ComplianceOne Newsletter – Apr 2025
The topics discussed in this monthly newsletter are as follows:
REGULATORY UPDATES
MARKET NEWS
A Revised grant scheme for Open-ended fund companies and Real estate investment trusts
Uncertificated Securities Market Regime to be launched in early 2026
SFC and HKEX co-organise inaugural International Carbon Markets Summit
ENFORCEMENT NEWS
Regulatory Updates
1. The SFC Enforcement Reporter is back in action
In March, the SFC announced that the “Enforcement Reporter” is back in action again. A snapshot of focus on the highlights of the “New Market Scanning Initiative” and the “SFC & AFRC# Joint Statement and Enforcement Actions on Dubious Loans” are as follows.
# Accounting and Financial Reporting Council (AFRC): The independent regulator of the accounting profession.
A. New Market Scanning Initiative
The SFC is of the view that early intervention is the key to prevent governance failures, and the Commission is leveraging the use of artificial intelligence (AI)-empowered analytics to:
(i) identify red flags in listed companies engaged in money-lending activities including: e.g. granting substantial loans with insufficient due diligence and internal control;
(ii) through the adoption of “Market Scanning Detection Model” and to engage with boards and audit committees to highlight key risk areas and governance concern before the issues are worsened.
The goal is to prevent rather than to discipline, the SFC aims to achieve:
(i) Early Intervention to identify, prevent and mitigate.
(ii) Behavioural Change in management culture to take proactive steps to address issues.
(iii) Market Confidence from investors through promoting transparency and accountability.
B. SFC & AFRC Joint Statement and Enforcement Actions on Dubious Loans
It was found that in recent years, corporate executive at listed companies may use loan arrangements to divert corporate funds to related parties which usually lack genuine commercial purpose, and not for interest of the company itself.
In the light of this, the SFC and the AFRC had issued a joint statement in July 2023, signalling to the public their collaboration in addressing the trend in capital market in Hong Kong. The statement highlighted an observed increase in suspected misconduct by listed issuers using dubious loans, some red flags are:
(i) Loans granted without sound commercial rationale.
(ii) Poor Due Diligence with insufficient risk assessments or supporting documentation.
(iii) Weak Internal Controls in managing loan approvals.
The SFC & AFRC had set out some guidelines in addressing the issue of dubious loans with expected standards as below:
(a) Expectation on Management
(i) undergo effective vetting of loans;
(ii) act with duty of good faith;
(iii) ensure proper documentation;
(iv) report material issues timely to the board.
(b) Expectation on Audit Committees
(i) ensure oversight of internal controls;
(ii) ensure accurate financial reporting of the loans in the financial statements;
(iii) engage with auditor to ensure a robust audit on the loans.
(c) Expectation on Auditors
(i) design responsive audit procedures to evaluate the effectiveness of internal controls over the loans granted;
(ii) heighten professional scepticism when come across loans without proper commercial rationale;
(iii) timely report any observed or suspected fraud to the audit committee.
For more details of the highlights in the Reporter, please click Enforcement Reporter Returns.
2. SFC sets out staking guidance for licensed VATPs and authorised VA funds
The SFC provided on 7 April 2025, together with two additional circulars of regulatory guidance, to: (i) licensed virtual asset trading platforms (“VATP”s) on their provision of staking services; (ii) SFC-authorized funds with exposure to virtual assets (“VA Funds”) on their engaging in staking.
“Staking refers to the process of committing or locking client virtual assets for a validator to participate in a blockchain protocol’s validation process based on a proof-of-stake consensus mechanism, with returns generated and distributed for that participation”.
The SFC recognised the potential benefits of staking in enhancing the security of blockchain networks and allowing investors to earn yields on virtual assets within a regulated market environment. The guidelines allow VATPs to expand the product and service offerings which are in line with one of the five pillars (“Products” as one of the Pillar P) set out in the “ASPIRe” roadmap to develop the VA ecosystem in Hong Kong.
In the circular to VATPs, clear guidance is provided to licensed platforms when providing staking services. To further protect investors, VATPs should maintain measures to prevent any errors associated with provision of the services, to safeguard the staked client virtual assets, and ensure proper risks disclosure of staked assets to investors. Also, VATPs interested in providing staking services have to acquire SFC’s prior written approval, and be subject to specific conditions imposed by the SFC. The “Terms and conditions for providing staking services” have already been enclosed as Appendix in the relevant circular for reference to interest parties.
