ComplianceOne Newsletter – July 2022
ComplianceOne Newsletter – July 2022
The topics discussed in this monthly newsletter are as follows:
1. Publication of the latest Hong Kong’ Money Laundering and Terrorist Financing (“ML/TF”) Risk Assessment Report by the HKSAR Government (“the Report”)
2. Joint Announcement of the People’s Bank of China (“PBC”), the Hong Kong Securities and Futures Commission (“SFC”) and the Hong Kong Monetary Authority (“HKMA”) with regard to SWAP CONNECT
3. Hong Kong’s asset and wealth management business remained resilient in 2021
4. SFC reprimands and fines RBC Investment Services (Asia) Limited $7.7 million for mishandling client assets
5. SFC reprimands and fines Rifa Futures Limited $9 million for regulatory breaches
6. SFC reprimands and fines KTF Capital Management Limited $400,000 for breaching Financial Resources Rules
MARKET NEWS
1. Publication of the ML/TF Risk Assessment Report
The Hong Kong Government published the Report in July 2022 which examines the ML/TF threats and vulnerability facing various sectors in Hong Kong as well as the risk of proliferation financing in the city.
The assessment concludes the ML risk of the securities sector remains at medium level, taking into account the ML threat and vulnerability levels for the securities sector which are both assessed to remain at medium level. It is noted that securities sector continues to be exposed to transnational, cross-border as well as domestic ML threats, in particular with the overflow of social media investment scams recently.
In the light of this, the SFC has strengthened its risk-based AML/CFT supervision which enables the monitoring of a licensed corporation’s AML/CFT compliance in a more risk-sensitive and effective manner.
Significance:
The increased risk in ML/TF is obvious as exemplified by the increase in enforcement news of licensed corporations being sanctioned for failure to comply with the KYC , AML/CFT lately.
On the contrary, licensed corporations are also confronted with the difficulties in identifying and certifying the sources of funds and nature of business of their clients, especially those originated across the border.
2. Joint Announcement between PBC, SFC and HKMA with regard to SWAP CONNECT
To promote the development of financial derivatives markets in both Mainland China and Hong Kong, a joint announcement has been made that both will collaborate to develop mutual access between the Hong Kong and Mainland interest rate swap markets (Swap Connect). Details are as follows:
(1) Swap Connect refers to an arrangement which will enable investors to participate in the financial derivatives markets in the Mainland and Hong Kong through a connection between Infrastructure Institutions in both places. At the initial stage, Northbound Trading will commence first.
(2) Swap Connect is another important measure of the Central Government to support the development of Hong Kong and enhance Mainland-Hong Kong cooperation.
(3) Swap Connect is subject to the relevant laws and regulations of both markets.
(4) The regulators of the financial derivatives markets agreed to establish effective mechanisms under Swap Connect to handle any misconduct in a timely manner for the purpose of investor protection on both sides.
(5) Hong Kong and Mainland Infrastructure Institutions should actively take forward the development work for Swap Connect in an orderly manner and with prudent risk management
(6) The official launch of Swap Connect will take place after six months from the date of this announcement in July 2022
Significance:
The SWAP Connect , together with the ETF Connect, demonstrate the determination of the Mainland Government to open up China’s interest rates derivative market to overseas investors; with the interest rate swap (“IRS”) accessible to foreign investors, it provides a hedging tool to the bond markets in Mainland China amid the anticipation of interest rate hikes in the global markets, and further helps increase the attractiveness of the bonds actively traded in China.
To conclude, the new mutual access mechanism will argument the role of Hong Kong as an international financial hub and as a bridge between China and the outside world.
3. Hong Kong’s asset and wealth management business remained resilient in 2021
A survey published today by the SFC found that the asset and wealth management business in Hong Kong recorded a 2% year-on-year increase in assets under management (AUM) to $35,546 billion (US$4,558 billion) at the end of 2021 with net fund inflows reaching $2,152 billion (US$277 billion), up 6% from 2020. The AUM of the asset management and fund advisory business conducted by licensed corporations and registered institutions increased 8% to $25,888 billion (US$3,320 billion).
“The survey findings underscore the core strengths of the asset and wealth management industry in the fast-changing, challenging environment; and the SFC will continue to support the development of Hong Kong as a premier global asset and wealth management center and preferred fund domicile”, as said by Ms. Christina Choi, the SFC Executive Director of Investment Products.
Significance:
There are also other highlights of the survey which include:
i Assets held under trusts increased 5% to $4,719 billion (US$605 billion).
ii The AUM of the private banking and private wealth management business decreased 6% to HKD10,583 billion (USHKD1,357 billion).
iii Non-Hong Kong investors remained a major source of funding for the asset and wealth management business, accounting for 65% of AUM.
iv The total number of staff in the asset and wealth management business increased 12% to 54,003.
ENFORCEMENT NEWS
4. SFC reprimands and fines RBC Investment Services (Asia) Limited
The RBC Investment Services (Asia) Limited (RBC) was fined by the SFC an amount of $7.7 million for regulatory breaches relating to mishandling of client assets.
It was found in an investigation that between January 2018 and August 2020, RBC had failed to segregate client money as required under the Securities and Futures (Client Money) Rules (Client Money Rules) on 86 occasions; and further that between 3 December 2012 and 26 March 2020, RBC had breached the Rules again by transferring securities from 65 client accounts held by non-professional investor clients to SEHK Options Clearing House Limited as collateral without valid standing authority.
Significance:
It expressly demonstrates the prior importance of upholding the segregation of client money and the indispensable necessity to obtain standing authority from the clients whenever the licensed corporations are executing any kind of transfer of client money where protection of it is of paramount importance in the eyes of SFC.
5. SFC reprimands and fines Rifa Futures Limited $9 million for AML/CFT breaches
The Securities and Futures Commission (SFC) has reprimanded and fined Rifa Futures Limited (Rifa) $9 million for failures in complying with know-your-client, anti-money laundering and counter-terrorist financing (AML/CFT) and other regulatory requirements between May 2016 and October 2018.
The SFC’s investigation found that Rifa, which permitted 310 clients to use client supplied systems (CSSs) for placing orders, had failed to conduct adequate due diligence on the CSSs. Also, Rifa had failed to implement two-factor authentication (2FA) for clients to login to their internet trading accounts via CSSs
It was further found that Rifa failed to conduct adequate ongoing monitoring of clients’ fund movements to ensure they were consistent with the clients’ nature of business, risk profile and source of fund. The SFC is of the view that Rifa’s conduct was in breach of the AML/CFT Ordinance.
Significance:
A couple of licensed corporations ("LC") had been fined by the SFC before for the same reasons of allowing their clients to use the CSS where the LCs had no effective measures to monitor, and thus provide loopholes for the possibilities of breaching the AML/CFT ordinance.
The SFC has reprimanded and fined KTF Capital Management Limited (KTFCM) $400,000 for failures to comply with the Securities and Futures (Financial Resources) Rules (FRR).
The SFC found that KTFCM failed to:-
ii maintain its required liquid capital of approximately $2.8 million between 13 and 18 December 2018, and
iii notify the SFC when it became aware of its inability to comply with the financial resources requirements;
iv anticipate its proprietary trading in shares would trigger adverse implications to its liquid capital calculation under the FRR.
The SFC is of the view that KTFCM’s conduct was in breach of the Code of Conduct.
Significance:
As a licensed corporation ("LC"), the maintenance of liquid capital at all times should always be in the mind of the responsible officers and the key finance personnel who serve as safeguard to uphold this benchmark. The deployment of competent personnel to take on various functions is also "second to none" in ensuring a certain level of compliance for a LC