SFC Corporate Governance Code: Board Composition and Responsibilities for Licensed Corporations

In July 2024, the Securities and Futures Commission (SFC) published its Corporate Governance Code for Licensed Corporations (the Code), effective from 1 January 2025. This is not a soft-touch guidance note. It is a binding set of baseline requirements for all corporations licensed under the Securities and Futures Ordinance (SFO, Cap. 571). The Code replaces the previous Code of Conduct for Persons Licensed by or Registered with the SFC provisions on board composition with a far more prescriptive framework. For any licensed corporation—whether a new applicant or an existing firm—the compliance clock is already ticking. The SFC’s 2024 annual report noted that 38% of enforcement actions in the preceding financial year involved governance failures at the board level. The message is clear: the regulator now treats board structure as a frontline risk-control mechanism, not an administrative formality.

The Scope and Legal Status of the Code

The Code Binds All Licensed Corporations

The Code applies to every corporation licensed under the SFO. This includes Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance), Type 7 (providing automated trading services), Type 8 (securities margin financing), and Type 9 (asset management) licensees. The SFC has not created exemptions for small firms or single-director operations. The Code’s requirements are mandatory, not aspirational.

The Code Sits Within the SFC’s Regulatory Toolkit

The Code is issued under section 399 of the SFO. It supplements, and in some areas overrides, the general principles in the Code of Conduct for Persons Licensed by or Registered with the SFC (the General Code). Where a conflict arises between the Code and the General Code, the Code prevails. The SFC has stated that it will treat a breach of the Code as a breach of a condition of the licence. This means the SFC can impose disciplinary action—including fines, suspension, or revocation—directly for non-compliance.

The Code Does Not Apply to Registered Institutions

The Code does not apply to registered institutions (RIs) authorised under the Banking Ordinance (Cap. 155). RIs remain subject to the HKMA’s Supervisory Policy Manual modules, particularly CG-1 (Corporate Governance of Locally Incorporated Authorized Institutions). However, the SFC has indicated that it expects RIs carrying on regulated activities to adopt equivalent standards. The HKMA issued a circular on 12 December 2024 confirming that it will review its own governance requirements in light of the SFC’s Code.

Board Composition: The Mandatory Requirements

Minimum Number of Directors

The Code requires every licensed corporation to have at least three directors on its board. This is a change from the previous position where a single director was permissible for a sole-proprietorship structure. The three-director minimum applies regardless of the number of regulated activities the firm holds. A firm with only a Type 9 (asset management) licence must still appoint three directors.

Independent Non-Executive Directors (INEDs)

The Code mandates that at least one-third of the board must be independent non-executive directors (INEDs). For a board of three directors, this means at least one INED. For a board of six, at least two. The INED must meet the independence criteria set out in paragraph 2.3 of the Code. These criteria mirror the Hong Kong Exchange (HKEX) Listing Rules (Rule 3.13) but are tightened for licensed corporations. An INED cannot have been an employee of the licensed corporation or any of its group companies in the preceding three years. The INED also cannot be a director of any substantial shareholder (holding 10% or more of the voting rights) of the licensed corporation.

The Role of the INED

The Code describes the INED’s role as providing “independent oversight of management”. In practice, the INED must review all material transactions between the licensed corporation and its connected persons. The INED must also attend all board meetings unless excused by the board chair for a valid reason. The SFC expects the INED to have sufficient time to perform the role. The Code recommends that a person should not hold INED positions in more than five licensed corporations at the same time.

The Board Chair and the Chief Executive

The Code requires a clear separation of the roles of board chair and chief executive. The same individual cannot hold both positions. This is a hard prohibition, not a recommendation. The board chair must be an independent director. If the board chair is not independent, the licensed corporation must appoint a lead independent director. The lead independent director’s role includes presiding at board meetings when the chair is conflicted and serving as the primary point of contact for the SFC on governance matters.

Board Responsibilities: From Policy to Enforcement

The Board Must Approve the Business Plan

The Code requires the board to approve the licensed corporation’s annual business plan and risk appetite statement. The business plan must include a detailed description of the firm’s target clients, products, and geographical markets. The risk appetite statement must specify the maximum acceptable level of exposure for each material risk category, including market risk, credit risk, operational risk, and regulatory compliance risk. The SFC will review these documents during its routine inspections.

The Board Must Monitor Compliance

The Code imposes a direct duty on the board to monitor the licensed corporation’s compliance with all applicable laws, rules, and codes. This duty cannot be delegated entirely to a compliance officer. The board must receive a compliance report at least quarterly. The report must include a summary of all regulatory breaches, near-misses, and complaints received. The board must also review the compliance officer’s annual assessment of the firm’s compliance culture.

The Board Must Oversee the Management of Conflicts of Interest

The Code requires the board to adopt a written conflicts-of-interest policy. The policy must cover conflicts between the licensed corporation and its clients, between different clients, and between the corporation and its directors or employees. The board must review the policy annually. The Code also requires the board to approve any transaction in which a director has a material interest. The interested director must abstain from the board vote.

The Board Must Conduct an Annual Self-Assessment

The board must conduct an annual self-assessment of its own effectiveness. The assessment must cover the board’s composition, the performance of individual directors, and the board’s oversight of management. The results of the assessment must be documented and presented to the board at a dedicated meeting. The SFC may request a copy of the assessment during an inspection. The Code does not prescribe a specific format for the assessment, but the SFC has issued a sample template in its guidance note of November 2024.

Implementation Timeline and Practical Steps

Effective Date and Transitional Provisions

The Code is effective from 1 January 2025. Existing licensed corporations have a transitional period until 30 June 2025 to comply with the board composition requirements. This means any firm that currently has fewer than three directors or lacks an INED must appoint additional directors by 30 June 2025. The SFC has stated that it will not grant extensions. Firms that fail to meet the deadline will be in breach of a condition of their licence.

Step-by-Step Compliance Checklist

Step 1: Review current board composition. Count the number of directors. Determine whether at least one-third are INEDs. If the board chair is not independent, identify whether a lead independent director is needed.

Step 2: Appoint additional directors if required. The new directors must meet the fit-and-proper criteria under section 129 of the SFO. The licensed corporation must notify the SFC of the appointment within seven business days using Form N.

Step 3: Draft or update the conflicts-of-interest policy and the business plan. Ensure the board approves these documents at its next meeting. Keep signed minutes.

Step 4: Schedule the first quarterly compliance report for the board. The report must cover the period from 1 January 2025.

Step 5: Conduct the first annual board self-assessment. The assessment must be completed by 31 December 2025 for the 2025 calendar year.

Common Pitfalls to Avoid

Do not appoint a director who is also a director of a substantial shareholder. The Code’s independence test is stricter than the HKEX Listing Rules. Do not assume that a compliance officer can handle all board-level compliance duties. The board must actively engage. Do not delay the appointment of INEDs. The SFC has warned that it will treat late compliance as a serious breach, particularly for firms that have previously been subject to enforcement action.

Actionable Takeaways

1. By 30 June 2025, every licensed corporation must have at least three directors on its board, with at least one INED.
2. The board chair and chief executive roles must be held by different individuals, and the chair must be independent.
3. The board must approve the annual business plan and risk appetite statement, and receive a quarterly compliance report.
4. A written conflicts-of-interest policy must be adopted and reviewed annually by the board.
5. The board must conduct an annual self-assessment of its own effectiveness and document the results.

This does not constitute legal advice. Consult a solicitor for your specific case.