SFC licensing and compliance hints – Jul 2014

Financial Resources Rules aka “Forever Revolving Review”: Compliance with the FRR Rules is important: this is one of the key areas the SFC assesses to determine whether a company is fit and proper to be granted, and to retain, a licence.

Some clients outsource FRR monitoring, and the preparation of the returns, to group companies or external service providers. Such arrangements are perfectly fine provided the outsourcee is familiar with the requirements of the FRR Rules. The Rules differ significantly from requirements in other jurisdictions, so whoever is handling FRR monitoring needs to consider the specific requirements of the Rules.

FRR compliance is not just an accounting or finance matter and is not just about having an RO sign and submit the returns to the SFC: it requires continuous monitoring in relation to the specific requirements. This is especially important when a company decides to expand its business operations or take on a significant client. Management needs to work with the team handling FRR monitoring to do an FRR impact assessment prior to absorbing any such business opportunity. A new business or client might trigger a provision in the FRR Rules that did not previously apply to the company, which can cause a significant drop in the company’s liquid capital position.

Conducting FRR impact assessments can give a company sufficient time to take appropriate action to ensure that the new business opportunity can be absorbed whilst meeting the liquid capital requirement, thus avoiding FRR related notifications to the SFC.

Another SFC enforcement case regarding false or misleading information: Demonstrating again the importance to the SFC of having sufficient liquid capital, a director of an ex-licensed corporation was fined in May 2014 (almost two years after the company ceased to be licensed) for the provision of false information to the SFC in two licensing applications. The director (also a shareholder in the company) had stated that the licensed corporation satisfied the FRR minimum capital requirements by virtue of him having placed money into the licensed corporation’s bank account. He transferred the money out shortly afterwards. The SFC has said, “We will not tolerate any window-dressing activities aiming to circumvent the FRR”.