SFC licensing and compliance hints – Jun 2015

Are your KYC and account opening procedures “fit and proper”? The SFC issued a circular on 12 May 2015 reminding intermediaries about their know your client (KYC) obligations under the SFC Code of Conduct (Code), naming some deficiencies identified from its recent supervisory reviews, particularly in relation to account opening procedures, authentication of the client’s identity and the certification process.

The SFC set out some key controls in the Certification Process and emphasised that:-

1.   Persons certifying account opening documents should be suitably qualified;

2. Intermediaries are ultimately responsible for conducting the proper KYC and account opening procedures with their clients, regardless of who actually does the work and they should have proper policies and procedures in place to supervise the KYC and account opening procedures.

Intermediaries should be aware of potential risks in this area when dealing with prospective investors outside Hong Kong or where the account opening process is not conducted “face to face”.

Intermediaries need to make sure that their client records are accurate and up-to-date to ensure clients are reachable, and should be alert to, follow up and monitor any potential KYC issues.

The SFC strongly discourages intermediaries from appointing unregulated affiliates to perform the Certification Process as they may be unfamiliar with KYC requirements.

An intermediary who becomes aware that seemingly unrelated clients (e.g. without any family relationship) have authorised the same third party to place orders for their accounts, should query why such authority has been given, ascertain the relationship between the clients, and monitor these client accounts closely for irregularities.

Have you kept the SFC up-to-date? The SFC issued a reminder on 11 May 2015 to intermediaries as well as their substantial shareholders about compliance with the notification requirements under the Securities and Futures Ordinance, the Securities and Futures (Licensing and Registration) (Information) Rules (Information Rules) and the Code of Conduct.

The Information Rules cover information on intermediaries, licensed individuals and directors and substantial shareholders of intermediaries.

The scope of information that needs to be notified is wide, ranging from basic information (such as change in passport or contact details) to sensitive information (such as regulatory investigations). The Information Rules have no geographical boundaries, so the SFC does not just want Hong Kong related information.

The circular serves to remind intermediaries that disclosure to the SFC does not stop once the application is approved. It is an on-going process.  If there are new items that need to be disclosed to the SFC (e.g. if any of the information which was provided to the SFC as part of the application changes), it will need to be notified within seven business days.

The SFC has helpfully given some examples of the type of information that is required to be notified, such as an event which:

1. directly involves the intermediaries or any of its representatives and which may have an impact on the fitness of the intermediary or any of its representatives;
2. may have a significant impact on the operations or viability of the intermediary’s corporate group as a whole; or
3. arises from a material failure of any of the intermediary’s systems and controls, even if the failure occurred outside of Hong Kong (for example where the intermediary has delegated any of its operations to third parties or to other group entities).

Intermediaries should make immediate enquiries to check whether notification to the SFC is required in respect of any actual or suspected material breach of the Information Rules.

It is likely that the SFC will focus on this area in their onsite visits.