ComplianceOne Newsletter - July 2024
The topics discussed in this monthly newsletter are as follows:
SFC is to launch new online application and submission system for investment products
SFC sets clear timeline for implementing an uncertificated securities market in Hong Kong
MARKET NEWS
1. Consultation conclusions for legislative proposal to implement regulatory regime for stablecoin issuers in Hong Kong
The Financial Services and the Treasury Bureau (FSTB) and the Hong Kong Monetary Authority (HKMA) jointly issued the consultation conclusions on 17 July 2024 on the legislative proposal to implement a regulatory regime for fiat-referenced stablecoin (FRS) issuers in Hong Kong.
The consultation ended in February with 108 response submissions received; most of the respondents agreed with:
the existing increased prevalence and evolving development of virtual assets (VAs);
the view that a regulatory regime should be introduced for FRS issuers in order to facilitate proper management of potential monetary and financial stability risks, as well as providing transparent and suitable guardrails;
the proposed regulatory requirements and implementation arrangements.
The Secretary for Financial Services and the Treasury, Mr. Christopher HUI, also demonstrated his consent to the view that a licensing regime for FRS issuers will further strengthen the VA regulatory framework in Hong Kong in line with international standards.
The Chief Executive of the HKMA, Mr Eddie Yue also added “we believe that a well-regulated environment is conducive to the sustainable and responsible development of the stablecoin ecosystem in Hong Kong.”
SIGNIFICANCE:
The FSTB and the HKMA will take into account the views and suggestions from respondents in finalising the legislative proposal for implementing the regulatory regime, with a view to introducing a bill into the Legislative Council as soon as possible.
Actually, in early stage on 12 March 2024, the HKMA had announced the launch of the stablecoin issuers sandbox arrangement with parties interested in issuing FRS in Hong Kong, and the applicants have to come up with proposed operations under a sandbox arrangement conducted within a limited scope and in a controllable manner.
2. Enduring strength of Hong Kong as leading international asset and wealth management hub- a SFC survey 2023
On 12 July 2024, an annual survey by the SFC further affirmed the theme of Hong Kong’s position as a premier asset and wealth management hub with a highly-diversified investor base, globalised asset allocation and robust fund inflows.
According to the Asset and Wealth Management Activities Survey 2023 published that date, key findings of the Survey were as follows:
investors outside Mainland China and Hong Kong accounted for 54-56% of total AUM in the past five years;
60% of the assets managed in Hong Kong were allocated to overseas markets;
the number of Type 9 asset management firms increased steadily by 12% to 2161 as of June 2024;
overall AUM grew 2% year-on-year in 2023 to HKD31,193 billion, while net fund inflows surged 342%;
a strong net fund inflow for Hong Kong domiciled SFC-authorized funds with 93% year-on-year growth to HKD87 billion in 2023; with a strong net fund inflow of HKD33 billion in Q1 of 2024!
the AUM of Mainland-related firms’ asset and wealth management business grew 4% to HKD2,676 billion, with net fund inflows increased 16% to HKD153 billion;
the number of registered open-ended fund companies (OFC) surged 118%!
SIGNIFICANCE:
As Ms Christina Choi, the SFC’s Executive Director of Investment Products, had said: “The survey’ s findings underscored the enduring strengths of Hong Kong’ s asset and wealth management industry, particularly the market’ s growing breadth and depth, as well as its resilience in the face of unprecedented challenges and macro headwinds.”
Despite the negative figures of increasing number of securities brokers opting for exit plans to cease business, Hong Kong is undergoing a structural innovation to navigate to other scope of the financial industrial regime, in particular the recent remarkable development in nascent virtual assets and wealth management landscape.
3. SFC is to launch new online application and submission system for investment products
On 8 July 2024, the SFC announced its launch of a new online application and submission system named e-IP for investment products administered by the Investment Product Division (IDP) on 29 July 2024.
The e-IP is developed on the existing WINGS portal that digitalises all processes and serves as a one-stop online platform for e-IP users to facilitate the following procedures: (i) submit new product applications; (ii) proceed with post-authorisation or registration submissions; (iii) track the progress of applications; (iv) maintain information profiles of investment products and (v) settle fee payments.
