ComplianceOne Newsletter – January 2023
ComplianceOne Newsletter – January 2023
The topics discussed in this monthly newsletter are as follows:
1. FUTU and TIGER were ordered by the China Securities Regulatory Commission (CSRC) to rectify their cross-border "illegal operations”;
2. "AML-CTF (Amendment) Ordinance 2022" will take effect on 1 June 2023;
3. HKEX Publishes "Review of Issuers’ Annual Reports - 2022";
4. HKIDR will be launched shortly on 20 March 2023; and
5. SFAT affirms SFC decision to fine Cardinalasia Consulting Limited $1.5 million for failures in managing private fund.
MARKET NEWS
1. FUTU and TIGER were ordered by the China Securities Regulatory Commission (CSRC) to rectify their cross-border "illegal operations"
At the end of 2022, the CSRC made an announcement making it explicit that the activities conducted by the two firms, namely Futu Securities International (Hong Kong) Limited (“FUTU”) and Tiger Brokers (HK) Global Limited (“TIGER”), have been construed as engaging in illegal securities business without proper license in China.
Though licensed in Hong Kong under the SFC, FUTU and TIGER are considered as conducting regulated activities in securities across the border in China (i.e. cross-border online brokerage) without acquiring approval from the CSRC. Both FUTU and TIGER had been reprimanded by the CSRC as having involved some sort of "cross-border regulatory arbitrage (跨境監管套利)", which means taking advantage of the great difference in political and regulatory systems between two regions by engaging in a less stringent regulatory regime and thus circumventing the onerous documentation process in the stringent regime in another region.
SIGNIFICANCE:
The regulatory measures taken by the CSRC seems like playing an art of reconciliation by deploying a “有效遏制增量，有序化解存量” towards FUTU and TIGER ; instead of an “once-off ban for all”, a more pragmatic approach, has been adopted. In essence, it means the followings:
(1) The two firms are not allowed to accept new customers and new accounts as these activities have been construed as conducting unlicensed regulated activities;
(2) Both FUTU and TIGER can continue to serve the existing accounts on condition that no additional funds can be accepted which may constitute a breach of the foreign exchange restriction, which is implemented to prevent an outflow of funds from the country, imposed by the Chinese Government.
2. "AML-CTF (Amendment) Ordinance 2022" will take effect on 1 June 2023
The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022 (the Amendment Ordinance) will take effect on 1 June 2023.
Apart from the introduction of new licensing regime, namely the Virtual Asset Service Providers (VASP), which deserves attention to brokers who are currently involved in virtual assets trading; there are other AML-CFT amendments which cannot be missed out as well. The key takeaways are as follows:
(1) Under the Amendment Ordinance, Politically exposed person (PEP) is re-defined as "an individual who is or has been entrusted with a prominent public function in a place outside the People’s Republic of China Hong Kong”.
(2) Former politically exposed person (former PEP), which means “an individual who, being a politically exposed person, has been but is not currently entrusted with a prominent public function in a place outside Hong Kong”, is introduced. With such amendment in place, the licensed corporations can be exempted from taking special requirements or additional measures in relation to a former PEP who happens to be a client onboarded. Instead, a risk-based approach can be adopted.
(3) The use of a recognized digital identification system (“RDIS”) is allowed in situations where a customer is not physically present for identification purposes (i.e., non-face-to-face). If the Customer Due Diligence (CDD) requirements are met using reliable and independent digital identification systems, the Enhanced Due Diligence (CDD) requirements can be exempted.
SIGNIFICANCE:
With the amendment of definition of PEP, the special requirements apply not only to a PEP from a place outside “the People’s Republic of China” but also a PEP from a place “outside Hong Kong”.
And with the new definition of former PEP, there is no longer a “once a PEP, always a PEP” scenario. Licensed corporations have the flexibilities to adopt a risk-based approach provided that there is sufficient assessment to justify that the former PEP no longer poses a high AML risk as before.
The Amendment merely defines RDIS as "a digital identification system that is a reliable and independent source that is recognized by the relevant authority”. However, no specific example or further detail has been provided in the Amendment.
3. HKEX Publishes Results of Review of Issures’ 2021 Annual Reports
On 20th January 2023, the Hong Kong Exchanges and Clearing Limited (HKEX) published a report on the findings and recommendations in its Review of Issuers’ Annual Reports – 2022 (the “Report”).
