ComplianceOne Newsletter - January 2024
The topics discussed in this monthly newsletter are as follows:
1. New TV drama “SFC in actions” highlights SFC’s enforcement work
2. SFC sets out three-year Strategic Priorities
MARKET NEWS
1.New TV drama “SFC in Action" highlights SFC’s enforcement work
On 10 Jan 2024, the SFC announced that it had teamed up with Radio Television Hong Kong (RTHK) to produce a new series of “SFC in Action (證義搜查線之騙局拼圖)”, a law-enforcement TV drama premiering on RTHK TV 31 starting 11 January 2024. Consisting of four half-hour episodes in Cantonese, the series recounts the SFC’s major enforcement cases in recent years, focusing on social media investment scams, ramp and dump schemes, insider dealing and market manipulation. It reveals the modus operandi of wrongdoers in the financial markets today and helps to alert the public to act with caution when making investment decisions.
The true-to-life TV drama is the fourth series since 2010 to illustrate to the public prevalent investment scams and other market misconduct, to help them to avoid falling victim to these scams. As Ms Julia Leung, the SFC’s Chief Executive Officer, had said: “Our market evolves with the times and technological advances, but the fundamental nature of investment scams and misconduct has not changed.”
After the premiere on RTHK TV 31, all four episodes can also be viewed on the SFC’s YouTube channel (Chinese version only).
SIGNIFICANCE:
As Mr. Christopher Wilson, the SFC’s Executive Director of Enforcement, said: “Through action-packed dramatization of enforcement cases, the series delivers a clear message to the market and the public by showcasing the SFC’s relentless pursuit of wrongdoers and their misconduct.” Moreover, by bringing these cases to life through TV and YouTube channels which are more accessible to the public at large, it helps bridge the gap between complex fraudulent schemes and ordinary experiences of the public, and ultimately attaining the aim of enhancing public alertness to these fraudulent activities.
2. SFC sets out three-year Strategic Priorities
In a circular dated 23 Jan 2024, the SFC releases its three-year Strategic Priorities for 2024-2026, setting out its approach to developing Hong Kong’s securities markets, addressing risks and protecting investors.
Making clear that the SFC is committed to continuing to facilitate market development as well as safeguarding the integrity and quality of the Hong Kong markets, in the coming three years, the SFC will strive to:
Maintain market resilience and mitigating serious harm to our markets;
Enhance the global competitiveness and appeal of the Hong Kong capital markets;
Lead financial market transformation through technology and ESG; and
Enhance institutional resilience and operational efficiency.
Mr Tim Lui, the SFC’s Chairman, said: “With this roadmap, the Commission is now better placed than ever to respond robustly and creatively to new regulatory challenges at home and abroad and to shape market developments. In particular, we are committed to playing an even more active part in further strengthening Hong Kong’s unique role as a gateway to the Mainland and positioning the city as an offshore hub for RMB businesses and risk management, as well as supporting national development and safeguarding financial security.”
Ms Julia Leung, the SFC’s Chief Executive Officer, said: “The Commission would be on a stronger footing to keep investors out of harm’s way and bring wrongdoers to justice when financial crimes nowadays come in any shape and form, as well as to bring the full range of resources and tools at its disposal to achieve positive regulatory outcomes.”
SIGNIFICANCE:
The statements from seniors of the SFC can be conceived of its duo purposes of determination to develop the financial edges of Hong Kong being in vicinity to Mainland China while enforcing the regulatory side of combating the complex financial fraudulent malpractices and bringing wrongdoers to justice.
3. SFC will commence circularisation exercise and internal control review on selected securities brokers
The SFC announced in the circular dated 23 Jan 2024 that it will commence in February 2024 a circularisation exercise on clients’ accounts of selected securities brokers and an internal control review of these brokers’ safeguarding of client assets (collectively the “Exercise”). The SFC has engaged KPMG Advisory (Hong Kong) Limited (KPMG) to assist with the Exercise, which includes obtaining direct written confirmation from selected clients.
Some Key Takeaways:
Client Asset Protection
Client asset protection is always a top priority of the SFC in supervising licensed corporations (LCs). The SFC also conducts regular circularisation exercises such that both the SFC and brokers’ management could obtain direct confirmations from clients on their account positions and identify any potential misconduct such as unauthorised trading and misappropriation of client assets.
Circularisation exercise
To facilitate the conduct of the circularisation exercise, brokers are reminded to ensure that their clients’ personal information is accurate and up-to-date, including clients’ identities and contact details, clients’ account positions and balances, and finally the clients have to sign and return their replies directly to KPMG.