In the revised circular on SFC-authorized VA Funds to facilitate their engagement in staking, these funds are required to stake virtual assets holdings only through SFC-licensed VATPs or authorized institutions, and be subject to a cap to manage the liquidity risk. Also, the VA Funds have to seek prior consultation with and approval of the SFC before engaging in VA-related staking activities.
SIGNIFICANCE:
The perspective of SFC is clear as Ms Julia Leung, the SFC’s CEO, has said, “Broadening the suite of regulated services and products is crucial to sustain the healthy advancement of Hong Kong’ s virtual asset ecosystem”; yet she also added that such mission should be done in a regulated environment to safeguard clients’ interests in virtual assets in order to uphold the compliance framework.
Market News
3. A Revised grant scheme for Open-ended fund companies and Real estate investment trusts
Since the launch of the grant scheme in May 2021, which gained overwhelming industry support for its vision to support the setting up of open-ended fund companies (“OFC”s) and real estate investment trusts (“REIT”s) in Hong Kong, the SFC has recorded a strong growth in the number of OFCs. As of the end-February 2025, the number of OFCs in Hong Kong was recorded with a year-over-year increase of 81% to 502, among which 430 OFCs and one REIT have benefitted from the grant scheme.
In the light of keen industry demand, the Hong Kong Government announced in the 2024-25 Budget with an extension of the grant scheme for another three years to 2027 to facilitate continued development of the industry and adoption of OFC structure in Hong Kong. In order to benefit more participants, the eligibility criteria of the grant scheme have been adjusted. With effect from 11 April 2025, for OFCs incorporated in or re-domiciled to Hong Kong and any SFC-authorized REITS newly listed on the Stock Exchange of Hong Kong Limited, they will be subject to the following criteria under the “adjusted” grant scheme (the “New Scheme”):
The New Scheme will cover 70% of eligible expenses paid to HK-based service providers with a cap of HKD300,000 for a public OFC (down from HKD1 million before), HKD150,000 for a private OFC (down from HKD500,000) and HKD5 million (down from HKD8 million) for a REIT, with a maximum of one OFC per investment manager. Details of the eligibility criteria of the New Scheme are set out in the Attachment under the circular.
SIGNIFICANCE:
It should be noted that a “first-come-first-served” basis is adopted by the grant scheme, and the scheme will expire when the funding is fully disbursed or in May 2027, whichever is earlier. Upon full utilisation of the funding, an applicant may not receive a grant at all or may only receive less than the original eligible grant amount. Despite reduction in subsidies, the scheme undoubtedly continues to help sustain the momentum of the development of the OFC and REIT regimes in Hong Kong.
4. Uncertificated Securities Market Regime to be launched in early 2026
The SFC is pleased to announce the enactment of all necessary legislation to get readiness for implementation of the uncertificated securities market initiative (“USM”) in early 2026.
From recent consultations during previous years, the SFC found that the launch of USM gained wide support from market participants and investors as the USM not only increases efficiency in the securities market and also provides better protection and trading convenience to investors.
A dedicated USM webpage is introduced to provide one-stop access to all useful information with FAQs for illustrations.
Among the key changes under USM are:
(i) for newly listed securities , they will have to be in paperless form upon listing, securities in paper form are no longer available to investors;
(ii) for existing securities, paper certificates will not be invalidated. Yet, each issuer has to take steps to ensure investors can hold and transfer the securities in their own names without paper before a specific deadline after which the issuers will no longer be able to issue new paper certificates.
The SFC is working with Hong Kong Exchanges and Clearing Limited (“HKEX”) and the Federation of Share Registrars Limited (“Federation of Share Registrars”) on a detailed five-year implementation timetable which will cover around 2,500 issuers from Hong Kong, Mainland China, Bermuda and Cayman Islands for a gradual participation in the USM scheme.
SIGNIFICANCE:
The USM provides an efficient means for investors to hold and manage securities in their own names electronically, using platforms that are operated by approved securities registrars and connected to systems of Hong Kong Securities Clearing Company Limited (“HKSCC”). Precisely, under the USM:
(i) investors hold legal title to securities but in uncertificated form;
(ii) investors enjoy full shareholder rights directly and can transfer and manage their securities electronically online;
(iii) enables a faster and more efficient processing, effecting of transfers as quickly as within the same business day;
(iv) this option is available to all investors, regardless of how they currently hold their securities.
5. SFC and HKEX co-organise inaugural International Carbon Markets Summit
The SFC and HKEX co-organized the inaugural International Carbon Markets Summit in Hong Kong, signalling as a pioneer in hosting this kind of Summit in Hong Kong.