To start off, e-IP users are advised to activate their e-IP administrator accounts and review the account administration arrangements like account delegation to advisory firms (if applicable), or any permission rights to be assigned.
SIGNIFICANCE:
For market participants to get familiarized with the new system, the launch will be accompanied by a three-month parallel run of the existing application and regulatory submission channels until 29 October 2024. Briefing sessions, user guides and online clips are all available on the SFC website.
4. Financial resources management and compliance with the Securities and Futures (Financial Resources) Rules (FRR)
On 3 July 2024, the SFC published a circular which elaborated on the SFC’s expectations regarding the governance and internal controls standards of licensed corporations (LCs) for monitoring their compliance with the FRR of the SFO.
During its monitoring of LCs’ financial resources adequacy, the SFC has discovered various cases of deficiencies, typical examples were:
(i) inadequate control over the liquid capital monitoring;
(ii) ineffective management oversight; and
(iii) failure to employ competent and qualified staff for calculating and monitoring liquid capital;
(iv) late notification to SFC regarding the deficit of required liquid capital (RLC).
With respect to FRR monitoring, five crucial areas SFC would focus on:
(1) Expected Standards
(a) an LC must at all times maintain liquid capital NOT less than the RLC, and cease operation immediately in case it fails to do so;
(b) an LC should be aware of the internal controls over the FRR compliance as breach of which would lead to sudden cessation of operation and incur adverse impact on its clients’ interests;
(c) as contravention of the FRR would cast doubt on the fitness and competence of the LC to remain licensed; it is of top priority for an LC to identify and ensure certain standards which are the minimum to be observed.
(2) Governance
(a) management oversight: since the ROs and MICs are primarily accountable, it is advised for an LC’s senior management to designate at least one RO or MIC to be responsible for overseeing the compliance of FRR;
(b) competence: the LC should ensure the designated RO or MIC are competent and have the relevant knowledge in complying with FRR requirements;
(c) FRR returns: since the FRR returns of an LC must be signed by its RO or officer approved by the SFC (each a Signer), it is necessary for an LC to produce reliable, up-to-date and accurate financial information to the Commission.
(3) Internal Control Standards
According to internal control guidelines, an LC should implement effective controls for its FRR compliance in areas like:
(a) a maker-checker mechanism for calculation;
(b) effective ongoing monitoring of its RLC status;
(c) maintaining a regular projection of its liquid capital conditions;
(d) any advance alerts when certain thresholds of Excess Liquid Capital (ELC) are triggered.
(e) the frequency of liquid capital monitoring should be commensurate with the operational complexity of an LC
(4) Incident Report and Remedial Measures
(a) in case where an LC is aware of its failure to maintain the RLC, it should notify the SFC in full details of the incidence, the reasons for such occurrence and the immediate remedial measures to mitigate the situation.
(5) Financial Distress Situation
(a) In case where an LC has ceased business operations, it is still subject to all FRR requirements until the license has been revoked by the Commission.
SIGNIFICANCE:
LCs are strongly advised to take a look at the Appendix A where illustrative examples of deficiencies commonly discovered in FRR compliance, and expected standards are delineated in details. The examples also serve as guidelines for the LCs to follow and examine themselves if the same deficiencies in calculations have been adopted before, and to implement remedial measures accordingly in due course.
5. SFC sets clear timeline for implementing an uncertificated securities market in Hong Kong
On 16 July 2024, the SFC released a consultation conclusion on its proposed subsidiary legislation, code and guidelines for implementing an uncertificated securities market (USM) in Hong Kong in the wake of its two consultation papers in March & October 2023 respectively.
In response to market feedback, the SFC now proposed a 5-year timeline as below:
subject to completing the legislative process, the USM regime will be implemented towards the end of 2025;
companies whose laws are compatible with the regime will have to transition to the new regime in batches by the end of 2030;
a more detailed timeline will be set to ensure an orderly transition.
In the interim, the SFC will conduct a separate consultation on the maximum levels of certain USM-related fees, aiming to set upper limits in respect to the three fees charged by share registrars, i.e. transfer fees, dematerialisation fees and the fees charged for setting up a new facility since these fees may be shifted to the investors, thus affecting their participation in the USM.
