding client assets) | HK$3 million | No hard requirements | HK$3 million (required for Type 1 regulated activities) |
Minimum paid-in capital (of client assets held) | HK$5 million | HK$5 million | HK$5 million (choose the higher amount) |
Minimum liquid capital | HK$3 million | HK$100,000 | HK$3 million (required for Type 1 regulated activities) |
Application fees (per regulated activity) | HK$4,740 | HK$4,740 | HK$4,740 × 2 (each regulated activity is charged separately) |
Minimum number of ROs required | 2 ROs | 2 ROs | 2 ROs (can hold multiple positions, see below) |
Merging service capabilities | Only able to execute securities transactions | Investment advice can only be provided. | It can execute transactions and provide advice simultaneously. |
Cost Summary: When applying for a merger, the paid-in capital of the brokerage holding client assets must be HK$5 million (required for License Type 1 and License Type 4, the same for both), and liquid capital must be maintained at HK$3 million (whichever is higher). Compared to applying separately and maintaining liquid capital individually, a merger application can save an additional HK$100,000 in liquid capital requirements, while also saving on long-term salary expenses for hiring additional ROs.
Compliance Points for Shared Responsible Officers (ROs)
As outlined in the SFC's Competency Guidelines, a single RO can be appointed to supervise more than one type of regulated activity at the same time, provided that the person meets the appropriate candidate and "competency" requirements and there is no conflict of roles.
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Practical application: If the same RO has experience in both Dealing in Securities (Type 1) and Dealing in Securities (Type 4), the person can serve as the RO for both business areas simultaneously, thereby reducing the need for recruitment.
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Cost savings: Saves hundreds of thousands to over a million annual salaries in additional RO recruitment costs.
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Number of ROs: It must still be ensured that there are at least two ROs directly supervising each type of regulated activity, but the same person can be counted repeatedly.
Liquid capital and filing costs for the merger application
Liquid Capital
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The applicant does not hold client assets: License Type 1 requires HK$3 million, and License Type 4 requires HK$100,000. For merger applications, only the higher of HK$3 million needs to be met.
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Holding client assets: Both require HK$5 million (for Type 4 regulated activities, holding client assets require HK$5 million), and the merger application will not be further affected.
Liquid capitals are considered "operating reserves": The SFC requires licensed corporations to calculate liquid capital monthly and maintain a minimum level even after license approval, otherwise they may be fined or forced to cease operations. Brokerages must ensure that cash is readily convertible to cash and cannot lock up paid-up capital in fixed assets for extended periods.
Application Fees: The application fee for each type of regulated activity is calculated separately (HKD 4,740 per type), and the SFC does not offer any reductions or exemptions for consolidated applications. However, brokers holding a Type 1 license who apply for an additional Type 4 license will still be required to pay the application fee for a Type 4 license.
Incidental Exemption: When is a Type 4 License Not Required?
If a brokerage firm holds only a Type 1 license and its Type 4 activities are "entirely subordinate" to its securities trading business and it does not charge a separate fee for them, it may be exempted by the SFC from applying for a Type 4 license in some cases.
Typical exemption scenarios: Providing supplementary investment advice (such as "Is now a good time to buy?") to trading clients is exempt from the service fee and is not subject to additional advisory fees.
Situations where Type 4 regulated activities are still required:
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Independently provide paid investment advice services (such as paid research reports and membership-based consulting communities);
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Charge clients a separate advisory fee, rather than just reflecting it in transaction commissions;
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The business model involves distributing a large number of analytical reports, constituting an "independent business line".
Application Process for License Type 4 regulated activities
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License type: Type 4 regulated activities (advising on securities).
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Company entity: Must be a limited company incorporated in Hong Kong or a non-Hong Kong registered company.
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Appointment of responsible officers: at least two ROs, one of whom must be an executive director and be based in Hong Kong and may share Type 1 regulated activities.
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Capital requirements: Minimum liquid capital of HK$100,000. If “holding client assets” is required, a minimum of HK$5 million in paid-up share capital and HK$3 million in liquid capital must be maintained.
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Application time: The entire license application process takes approximately 5 to 7 months (including approximately 1 to 2 months for preliminary preparation and approximately 4 to 6 months for SFC approval).
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Submission method: All materials should be submitted through SFC's WINGS system. A business plan explaining why it is necessary to conduct both Type 1 and Type 4 license business simultaneously can also be submitted.
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Licensing conditions: A "no holding of client assets" clause can be added to the application to lower the capital threshold.
Q&A: Frequently Asked Questions about Merging Applications
Q1: Can the threshold for Type 1 regulated activities (without holding client assets) be used to apply for Type 4 regulated activities at the same time?
A: Yes. For the merger application, the higher of the paid-in capital (i.e., HK$3 million for License 1) and the higher of the liquid capital (HK$3 million) for License 1 are required. If License 1 is held in client assets (HK$5 million), then the paid-in capital is HK$5 million. ComplianceOne Consulting Limited (“ComplianceOne”) can assist in assessing the necessity of merging License 1 and License 4, business planning, and incidental exemption eligibility for the license application.
Q2: What costs should I be aware of when applying for a Type 4 regulated activities independently?
A: The minimum liquid capital for a Type 4 license is HK$100,000, and operating expenses must be reserved upfront. A consolidated application helps save on the cost of independently recruiting a Type 4 RO (Responsible Officer) and the ongoing maintenance costs of the HK$100,000 liquid capital.
Q3: Are activities under Incidental Exemption subject to restrictions?
A: The exemption applies only to advisory services that are entirely subordinate to securities trading business and cannot be extended to independently paid investment advisory or research services.
Q4: If I only hold license number 1 and provide supplementary advice, do I need an additional license?
A: SFC stated that as long as the activity is entirely subordinate to the licensed main business (License 1) and does not generate separate fees, it may not be necessary to apply for a separate License 4.
Q5: Are there any special requirements for monitoring liquid capital under a merger application?
A: After the merger, the company must maintain the high cash flow standards required for a Type 1 license, ensuring sufficient cash reserves to sustain operations. At the time of application, the company should submit a 12-month financial budget and audit report to the Securities and Futures Commission (SFC) to demonstrate its financial soundness.
Q6: Can the same RO handle both Type 1 and Type 4 regulated activities at the same time?
A: Yes, provided the RO possesses the competence and relevant experience for both types of regulated activities. An RO can oversee more than one type of license as required by the SFC, but it is recommended to clearly state the arrangement for the RO to oversee two business lines simultaneously when applying, and provide a division of responsibilities and time allocation plan. ComplianceOne can assist in designing a compliant RO co-appointment structure that accommodates multiple roles while aligning with SFC approval principles.
Conclusion
The combined application for License 1 and License 4 is crucial for Hong Kong securities firms and wealth management institutions to achieve a complete "trading + advisory" business loop. Utilizing three key mechanisms—RO (Responsible Officer) roles, high capital requirements, and incidental exemptions—can significantly reduce capital costs and personnel expenses. Institutions preparing to apply for or upgrade to License 4 should plan a compliant governance structure based on the substance of their business to ensure sustainable business growth within the regulatory compliance framework.
For further consultation on the combined application strategy for License 1 and License 4, please contact ComplianceOne.