Hong Kong: Offshore Business Sectors
Hong Kong is the most liberal Asian jurisdiction in terms of permitting participation in the market by foreign professionals. The international nature of fund-raising and merger activities requires professional firms to go global. Nevertheless, the legal and accountancy sectors remains relatively restrictive in many parts of the world. Many international professional firms have set up operations in Hong Kong to serve clients in the region.
The mainland will increasingly be an important market for Hong Kong's professionals, particularly in the light of the PRC's accession to the WTO, and the ongoing liberalization of professional and other services under the Hong Kong/China Closer Economic Partnership Arrangement (CEPA).
Some of the moves targeting legal services under CEPA III, which took effect in January 2006, include:
- Waiving the requirement regarding the number of full-time lawyers employed by Mainland law firms that operate in association with Hong Kong law firms;
- Waiving the residency requirement for representatives stationed in representative offices of Hong Kong law firms in the Mainland;
- Allowing Hong Kong residents qualified for practice in the Mainland to act as agents in matrimonial and succession cases relating to Hong Kong;
- Allowing Hong Kong barristers to act as agents in civil-litigation cases in the Mainland in the capacity of citizens;
- and Allowing Hong Kong residents who have acquired Mainland lawyer qualifications or legal professional qualifications to undergo internships in a branch office of a Mainland law firm set up in Hong Kong.
The legal services industry consists of two streams of professionals, solicitors and barristers. Solicitors engage in general practice while barristers specialise in advocacy and litigation. Solicitors can only represent clients in lower courts such as the District Courts.
The most recent statistics suggest that as of 2011, there were over 1,100 practising barristers, and more than 7,000 solicitors. In addition, there are nearly 1,300 registered foreign lawyers from 28 jurisdictions. There are approximately 700 local law firms, plus some 70 foreign law firms. Turnover of the legal sector exceeds US$1.5bn.
In terms of exports of legal services, customers are mostly regional offices of foreign multinationals, investment banks, developers, construction companies, industrialists, etc., which have substantial business interests in the region and would seek legal advice from time to time to safeguard their interests.
Mainland China is by far the most important export market for Hong Kong's legal services industry. Demand for Hong Kong's legal services support comes mainly from foreign and Hong Kong companies which have investments or are planning to invest in the Mainland.
Hong Kong's legal sector has however become a victim of its own success, as waiting periods for cases to be heard continue to lengthen despite efforts to increase capacity. Although many cases have been shifted to the District Court after its financial jurisdiction was raised to HK$600,000, a surge in bankruptcy petitions has kept the High Court caseload fairly static.
The average waiting time between a request for a court date and the actual hearing is 216 days in the civil court, although time spent on preliminary matters means that the average litigant will have to wait for about 400 days to have a case heard (at the time of writing). A recent paper on civil justice reform said the number of judges in Hong Kong had not changed significantly in the past decade despite sharp increases in workload.
The caseload of the High Court has increased 82% since 1991, so that judges have thus had to cope with higher pressure and bigger workloads. The panel of Masters will deal with work in the High Court that encompasses summary judgments, where a case is instantly disposed of, and interlocutory applications, i.e. technical queries that don't require a court hearing as such. They will also deal with so-called 'taxation', meaning the scrutiny of legal bills to allocate costs between litigants.
Under the Hong Kong judiciary's 'Performance Pledge,' the Court of First Instance pledges to set a hearing date for criminal cases within 120 days from the filing of an indictment, and within 180 days from the application to fix a date in civil proceedings. The Judiciary has stressed, however, that these are "targets" and they may fluctuate according to the year's particular circumstances.
Secretary for Justice, Wong Yan Lung, confirmed in November 2010 that the government is committed to the development of arbitration in Hong Kong.
The recent updating of the Arbitration Ordinance was cited as an example of the government's continued efforts to strengthen Hong Kong's formal legal infrastructure to promote its status as an international dispute resolution hub.
"With the enactment of the new Ordinance, our arbitration law becomes clearer, more certain, and more easily accessible to arbitration users and practitioners from across the world," he said. "An enhanced arbitral environment will help further develop our arbitration services. We already have a mature legal system, an independent Judiciary, as well as a deep pool of experienced professionals.”
Hong Kong's new Arbitration Ordinance was enacted on 1 June 2011. Major features of the new law include the protection of confidentiality in arbitration proceedings as well as court hearings related to those proceedings. Wong says that these provisions seek to strike more accurately the right balance between safeguarding confidentiality in arbitration and protecting the other substantive legal rights of the parties.
Rising business opportunities and the use of international standard accounting practices have also attracted the big international accounting firms to Hong Kong. Most of them have set up their regional headquarters in the territory. Smaller-scale local accounting firms will find it increasingly challenging competing with the accounting giants. There are currently more than 3,000 accounting firms in Hong Kong with a turnover in excess of US$1 billion.
In its bilateral agreement with the United States over WTO accession, China made market access commitments in the accounting sector. Foreigners who have passed the National Accounting Examination will be allowed to form partnerships or incorporated accounting firms in China. Accountancy services have also been liberalized under CEPA III. Hong Kong accounting professionals should benefit from these development.
The Chinese mainland is the biggest export market for Hong Kong's accounting services. Major export services included: statutory audit services; investment-related advisory services (e.g. due diligence); tax advisory; computer assurance and corporate services.
In 2004, the the Hong Kong Institute of Certified Public Accountants' corporate governance committee released new guidelines designed to help prevent and report fraudulent activities undertaken by companies in the jurisdiction.
In addition, the government created the 'Independent Investigation Board' (IIB) modelled on the US Public Companies Accounting Oversight Board (PSAOB). The IIB has a staff of 10 and acts on references from other regulators, but unlike its US and UK equivalents, it does nothave powers to act on its own or to create regulatory standards. "It is obvious that HK$8 million is not going to be enough to set up a good investigation team. With such a low budget, we have to question whether the proposed board is just a hollow gesture," said Chan Kam-lam, economic affairs spokesman for the Democratic Alliance for Betterment of Hong Kong. "It will not benefit the Hong Kong market if we set up an investigation board that does not have enough money to hire experts and fulfil its duties."
The government is thought to have wanted a larger budget for the IIB, but failed to secure sufficient financial backing from HKSA, the Hong Kong Institute of Certified Public Accountants and HKEx.