The Listing Division of the Exchange undertakes an on-going programme to review issuers’ annual reports as part of its monitoring activities. In the review, HKEX considered the actions taken by the issuers and their directors to safeguard company’s assets, and whether material information was disclosed to allow shareholders to properly assess the relevant matters reported on. HKEX also assessed issuers’ compliance with the Listing Rules and specific accounting standards in financial statements. In addition, HKEX also reviewed issuers’ compliance with annual report disclosure requirements under the Listing Rules.
According to the Report, most issuers continued to achieve a high rate of compliance with annual report disclosure requirements with only a few issuers did not adequately substantiate the fairness of asset reported values (including loan receivables) due to deficiencies in their financial reporting, risk management and internal controls.
HKEX also identified areas of improvement in some issuers’ disclosure of their material loan receivables and has made the following recommendations to issuers:
(1) Financial reporting and related controls – deploy adequate resources to maintain risk management and internal controls, with special regard to the accounting estimates and the reasonableness of the assumptions behind.
(2) Material lending transactions – critically assess the commercial rationale, whether their terms are fair and reasonable, and whether the use of funds is in the interests of the issuer and its shareholders.
(3) Financial statement disclosure under accounting standards – maintain good communications with auditors on emerging issues identified during the audit, and take prompt actions to address auditors’ concerns.
4. HKIDR will be launched shortly on 20 March 2023
With reference to the Circular dated 12 December 2022, Relevant Regulated Intermediaries (RRIs) have to get themselves ready for launch of the HKIDR on 20 March 2023. RRIs are reminded to submit the BCAN-CID Mapping File that contains Broker-to-Client Assigned Number (BCAN) and client identification data (CID) of their clients to the SEHK effective 19 December 2022.
RRIs are strongly advised now to ensure that they can login via the SEHK’s Electronic Communication Platform (ECP) web interface and / or the ECP (SFTP) interface, and submit the BCAN-CID Mapping Files as soon as possible so as to allow the SEHK with sufficient time to verify the data and rectify any error discovered during the file submission process
For compliance with the applicable data privacy ordinance, RRIs should have obtained the necessary consent from the individual clients before submitting their BCAN and CID to SEHK.
SIGNIFICANCE:Once again, the prioritized aim of the introduction of BCAN and HKIDR is to enhance the effectiveness of market surveillance by improving the transparency of the identity behind who initiates an order to the market, and reduce the investigation and execution costs of regulatory institutions.
ENFORCEMENT NEWS
5. SFAT affirms SFC decision to fine Cardinalasia $1.5 million for failures in managing private funds
The Securities and Futures Commission (SFC) has reprimanded and fined Cardinalasia Consulting Limited (CCL) $1.5 million over its failures in acting as a principal investment adviser to five private funds between August 2014 and October 2017. The licence of CCL’s responsible officer, Mr Edward Lee Shiu Lun, has also been suspended for nine months.
The Securities and Futures Appeals Tribunal (SFAT) imposed a heavier penalty than proposed by the SFC, as the SFAT’s chairman the Hon Justice Hartmann said: “The clear importance of an investment adviser in protecting the interests of investors lies in the simple, single fact that the person so appointed acts in an independent way”, even the advice is contrary to that of the investment managers.
Also, the SFC’s Executive Director of Enforcement, Mr Christopher Wilson, has said: “This case serves as a timely reminder to fund managers and advisers of the high standards of conduct the SFC expects of them”; and “the SFC is determined to crack down on asset management misconduct and will impose harsher penalties going forward to deter such misconduct.”
SIGNIFICANCE:
The message delivered from the regulator is explicit that “the role of an investment adviser is a role of real substance” which seems to be perceived as a lesser role in conventional practice.
The investment advisor should always uphold its independent role in giving advice even that advice is not in line with those higher in the delegated chain of management.
For more details, please click on the title of the topic above.
=================================
~ Make It Right Today, Better Tomorrow ~
=================================
The Newsletter is for general information purpose only and is not intended to constitute legal or other professional advice.
For enquiries, please email to support@complianceone.hk or call us at (852) 39550277.
Unit 1104, 11/F, 299QRC, 287-299 Queen's Road Central, Sheung Wan, Hong Kong
Tel: (852) 39550277 www.complianceone.hk
To unsubscribe, please simply reply with “I don’t like to know more about Compliance”.