60 Frequently Tested Concepts You Need To Know Before Taking HKSI Paper 1

Below are some highlights on frequently tested concepts for HKSI Paper 1 that you need to know before taking the exam

  • They help to maintain Hong Kong’s position as a leading financial centre by ensuring that the regulations they apply are necessary for the proper supervision of the financial markets.
  • They aim to achieve this goal through financial regulations of an acceptable international standard.
  • They strive to be market-friendly, open and approachable, but also fair and
  • To the extent of their powers, they seek to ensure that the legal framework of financial regulation is certain, adequate and fairly enforced (for example, the Securities and Futures Ordinance (“SFO”) was drafted with these objectives in mind).
  • They encourage the installation of a sound technical infrastructure for the functioning of the financial markets and for interlinking with settlement and clearing systems
  • Their actions are designed to help promote confidence in the financial markets, internationally and locally
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Disclosure regulation is simply the idea that maximum disclosure is required to protect investors, but there is an obligation on the part of the participants to take responsibility for using the full information to make their own independent investment

Merit regulation is based on the objective of screening out undesirable players and undesirable offerings. In this way, the investor will not have the freedom to invest in a merit-regulated market in so-called undesirable offerings which may be promoted by undesirable persons, as the system bars them.

There is no clear-cut distinction between disclosure-based and merit-based regulation, as, in practice, there is often an overlap between the two approaches.

No, as the Hong Kong financial markets offers a wide variety of products traded including but not limited to futures and options, foreign exchange products, mutual funds, unit and investment trusts, certificates of deposit and other banking products, money market products, gold market products, transferable interests in companies such as shares, debentures, and warrants.

The Financial Secretary has effective overall authority over the SFC and can require the SFC to provide him with information on the principles, practices and policy it is applying in order to meet its objectives and perform its functions. The SFO states that the SFC may advise the Financial Secretary on matters relating to the securities and futures industry and provide him with information.

The HKMA may refer cases of suspected malpractice by registered institutions in respect of the SFC-regulated activities to the SFC, which may directly review those institutions. The SFC may suspend or revoke the registrations of such institutions, issue public or private reprimands, and impose fines on both the institutions concerned and the relevant employees engaged by the institutions in respect of the regulated activities. The HKMA, on the other hand, may remove the names of relevant employees, either temporarily or permanently, from the register it maintains under the Banking Ordinance.

The IA has powers in relation to the insurance industry similar to those possessed by other financial regulators in Hong Kong. This includes the power to issue licences for insurance intermediaries (including both insurance brokers and agents), conduct supervisions and investigations, apply against a regulated person that engages in wrongdoing disciplinary sanctions of up to HK$10 million or three times the profit gained or loss avoided, and commence prosecutions under the Insurance Ordinance.

The MPFA has responsibility for registering mandatory provident fund (“MPF”) schemes, approving pooled investment funds, overseeing and making rules and guidelines for the administration and management of registered schemes and pooled investment funds, ongoing monitoring of compliance by MPF products with the Mandatory Provident Fund Schemes Ordinance (“MPFSO”), investigating alleged breaches of the provisions of the MPFSO, approving trustees and regulating the affairs and activities of such approved trustees, and dealing with complaints about MPF products and approved trustees, and referring them to the SFC and other regulators for action where necessary. 

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Certain responsibilities of the MPFA interlink with the particular responsibilities of the SFC, which are:

  • vetting and authorising MPF products and related marketing materials in accordance with the provisions of the SFC Code on MPF Products and the relevant ordinances (including the SFO);
  • registering and approving investment managers and continued monitoring of their conduct in the investment management of MPF products;
  • supervising the activities of investment advisers and securities dealers providing services in respect of MPF products;
  • investigating alleged breaches of the provisions of the SFC Code on MPF Products and any relevant ordinances, and taking enforcement action; and
  • dealing with complaints referred to it by the MPFA or the public about MPF products authorised by the SFC, or the conduct of SFC-licensed persons engaged in the investment management of these products.
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The Registrar of Companies does not directly regulate companies, limited partnerships, trustees or money lenders; such functions are assumed by different bodies. As a member of the Standing Committee on Company Law Reform, the Registrar of Companies takes an active interest in corporate governance issues and may make recommendations.

Not quite as the SFC regulatory objective include more than that as it also does the following:

  • maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the market;
  • promote public’s understanding of the industry including its operation and functioning;
  • provide protection to the investing public;
  • minimise crime and misconduct in the market;
  • reduce systemic risks in the industry; and
  • assist the Financial Secretary in maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the industry.

