SFC licensing and compliance hints – Sep 2015

Licensed individuals wearing different hats

The SFC issued a FAQ on 19 June 2015 regarding disclosure by licensed individuals.

An individual is required to disclose to the SFC if s/he is a director, a partner or a proprietor of any company or business at the time of filing an application to be licensed. Once the individual is licensed, s/he must notify the SFC when there is a change in the status of any of his/her directorship, partnerships or proprietorships (e.g. a new appointment or resignation) within 7 business days.

The SFC will consider whether such external directorships in, or outside business interests present any potential conflicts of interest or might adversely affect the fitness of the individual or their ability to carry on their licensed activities effectively. If the SFC has concerns it may be necessary to give up the relevant external directorship or business interests. The SFC has clarified that this disclosure requirement extends to the provision of consultancy services.

Licensed companies should therefore have internal control processes requiring their staff / employees to (i) disclose their outside business interests and directorships upon joining the licensed company, and (ii) obtain prior permission from the licensed company before engaging in any outside business activities or taking up an outside directorship.

Licensed companies could consider the following factors listed by the SFC in assessing whether the individual can keep or have the external directorship or business interests:

• the business natures (e.g. scope of services and clientele) of the licensed company and of the other companies (the “Firms”);
• his roles and duties, as well as reporting lines, in the Firms;
• his time allocation in performing his roles and duties in the Firms, and whether he can properly manage his time in carrying on (and, where applicable, supervising) the regulated activity for the licensed company;
• any measures imposed by the Firms to manage and monitor on an on-going basis any potential and actual conflicts of interest arising from his dual capacities in the Firms;
• any measures imposed by the Firms to address confidentiality concerns arising from his possible access to non-public or sensitive information in light of his roles and duties in the Firms;
• whether and on what basis the Firms take the view that there will not be conflicts of interest arising from his dual capacities; and/or
• whether the Firms consent to his dual capacities.

Changes to Financial Resources Rules

The SFC released a consultation paper on 17 July 2015, proposing to amend and expand the existing Securities and Futures (Financial Resources) Rules (FRRs). The proposed changes are primarily related to the new licensing regime for carrying on OTC derivatives (OTCD) activities in Hong Kong. However, some proposed changes are non-OTCD related. The consultation period will end on 16 October 2015.

On the OTCD front, one of the proposed changes to the FRRs is to introduce a “Basel-style risk-based” capital approach in calculating the capital requirement for market risk and counterparty credit risk arising from certain OTCD activities. The consultation paper also explores the possibilities for incorporating some new concepts to the FRRs such as adopting internal models for liquid capital calculation and setting another layer of capital requirement, a “tangible capital requirement”, for certain OTCD activities.

On the non-OTCD front, the SFC suggests to update certain requirements in the FRRs to promote prudent risk management as well as to align with market development, for example:

• impose a cap on intragroup uncollateralized receivables;
• encourage conducting credit risk assessment without relying predominantly on ratings provided by credit rating agencies;
• update haircut percentages for certain type of securities;
• treat certain amount receivables from a GCP under a third party clearing arrangement as a liquid asset.

Intermediaries, especially those who are or will be conducting any OTCD activities, should take time to review their business models to see and assess the impacts as a result of these proposed changes to the FRRs, and submit their thoughts to the SFC before the deadline.