Under the USM arrangement, the need for manual and paper-based process will be removed, and thus enhancing the operational efficiencies with Hong Kong’s financial market infrastructure. Investors will be able to hold securities in uncertificated form electronically with better protection and convenience.
ENFORCEMENT NEWS
6. HKMA takes disciplinary action against DBS Bank (Hong Kong) Limited for contraventions of the AML-CTF Ordinance
On 5 July 2024, the HKMA announced its disciplinary action against DBC Bank (Hong Kong) Limited (DBSHK) for contraventions of AML-CTF Ordinance, and fined the bank with HKD10 million as pecuniary penalty.
The disciplinary action followed an investigation by the HKMA on DBSHK’s systems
and controls for compliance with the AMLO, key findings of contravention were reported during various periods between 1 April 2012 and 30 April 2019, precisely that DBSHK had failed to:
obtain the copies of the identity document of 609 Authorizers of a corporate internet banking service offered by the bank;
duly complete the trigger event review of customer due diligence (CDD) documents of 23 customer;
identify transactions that have no apparent economic or lawful purpose when there were review alerts generated from its transaction monitoring system, or take any action to examine the background and purpose of these suspicious transactions in respect of 15 customers;
take reasonable measures to establish the source of wealth (SoW) and the source of funds (SoF) of the high-risk customers, or take any additional measures to mitigate the risks of money laundering involved in the business relationship with 15 customers;
establish and maintain effective procedures for purpose of carrying out its “duties to continuously monitor business relationships” with customers under section 5 of Schedule 2 to the AMLO; in particular with respect to the requirements of enhanced due diligence in high-risk situations where it is necessary to establish the principal business activities of customer in particular to SoF and SoW information;
keep records required under section 20(1)(b) of Schedule 2 to the AMLO for a period of at least 5 years on the date on which the business relationship ended.
SIGNIFICANCE:
The AMLO and its relevant guidelines have been made available to all financial institutions, and there is no reason of ignorance or omission if the management team has taken the measures with due care, to implement the measures effectively and conduct reviews as required in order to identify, mitigate and remediate any deficiencies thus discovered.
It could be deducted to the very interactive relationship between the "policies and procedures" per se and the personnel to whom these policies are applied and to be implemented! To foster a culture of compliance and integrity is an indispensable technique to harmonize such interactive relationship.
7. Hedge Fund manager ordered to disgorge HKD5.6 million illicit profits from false trading and disqualified for four years
On 3 July 2024, the Market Misconduct Tribunal (MMT) had ordered Mr Jonathan Dominic Iu Wai Ching (LU), a former responsible officer of Tarascon Capital Management (Hong Kong) Limited (Tarascon), to disgorge illicit profit of over $5.6 million from false trading and disqualified him for four years following legal proceedings brought by the SFC.
In findings of the investigation, on 22 trading days between August and September 2014, LU placed contemporaneous orders in the shares of Sinopharm Tech Holdings Limited and Quantum Thinking Limited through the brokerage accounts of the hedge fund managed by Tarascon and of his mother, leading to opposing orders to be executed against each other. The matched trades artificially created a false appearance of active trading in the listed shares, resulted in gains of HKD5.6 million in the brokerage account of LU’s mother at the expense of the hedge fund.
The MMT has made the following orders against LU precisely as below:
a disqualification order to prohibit him from being a director, effective from 28 June 2024;
LU is banned from dealing in securities, futures contracts, leveraged foreign exchange contracts or CIS in HK for four years, effective from 28 June 2024;
LU is not to engage in any conduct which constitutes market misconduct;
LU is to pay the sum of the amount of profits gained by his market misconduct; and
pay the SFC ‘s investigation costs.
SIGNIFICANCE:
At the material time, LU, who was responsible for managing and making investment decision for the hedge fund, was also a director, the chief investment officer, and a substantial shareholder of Tarascon. So ironical that LU was supposed to be the key management person to safeguard compliance of Tarascon and the hedge fund, and he turned out to be the main culprit to breach the rules he had to uphold by his capacity!
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 WhatsApp us at (852) 95164607.
Unit 1104, 11/F, 299QRC, 287-299 Queen's Road Central, Sheung Wan, Hong Kong
Tel: (852) 39550277 www.complianceone.hk