The SFC has general duties are help maintain Hong Kong’s position as an international financial centre, facilitate innovation in financial products, avoid restrictions on competition, act in a transparent manner, and use its resources efficiently. 

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The SFC has established various regulatory committees to which it has delegated some of its functions, e.g.:

  • Takeovers and Mergers Panel – is responsible for The Codes on Takeovers and Mergers and Share Buy-backs. Please refer to section 5 of Topic 8 for the details of its functions. Much of the administration of this code is in practice exercised by the SFC staff, acting as the Takeovers Executive.
  • Takeovers Appeal Committee – hears appeals against the disciplinary rulings of the Takeovers and Mergers Panel at the request of an aggrieved party for the sole purpose of determining whether any sanction imposed by the Panel is unfair or
  • Products Advisory Committee – advises on matters relating to the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products, the SFC Code on MPF Products and the Code on Pooled Retirement Funds, including overall market environment, industry practices and novel product
  • Investor Compensation Fund Committee – administers the Investor Compensation Fund and regulates its procedures in accordance with Part XII of the
  • Academic and Accreditation Advisory Committee – approves industry-based courses and examinations for meeting the licensing competence requirements, and recognises providers of training for the purposes of the continuous professional training requirements.
  • Share Registrars’ Disciplinary Committee – hears and determines disciplinary matters relating to share registrars in the first instance.

Corporate Finance Division:

  • administers The Codes on Takeovers and Mergers and Share Buy-backs;
  • supervises the listing-related activities of The Stock Exchange of Hong Kong Limited (“SEHK”);
  • reviews and recommends changes to the Listing Rules;
  • reviews and authorises prospectuses and marketing materials for unlisted shares or debentures; and
  • administers the dual filing regime under the SFO to enhance the quality of disclosure by listing applicants and listed

Enforcement Division:

  • enforces the SFO;
  • monitors the trading of Hong Kong’s stock and derivative markets and inquires into irregularities;
  • has the power to discipline regulated intermediaries, and those who are responsible, where they cease to be fit and proper or are guilty of misconduct;
  • inspects the books and records of listed companies if impropriety is suspected, which may involve directors, officers or substantial shareholders ;
  • reports suspected market misconduct to the Financial Secretary; and
  • co-operates with domestic and overseas regulatory bodies in local and overseas investigations.

It may do so if it is in the public interest or in the interests of the investing public, where it will help the recipient to perform its functions. The recipient must belong to a restricted group of persons including certain government officials and departments, statutory and regulatory bodies, and overseas authorities and financial regulators.

The SFC supervises and monitors the activities of the HKEX and the SEHK. The HKEX is the exchange controller of the SEHK and its holding company. The SEHK operates the stock market in Hong Kong under the supervision of the SFC.



There are remedies under equity which apply in the financial services These include injunction, specific performance, equitable rescission of contracts and rectification which are defined below:

  • Injunction is a court order prohibiting someone from doing
  • Specific performance is a court order that a person must carry out his part of the
  • Equitable rescission is a remedy provided by the court which aims to restore the parties to their original positions before the contract was entered
  • Rectification is an action by the court to clarify the contract when it does not properly record the intentions of the parties to it
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The purchase or sale of a security or futures contract, the acceptance by an investor of an initial public offer of securities made by an issuer, an undertaking to manage a mutual fund, and the purchase of a leveraged foreign exchange are all forms of contractual arrangements which have special legal obligations under the law of contract.

The hierarchy of the law courts of HKSAR is as follows:

  • The Court of Final Appeal is the highest court in Hong Kong. It is headed by the Chief Justice.
  • The Court of Appeal of the High Court hears appeals in all civil and criminal cases arising from the proceedings of the Court of First Instance, the District Court and the Lands Tribunal.
  • The Court of First Instance of the High Court has unlimited jurisdiction in respect of criminal and civil cases. It also hears appeals from tribunals and criminal appeals from Magistrates’ Courts. (The Court of Appeal and the Court of First Instance comprise the High )
  • The District Court considers more serious criminal cases (excluding very serious offences such as murder, manslaughter and rape), and civil cases involving disputes over amounts up to HK$1
  • The Magistrates’ Courts deal with the least serious criminal offences and impose smaller sentences than the District Court.
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Hong Kong companies can issue redeemable preference and redeemable ordinary shares if they are authorised to do so by their articles of association.

These may be redeemed at the option of the shareholder or the company depending on their terms of issue.

