SFC inspections – Hints for smoothing the process

Hong Kong's Securities and Futures Commission (SFC) has stepped up its on-site reviews of licensed intermediaries. The following hints should help firms get ready and stay ready for the inevitable visit.

1. Keep the SFC updated about your business activities

If the SFC has comprehensive information on its files about your business, including contractual arrangements and organisation structure, this will help the regulator to formulate its approach for the on-site inspection.

2. Communicate about the document request list

The SFC will provide a document request list a few weeks before the inspection starts. It is important to feel free to speak with the SFC if you consider any of the information/documents requested are not relevant in the context of your business or if you are not clear about what they need.

3. Appoint a coordinator

The appointment of a central contact person for all SFC communications and arrangements during the inspection, including interviews with the SFC, will enhance the efficiency and effectiveness of the entire process. This person should be familiar with the firm's operations, policies and procedures, but does not have to be a compliance professional and should not be expected to answer the regulator's enquiries or requests on behalf of other staff.

4. Plan the opening meeting

Typically the on-site review will kick-off with an opening meeting. The SFC will usually be represented by the full inspection team as well as licensing or other colleagues. Senior management, including all the responsible officers and department heads, should therefore try to attend the meeting. The firm should take this opportunity to explain the business activities of the Hong Kong office to the SFC representatives clearly and in detail and to introduce the firm's compliance and risk management culture and infrastructure. A detailed briefing will assist the SFC to understand the firm, its people and its inherent risks.

5. Plan the inspection logistics

The firm can assist and facilitate the onsite inspection process by doing the following:

• providing a quiet and comfortable room for the inspection team
• organizing the regulator's questions and requests so that they are directed to the right person, particularly where overseas staff are involved (e.g. back office function questions)
• maintaining a log or record of documents provided to the regulator, to help with follow-up questions
• checking information/documents before providing them to the inspection team to avoid confusion
• checking progress with the inspection team from time to time

6. Follow up with additional documents and information

The coordinator should make sure that all additional information/documents required by the SFC during the onsite visit are provided promptly and recorded in a database. The IT department should also be on stand-by so they can extract data as required. Where something cannot be provided, an explanation should be provided promptly.

7.Communicate clearly to the inspection team

The inspection team will wish to conduct interviews with staff, so staff members should be well prepared and cooperative. Key points to note with these interviews are that:

• the coordinator should arrange interviews at a time convenient to both the inspection team and the interviewee and should avoid busy periods
• the SFC will often find it useful if the employee can walk them through a system, rather than just describing it, to demonstrate the work flows
• answers should be precise and accurate and supported by documented records, where possible
• if an issue is raised, the person should discuss it with the regulator to understand the concern, and let the coordinator know so compliance can get involved
• it is not helpful to the SFC if employees comment on the work of their colleagues or on areas where they may not have the full picture

8. Try to schedule a closing meeting

Closing meetings at the end of an on-site audit/inspection are a good opportunity to sum up the process, get preliminary comments on any possible findings and resolve any outstanding or unclear matters: it is often easier to explain complex issues face-to-face. It can take the SFC several months to revert with comments, so it is advisable to try to finish all discussions before the on-site inspection ends while memories are still fresh.

If your firm has not been formally inspected by the SFC over the past three years, the chances are the regulator will be in touch. Deacons offers both health check and more comprehensive mock inspection services which are designed to identify regulatory or compliance risk areas and to offer remedial strategies.