Internal control review
The review will cover brokers’ internal control systems that are designed to protect client assets, such as their controls over client information maintenance, clients’ money and securities reconciliation, as well as the distribution of account statements and trade documents. Moreover, brokers’ compliance with the expected regulatory standards will also be assessed with reference to the following SFC circulars:
Review of internal controls for the protection of client assets and supervision of account executives and a self-assessment checklist issued on 19 December 2018;
Third-party deposits and payments issued on 31 May 2019;
Operation of bank accounts issued on 28 June 2021; and
Managing the risks of business email compromise issued on 24 March 2022.
SIGNIFICANCE:
Brokers are expected to have effective and robust controls in place to protect client assets. Where appropriate, the SFC may share the findings of the Exercise with the industry.
The previous time the SFC conducted similar exercises was in 2017, it will be a good time after a couple of years to assess if the brokers have taken substantial remedial measures in the interim to ensure compliance with the circulars given the deficiencies observed in the industry. Responsible Officers should make reference to these circulars again and have a self-assessment of the internal controls if they are implemented to the standards expected of the SFC.
4. SFC issues guidance to eligible licensed corporations on participation in Wealth Management Connect scheme
The SFC issued a circular on 24 Jan 2024 setting out the eligibility criteria and guidance for licensed corporations (LCs) to participate in the Cross-boundary Wealth Management Connect Pilot Scheme (跨境理財通) (WMC Scheme) in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).
Eligible brokers’ participation in the WMC Scheme was made possible by the revised Implementation Arrangements published the same date by the People’s Bank of China for the Cross-boundary WMC Pilot Scheme in the GBA (Implementation Rules). In the other revised arrangements, the individual investment quota is increased to RMB 3 million while the product scope is expanded to include funds with higher risk ratings. The revised Implementation Rules will take effect on 26 February 2024.
LCs interested in participating in the WMC Scheme should submit applications to the SFC in the form as a business plan with a self-assessment report certified by their Manager-in-Charge (MIC) – Overall Management Oversight, MIC – Compliance and head of internal audit function, to demonstrate its operational readiness. Precisely, the LCs should have:
(i) been licensed for Type 1 regulated activity,
(ii) paid-up capital and shareholders’ funds of not less than HK$100 million,
(iii) at least three years of experience in distributing funds and/or bonds,
(iv) transaction volume of not less than HK$500 million during any 12-month period in the past three years,
(v) adequate systems of control, and
(vi) partner with one or more eligible Mainland broker when providing services under the WMC Scheme.
SIGNIFICANCE:
The view of the SFC is positive and optimistic as Ms. Julia Leung, Chief Executive Officer of the SFC, said “The enhancements mark a major milestone in the expansion of the WMC Scheme to deepen and broaden Hong Kong’s financial integration with the Greater Bay Area.” And she further added that “eligible brokers’ participation in the Scheme does not only open up new opportunities to the industry, but also broaden the reach of the Scheme to new customer base.”
Interested LCs should note that they may only conduct business activities under the Southbound Scheme, the Northbound Scheme or both upon receiving the no objection notification from the SFC after submission of the business plan and a self-assessment report. To assist the LCs, the SFC has made it clear that interested LCs are encouraged to notify and discuss their business plan with their case officer in the SFC in advance should they wish to participate in the Cross-Boundary WMC.
ENFORCEMENT NEWS
5. SFC suspends Andy Wong Yeung for 10 months for failure in due diligence in CSS
In an announcement on 9 January 2024, the SFC had suspended Mr Andy Wong Yeung, former responsible officer (RO), manager-in-charge (MIC) of key business line and overall management oversight and director of City International Futures (Hong Kong) Limited (CIFHKL), for 10 months from 9 January 2024 to 8 November 2024.
The disciplinary action follows the SFC’s sanctions against CIFHKL for its failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) and other regulatory requirements between March 2016 and October 2018. The SFC considers that CIFHKL’s failures were attributable to Wong’s failure to discharge his duties as an RO and a member of the senior management of CIFHKL during the material time.
The SFC’s investigation found that CIFHKL, without conducting adequate due diligence, was unable to properly assess and manage the AML/CTF and other risks associated with permitting its clients to use client supplied systems (CSSs) in placing orders. The SFC also found that CIFHKL failed to conduct proper enquiries on client deposits which were incommensurate with the clients’ declared financial profiles and establish effective ongoing monitoring system to detect and assess suspicious trading patterns in client accounts.
SIGNIFICANCE:
The case reiterates the severe and potential regulatory risks in allowing the use of CSS from the client side where proper due diligence cannot be executed to ensure a satisfactory compliance standard!
It can also be observed that cases of this category were always associated with client deposits were incommensurate with the clients’ declared wealth status which posed high AML/CTF risks to the LCs.
For more details, please click on the title of the topic above.
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