Redeemable shares may only be:

  • issued if the company has already issued shares that are not redeemable; and
  • redeemed if the redemption is made on a fully paid basis and can be paid for out of:
    • its distributable profits;
    • the proceeds of a new share issue made for the purposes of the redemption; or
    • its capital.
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When shares are redeemed, they are treated as cancelled, and there will be a reduction in the amount of its share capital if the shares were redeemed out of share capital, a reduction in its distributable profits if the shares were redeemed out of profits, or a reduction in the amount of its share capital and profits proportionately if the shares were redeemed out of both capital and profits, by the total amount of the price paid by the company for the shares.

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Under s. 548, NCO, resolutions may be passed by circularisation and signed by all members except for the removal of auditors before the expiration of their term of office; or the removal of a director before his term expires.

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A special resolution is one passed by at least 75% of the members at a general meeting who cast a vote (whether voting in person or, where proxies are allowed, by proxy), of which not less than 21 days’ notice specifying the intention to pass the resolution has been given.

Examples of matters which need special resolutions are:

  • reduction of share capital;
  • winding up of the company voluntarily or by court; and
  • alteration of objects, articles of association (for companies formed and registered under the NCO) and conditions in memoranda of association that could have been included in the articles of association (for existing companies).
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Persons to be appointed directors must meet the following requirements:

A. They must be at least 18 years of

B. They must not be undischarged

C. They must not be disqualified by court order; the four principal grounds for such an order being:

  • conviction of an indictable offence for fraud or dishonesty or relating to forming or operating companies;
  • persistent default in relation to the NCO or in acting as a liquidator or receiver;
  • fraud in relation to company matters or fraudulent trading; or
  • a finding of being unfit during directorship of an insolvent company.
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Members in general meeting may only intervene in the management if the directors are unwilling to act, seeking approval to act beyond their powers (the members can approve such acts by ordinary resolution), or acting in breach of their fiduciary duties (the members may ratify such breaches in general meeting).

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The company may have the following remedies for a breach of duty by directors:

  • It may obtain an injunction stopping such
  • If the directors have not disclosed a personal interest in a contract they have made on behalf of the company, the contract may be cancelled at the option of the company, i.e. rescission.
  • All directors who have acted in breach of their duties will be jointly and severally liable to the company for damages.
  • If they have wrongfully profited by dealing with the company’s property, the directors must account to the company for such profits.
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To determine whether a director of the company has breached the duty of care, skill and diligence owed by him to the company, his conduct is compared to the standard that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (objective test), and the general knowledge, skill and experience that the director has (subjective test).

The Financial Secretary may appoint inspectors if:

  • an application is made by the specified number of members;
  • the company passes a special resolution requesting such appointment;
  • he suspects the company’s affairs are being or have been conducted:
    • in a manner unfairly prejudicial to the interests of its members generally or of one or more members; or
    • with intent to defraud its creditors or the creditors of any other person; or
  • he suspects the persons concerned with the formation of the company or the management of its affairs have, in relation to the formation or management, engaged in fraud or other misconduct (ss. 840 to 841, NCO).

A company may be wound up by the court if:

  • it has by special resolution resolved that it shall be wound up by the court;
  • it does not commence its business within a year from its incorporation; or has suspended its business for a whole year;
  • it has no members;
  • it is unable to pay its debts;
  • the event occurs on the occurrence of which the articles of association provide that the company is to be dissolved; or
  • the court is of the opinion that it would be just and equitable to wind up the company. Examples are where:
    • the main object of the company has failed;
    • the company was formed for a fraudulent purpose; or
    • the basis of mutual trust, understanding and confidence on which the company was formed no longer exists.
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A compulsory winding-up is ordered by the court, which will appoint a liquidator; a voluntary winding-up is started by the members. If the members declare that the company can meet its debts within one year, there will be a members’ voluntary winding-up; if not, it will be a creditors’ voluntary winding-up with a committee of inspection that will supervise the process.



The SFC may appoint an auditor to examine and audit a licensed corporation or any of its associated entities if:

  • the licensed corporation has not complied with the FRR;
  • the licensed corporation or associated entity has:
    • failed to comply with a prescribed requirement; or
    • failed to submit audited accounts and reports;
  • the SFC has received a special auditor’s report under s. 157, SFO

It should notify the SFC in writing as soon as reasonably practicable of the fact and immediately cease carrying out any regulated activity for which it is licensed, unless the SFC permits it to carry on such activity.

