ComplianceOne Newsletter – February 2023
ComplianceOne Newsletter – February 2023
The topics discussed in this monthly newsletter are as follows:
1. The Asset and Wealth Management Activities Survey 2022;
2. SFC and CSRC enter into an MoU on regulatory cooperation;
3. SFC consults on proposals to regulate virtual asset trading platforms;
4. SFC reprimands and fines Jinrui Futures (Hong Kong) Limited $4.8 million; and
5. SFC bans Chan Wai Chun for life
MARKET NEWS
1. The Asset and Wealth Management Activities Survey 2022
As an annual exercise to collect information on asset and wealth management activities in Hong Kong for regulatory and market facilitation purposes and to develop a better understanding of the state of the asset and wealth management industry in Hong Kong, the SFC has issued the Asset and Wealth Management Activities Survey 2022 (the “AWMAS”), and licensed corporations are expected to complete and submit on or before 21 April 2023.
For those licensed corporations (LCs) which had gross operating income derived from: (i) asset management, (ii) giving advice on funds/portfolios, and/or (iii) private banking / private wealth management business in 2022; they are required to complete the whole questionnaire accordingly. In case where the licensed corporation did not engage in any of the above activities through the previous year, they are also required to fill in the part of General Information in the questionnaire as well.
SIGNIFICANCE:
The survey is like a full-fledged scrutiny of the AUM structure of the licensed corporation containing the following details:
(1) Total AUM of the company;
(2) AUM sub-contracted to related companies;
(3) AUM managed in / outside Hong Kong;
(4) AUM breakdown by means of asset classes, geographical locations;
(5) AUM sourced from HK, or non-HK investors;
(6) AUM sourced from Mainland China in the form of QDII / other investors;
(7) AUM breakdown by client types, product types.
By compiling the collected information, the SFC will be able to have a clearer picture in depth of the underlying structure and nature of AUMs under management by the existing LCs, as well as their financial soundness to sustain survivability in case a LC has no active AUM under management at all!
2. SFC and CSRC enter into an MoU on regulatory cooperation
A Joint Announcement of the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) was published with an aim to further strengthen cross-boundary regulatory cooperation on matters concerning the listing of Mainland enterprises in Hong Kong, the CSRC and the SFC have agreed to enter into a Memorandum of Understanding (MoU) which will come into effect on 31 March 2023.
SIGNIFICANCE:
The MoU clarifies the arrangements and procedures for share issuance and listing, cross-boundary enforcement, supervision of intermediaries, and exchange of information between the CSRC and the SFC. The MoU will facilitate the CSRC and the SFC in discharging their supervisory functions, jointly combating cross-boundary offences and misconduct, safeguarding the legitimate interests of investors and ensuring the steady and healthy development of both markets.
It should also be noted that the CSRC had announced the《證券經紀業務管理辦法》which took effect on 28 February 2023, providing a more solid regulatory framework on cross-border sales solicitation of local Hong Kong based licensed corporations in Mainland China.
3. SFC consults on proposals to regulate virtual asset trading platforms
The SFC published a Consultation Paper on the proposed regulatory requirements for virtual asset (VA) trading platform operators licensed by the SFC in preparation for the new licensing regime of centralized VA trading platform for trading of non-security tokens.
The key takeaways are:
(i) the Guideline for Virtual Asset Trading Platform Operators (VATP Guidelines) will supersede the previous VATP Terms and Conditions under the SFO;
(ii) SFC’s proposal to allow retail access to Hong Kong licensed VA trading platforms subject to robust investor protection measures as proposed in the VASP Consultation Paper;
(iii) VA trading platform operators should conduct reasonable due diligence on certain tokens to be traded to ensure that they fulfil the token admission criteria and be monitored on an ongoing basis that the token thus traded in the platform continue to fulfil the criteria as required;
(iv) Pre-existing VA trading platforms which would like to be qualified provider must submit a completed license application online under the AMLO VASP regime between 1 June 2023 and 29 February 2024, and to demonstrate that it has the arrangements in place to ensure compliance with the regulatory requirements. For VA trading platforms which do not operate in Hong Kong immediately before 1 June 2023 must not carry on business in Hong Kong unless they have been formally licensed under the AMLO VASP regime;
(v) DUAL Licenses: upon commencement of the AMLO regime in June 2023, the SFC will regulate the trading of security tokens under the existing SFO regime and regulate the trading of VA trading platforms (for non-security tokens) under the AMLO VASP regime. It is suggested that VA trading platforms to be dual licensed under both SFO And AMLO regime in order to ensure a sustainable business operation;
(vi) External assessment report: to streamline the application process, the SFC proposes that VA trading platforms should engage an external assessor to submit a “Phase 1 Report” and a “Phase 2 Report” demonstrating the readiness of the VA trading platform operators before the SFC’s decision to grant a final approval upon satisfaction of the Phase 2 Report findings.