More than 200 participants with representatives from local and overseas regulators, carbon trading venues, corporates and investors attended the forum.
Key takeaways in discussion are:
(i) the challenges in scaling global voluntary carbon markets;
(ii) expansion of cross-border carbon transactions;
(iii) the role of technology in facilitating linkages.
Below is a concluding highlight from Ms. Julia Leung, the SFC’s CEO:
“Today marks the start of a collaborative effort where stakeholders across the carbon market ecosystem come together to discuss the scaling of voluntary carbon markets. Adhering to best practices and international principles is fundamental to building a harmonized, credible and transparent carbon market ecosystem.”
Enforcement News
6. Interactive Brokers Hong Kong is Fined HK$4.2 Million for mishandling of Client Assets
SFC has reprimanded and fined Interactive Brokers Hong Kong Limited (“IBHK”) HK$4.2 million for regulatory breaches in relation to the handling of client assets.
Key Findings
Between December 2017 and October 2020, IBHK loaned client securities worth approximately HK$586 billion without valid standing authorities, affecting 7,911 clients. The issue arose due to a programming error that prevented the distribution of renewal notices for Client Securities Standing Authority (“SLOA”) documents, which are required to remain valid for no more than 12 months under the Securities and Futures (Client Securities) Rules (“CSR”).
IBHK's system was designed to send renewal notices to clients to extend the validity of SLOAs. However, a staff error in December 2017 left updated notice templates inactive, halting their distribution. As a result, IBHK relied on expired authorities to lend securities listed on the Stock Exchange of Hong Kong (“SEHK”) under a securities borrowing and lending agreement.
Remedial Actions
Upon discovering the error on 27 October 2020, IBHK promptly activated the revised templates and obtained updated standing authorities from clients by Q2 2021. Further remedial actions included:
Distributing renewal notices every 11 months to ensure timely renewals.
Removing expired or deactivated templates to prevent future errors.
Enhancing its compliance assurance program to ensure accurate and timely notice distribution.
IBHK confirmed that no clients suffered financial losses due to the incident.
SFC's Decision
SFC considered IBHK’s self-reporting, remedial efforts, cooperation, and the absence of deliberate misconduct or client harm in determining the sanction. The fine and reprimand underscore the importance of robust compliance systems to protect client assets and adhere to regulatory standards.
SIGNIFICANCE:
This enforcement action serves as a reminder for licensed entities to maintain rigorous internal controls and ensure compliance with client asset protection rules. The SFC continues to prioritize investor protection and market integrity through vigilant oversight.
For more details, please refer to the Statement of Disciplinary Action from the SFC.
7. SFC Takes Disciplinary Action Against CSC Futures and Former Executive for Inadequate Due Diligence on Customer Supplied Systems
SFC has taken disciplinary action against CSC Futures (HK) Limited and its former responsible officer, Mr. KAO Cheng Yung, for compliance failures occurring between January 2017 and December 2018. These failures were attributed to Mr. KAO’s inability to effectively discharge his duties as a responsible officer and member of senior management.
Key Findings
The compliance issues centred on two key areas: inadequate due diligence on customer supplied systems (“CSSs”) and insufficient monitoring of client accounts for suspicious activities.
1. Customer Supplied Systems: CSC permitted 100 clients to use their own trading software without proper oversight. Specific shortcomings included:
Allowing CSSs, such as Xinguanjia, which enabled sub-accounts, potentially facilitating unlicensed trading and increasing money laundering risks.
Conducting only compatibility checks, neglecting to assess the software’s features or associated risks.
2. Client Account Monitoring: CSC also failed to implement an effective system to detect suspicious activities in client accounts. Notable lapses were:
Lacking procedures to ensure deposits aligned with clients’ declared financial profiles.
Failing to investigate suspicious deposits in five client accounts that were disproportionate to their declared financial situations.
SFC's Decision
As a result, SFC has imposed a six-month prohibition on Mr. KAO from engaging in regulated activities, effective from 19 April 2025 to 18 October 2025, and fined CSC Futures $4.95 million. In determining these sanctions, the SFC weighed the seriousness of the failures against Mr. KAO’s otherwise clean disciplinary record.
SIGNIFICANCE:
The SFC concluded that these failures breached the Code of Conduct and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, demonstrating a lack of due skill, care, and diligence, as well as inadequate internal controls.
This enforcement action emphasizes the vital role of robust compliance systems in preventing financial crimes and upholding the integrity of Hong Kong’s financial markets.
For more details, please refer to the Statement of Disciplinary Action from the SFC.
[End of ComplianceOne Newsletter –April 2025]
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