For the purpose of the FRR, the regulator wants the balance sheet prepared or adjusted on specified bases:

  • it must be prepared in accordance with generally accepted accounting principles;
  • the bases used must recognise the substance of transactions;
  • the individual items must be calculated on trade dates and not on settlement dates; and
  • liabilities not stated on the balance sheet will normally have to be included in the calculations unless the SFC is satisfied that they can be excluded
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As a licensed corporation is required to maintain the RLC at all times, it should be aware of its financial position at all times. This means in practical terms that it should review the liquidity position whenever there is a material adverse movement in its approved assets and ranking liabilities.

No person may receive or hold in Hong Kong client assets of an intermediary unless the person is:

  • the intermediary;
  • an associated entity of the intermediary; or
  • an excluded person such as any AFI, another intermediary with whom client securities collateral is deposited under financial accommodation arrangements, any company or non- Hong Kong company approved by the SFC, and any person specified under rules made by the SFC with whom designated trust accounts or client accounts are to be maintained

If a deposit is to be made, it must be:

with any of:

  • an AFI;
  • an approved custodian (see section 3.18 below); or
  • another intermediary licensed for dealing in securities

in the following manner:

  • in the case of client securities and securities collateral, in safe custody in separate segregated accounts for each of these two categories, designated as trust accounts or client accounts; or
  • in the case of securities collateral only, it may also be deposited in an account in the name of the intermediary or its associated entity maintained with any of the above entities.

The Client Money Rules do not apply to client money of a licensed corporation that is received or held outside Hong Kong by the licensed corporation or its associated entity while it remains outside Hong Kong, has at any time been received or held in Hong Kong by the licensed corporation or its associated entity, once that money has been transferred outside Hong Kong in accordance with the Client Money Rules, or is held in a bank account by the client in his own name.

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A licensed corporation will make a report to the SFC under the Client Money Rules if the licensed corporation or associated entity becomes aware of a failure to open a segregated account, pay money into the account or retain the money in the segregated account as specified.

A contract note contains details of one or more specific transactions. A statement of account will normally contain details of the state of an account between the intermediary and the client, including opening and closing balances of assets and money and the movement in these balances during the period covered by the statement of account. A statement of account may, if desired or arranged, also include the full details of transactions contained in the respective contract notes.



“Credit ratings” is defined as “opinions, expressed using a defined ranking system, primarily regarding the creditworthiness of a person other than an individual, debt securities, preferred securities, or an agreement to provide credit”.

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No, it must be a transaction in an OTC derivative that has been specified by the HKMA as being subject to the transaction information reporting requirements.



The nine general principles on which the Code of Conduct is based are:

  • honesty and fairness;
  • diligence;
  • capabilities;
  • information about clients;
  • information for clients;
  • conflicts of interest;
  • compliance;
  • client assets; and
  • responsibility of senior
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The PBO makes it an offence for an agent, such as a licensed or registered person, to solicit or accept unfair advantages which might induce him not to act in the best interests of his client. The PBO also makes it an offence to offer an advantage to an agent. An example of a possible situation is where a broker might offer inducements to a fund manager. Both are guilty of offences under the PBO if the inducement is accepted.

In order to provide the best service to its client and to minimise risk to its client and itself, a licensed or registered person should take all reasonable steps to establish the client’s true and full identity, financial situation or strength, investment experience, and investment objectives.

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The Online Distribution and Advisory Platforms (ODAP) Guidelines comprise five main parts:

  • core principles set out the primary considerations for matters such as platform design, information for clients, risk management, governance, review and monitoring, and record keeping;
  • general requirements applying to conduct requirements, the offer of investments, and materials posted on the platform;
  • requirements specifically applying to the provision of robo-advice, including information for clients, client profiling and the supervision and testing of algorithms;
  • suitability and other conduct requirements related to the sale of investment products, in particular, when the suitability requirement is triggered and how the suitability requirement can be properly discharged; and
  • requirements specifically applying to complex products.
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Goods and services not permitted by the SFC are travel, accommodation, entertainment, general administrative goods or services, general office equipment or premises, membership fees, employee salaries, and direct cash.

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Goods and services permitted by the SFC are research and advisory services, economic and political analysis, portfolio analysis, including valuations and performance measurement, market analysis, data and quotation services, computer hardware and software incidental to the above goods and services, clearing and custodial services, and, investment-related publications.

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All advertisements and marketing material should be authorised where required by the SFC and should:

  • not be false, biased, misleading or deceptive;
  • be clear, fair and give a balanced picture of the fund with adequate risk disclosures;
  • contain timely information which is consistent with the fund’s offering document; and
  • only contain performance claims that can be verified

It is essential to the proper function of CRAs in the financial marketplace that CRAs retain an appropriate degree of objectivity when determining credit ratings. The CRA Code states that the determination of a credit rating should only be influenced by factors relevant to the credit assessment.