SIGNIFICANCE:
The past 12 months have been a turbulent year for the virtual asset markets, the collapse of the Luna token and Terra stablecoin, along with the subsequent collapse of the FTX, explicitly unveiled the underlying fragility of the regulatory regime of the VA markets.
In the light of these adverse scenarios, most major jurisdictions are aware of the imminent need to take a more pro-actively approach in regulating the VA markets, particularly with the prior concern of protecting investors from engaging in fraudulent or unsound trading platforms.
As advocated by the HKSAR government before of its stern determination to develop Hong Kong as one of the international financial hubs for virtual assets markets, the SFC is keen to launch the AMLO (Amendment) Bill which will be in effect in June, coupled with this consultation on VATP, the HK government is definitely on the right track to be a pioneer in nurturing a full-fledged regulated VA trading environment ahead of other financial centre over the world.
Last but not least, the SFC is actively soliciting views, particularly on whether to allow licensed VA trading platforms to serve retail investors, and subsequently, the necessary measures to be implemented to ensure retail investors are adequately protected.
ENFORCEMENT NEWS
The SFC has reprimanded and fined Jinrui Futures (Hong Kong) Limited (Jinrui Futures) $4.8 million for failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) and other regulatory requirements between April 2015 and June 2018.
Apart from this, the licenses of two responsible officers of Jinrui Futures, namely, Shen Chun and Jiang Xiaoqing, were suspended for 6 months and 5 months respectively.
The SFC’s investigation found that Jinrui Futures, which permitted 258 clients to use customer supplied systems (CSSs) for placing orders during the material time, had failed to conduct adequate due diligence on the CSSs; thus, was not in a proper position to assess and manage the AML-CFT risks with the use of CSSs.
The SFC also found that some of the deposits made into four clients’ accounts were unusual and inconsistent with the clients’ declared net worth, and the subsequent follow-up enquiries were not sufficient to explain the issues.
It was further found that Jinrui Futures had failed to comply with its account opening procedures which require its staff to conduct AML screening on its clients including identifying if the clients were politically exposed persons or under the terrorist sanction list before accounts were approved. Such omissions constituted a breach of the AML-CTF Ordinance, the Guideline on Anti-Money Laundering and Counter-Terrorist Financing and the Code of Conduct.
SIGNIFICANCE:
The underlying potential risk of granting clients the use of CSSs to connect with the BSS of the broker really poses high risks since these CSSs are developed by external system vendors where the brokers do not have sufficient knowledge of how the CSSs actually operate, and the true identities of the underlying users who place orders through the CSS from the clients’ side of the API which cannot be identified or detected, not to mention any due diligence on the users or the CSSs per se. It is the reason why the adoption of CSSs by the clients constitutes substantially high AML risk. The ironic dilemma is that those clients opting for their CSSs are always the dominant clients contributing a substantial portion of the commission incomes to sustain the LCs themselves!
5. SFC bans Chan Wai Chun for life
The SFC has banned Mr Chan Wai Chun, a former customer relationship manager of Dah Sing Bank Limited (DSB), from re-entering the industry for life following his conviction for fraud.
The District Court found that in March 2021, Chan persuaded an elderly customer of DSB to redeem her investment in a fund and reinvest the redeemed amount in another fund to earn higher interest yield. However, Chan never invested in any new fund for the customer even the documents were signed, and instead, later transferred $1,195,000 from the customer’s account to his personal account and used the money to repay his own debts.
Chan is considered by the SFC as not a fit and proper person to be licensed or registered to carry on regulated activities as a result of his criminal conviction.
For more details, please click on the title of the topic above.
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