HSBC Securities Brokers (Asia) Limited reprimanded and fined $5 million for providing inaccurate information in licence application

On 19 December 2013, the SFC reprimanded HSBC Securities Brokers (Asia) Limited (HSBC Securities), a wholly owned subsidiary of The Hongkong and Shanghai Banking Corporation Limited (HSBC), and fined it $5 million, for providing inaccurate information to the SFC during a licence application, pursuant to section 194 of the Securities and Futures Ordinance (Cap. 571).

In May 2010, HSBC Securities submitted a licence application to the SFC, to carry on business in Type 7 (providing automated trading services) regulated activity, for its provision of matching and crossing services in Hong Kong (Crossing Service). In the application, HSBC Securities represented that existing clients would be given the option to opt in, by signing a letter to acknowledge that they wished to participate in the Crossing Service. The SFC granted HSBC Securities a Type 7 licence in March 2011.

However, in July 2011, it was reported in the media that HSBC proposed to launch the Crossing Service to its retail clients and that HSBC would adopt an opt out approach, namely clients would be assumed to have consented to their trades being matched and crossed on the Crossing Service, unless they notified HSBC to the contrary. This was contrary to HSBC Securities' representations made during its licence application that clients would be given the option to opt in.

The SFC's investigation found that:

1. A preliminary decision by HSBC to adopt the opt out rather than opt in approach for retail clients was made in mid-October 2010, but due to internal miscommunication, when the SFC specifically queried this with HSBC Securities in November 2010, HSBC Securities misrepresented to the SFC that the opt in approach would be adopted.
2. In December 2010 (well before the SFC had granted the licence to HSBC Securities), when the decision to adopt the opt out rather than opt in approach for retail clients was confirmed, HSBC Securities failed to inform the SFC about the change, as required by the Securities and Futures (Licensing and Registration) (Information) Rules. Those Rules require certain changes in information previously provided to the SFC in support of a licence application to be notified to the SFC, within seven days after the change. The SFC considered that the change from an opt in to an opt out approach was a significant change in HSBC Securities' business nature and business plan and was therefore a notifiable change. In failing to notify the change, the SFC also considered that HSBC Securities had breached (i) General Principle 7 (Compliance) of the Code of Conduct (which requires licensed persons to comply with regulatory requirements applicable to its business activities, and (ii) paragraph 12 (Compliance: in general) of the Code of Conduct (which provides that licensed persons should comply with, implement and maintain measures appropriate to ensuring compliance with the law, rules, regulations and codes administered and issued by the SFC).

The SFC considered that HSBC Securities' failure to ensure the accuracy of information submitted to it in support of its licence application and its failure to notify the SFC about the change, called into question its fitness and properness as a licensed person. In deciding the disciplinary sanction to impose, the SFC took into account the fact that HSBC Securities had cooperated with the SFC in resolving the disciplinary action and had agreed to engage an independent reviewer to review its access controls concerning trading information in the Crossing Service.

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Joseph Kwan

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