The requirements applicable to both public OFCs and private OFCs are set out in Section I of the OFC Code and address the following topics, each of which is briefly introduced below:

  • general principals;
  • registration and naming;
  • directors;
  • investment manager;
  • custody of the OFC’s assets;
  • administration of the OFC;
  • audit and annual accounts; and
  • termination and cancellation of registration
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The OFC Code contains seven general principles addressing:

  • the key operators of an OFC shall act honestly, fairly and professionally;
  • key operators shall act with due skill, care and diligence, including in the selection, appointment and on-going monitoring of any delegate;
  • the scheme property of an OFC shall be held by a custodian and properly protected;
  • key operators shall avoid conflicts of interest, and where they cannot be avoided ensure that they are managed and minimised and properly disclosed to investors;
  • disclosures should be made in a timely manner and be clear, concise, effective and kept up to date;
  • the OFC and its key operators are to ensure compliance with applicable regulatory requirements, co-operate with regulators, and promptly inform the SFC in the event of a material breach of the OFC Code; and
  • the OFC and its key operators shall ensure compliance with the instrument of incorporation and offering documents of the OFC.
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A public OFC is one that has applied for or will apply for authorisation under s. 104, SFO, whereas a private OFC will not make any application under that section.



Other than the Hong Kong Securities Clearing Company Limited (“HKSCC”), which is a wholly owned subsidiary of the HKEX that acts as the clearing house for the “cash business” and securities settlement of the SEHK;

There are three other clearing houses:

  • The SEHK Options Clearing House Limited (“SEOCH”), a wholly owned subsidiary of the SEHK, which clears the options business of the SEHK;
  • the HKFE Clearing Corporation Limited (“HKCC”), a wholly owned subsidiary of the HKEX, which clears the futures and options business of HKFE; and
  • the OTC Clearing Hong Kong Limited (“OTC Clear”), a 75% owned subsidiary of the HKEX, which clears over-the-counter (“OTC”) derivatives transactions.

As regards the Northbound trading links, all Hong Kong persons and overseas investors who are able to trade on the SEHK are able to participate. However, as noted below, during the initial launch of Shenzhen Connect only institutional professional investors are permitted to trade in stocks listed on ChiNext Board of SZSE.

Eligible securities for Northbound trading via Shanghai Connect are constituent stocks of the SSE 180 Index, constituent stocks of the SSE 380 Index, and SSE listed A shares with a dual listing of H shares on the SEHK.

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Eligible securities for Northbound trading via Shenzhen Connect are all the constituent stocks of the SZSE Component Index, the SZSE Small/Mid Cap Innovation Index which have a market capitalisation of not less than RMB 6 billion, all the SZSE-listed A shares which have corresponding H shares listed on SEHK; and, stocks listed on ChiNext Board of SZSE – however, these are initially only open to institutional professional investors.

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The following are eligible securities for Southbound trading under both the Shanghai Connect and the Shenzhen Connect, constituent stocks of the Hang Seng Composite LargeCap Index, constituent stocks of the Hang Seng Composite MidCap Index, and all H shares where the issuers have a dual listing with A shares listed on the SSE.

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Securities traded on SEHK are not regarded as eligible securities if, the security is not traded in Hong Kong dollars, the security is an H share and the issuer of it has corresponding shares listed and traded on any exchange in Mainland China other than SSE/SZSE, or the security is an H share and the issuer of it has corresponding A shares listed on either SSE or SZSE that are placed under risk alert.

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No, only institutional investors and any individual investors who hold RMB500,000 or more in his securities and cash accounts.

The Mainland China imposes two limits on foreign (i.e. non-Mainland China) ownership of listed companies: no single foreign investor can own more than 10% of a listed company’s issued shares and total foreign investors’ ownership of a listed company cannot exceed 30% of its total issued shares. The HKEX will publish a notification on its website where the SSE/SZSE have informed it that these limits are being approached. Foreign investors will be requested to sell the shares if the 30% threshold is exceeded.

The following are permitted short sellers or short sales a person who acts in good faith, believes and has reasonable grounds to believe that he or the intermediary for whom he acts as representative has the right to pass on the securities as mentioned above, Exchange Participants dealing in odd lots in the normal course of their business, and a sale of underlying securities relating to an options contract traded on a recognised stock market; and a sale permitted under rules prescribed by the SFC under s. 397, SFO.

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Tilly Conway

Tilly Conway

Tilly worked in various financial conglomerate. She is now the Senior Exam Specialist in HKSIDataBase