News & Insights

SFC licensing and compliance hints – Aug 2019

SFC introduces new template letter to protect client assets

According to the SFC’s circular of 8 July 2019, SFC licensed corporations (LCs) which hold client assets will need to have in place an acknowledgement letter by the end of July 2020. LCs should prepare the letter based on the SFC’s template (available in English and Chinese) and ensure it is duly signed by both the LC and the custodian bank (or LC acting as a custodian) before they deposit client assets into any new client accounts.

The SFC has become aware that in some cases the agreement entered into between an LC and the custodian with respect to current, deposit or securities accounts that are client or trust accounts, contain clauses which grant the custodian a right of set-off or lien. The SFC states that, “such clauses are fundamentally incompatible with the requisite standard of protection afforded to client assets under the Code of Conduct.” As a result, the SFC has included a no-recourse clause as one of the key elements of the template letter. The no-recourse clause prohibits any deduction (or recourse) to the client assets unless it is permitted by an applicable legislation or court order. If however in the case of an issuer’s default, clawback by the custodian of prepaid dividends or interest in respect of these securities would still be permissible.

The template also clarifies that in the event of any conflict between the acknowledgement letter and any other agreement between the parties, the acknowledgement letter shall prevail.

Even if your firm’s licence is subject to the condition that it will not hold client assets, it would be useful to note the SFC’s initiatives with respect to this issue – in this case the SFC has taken a proactive step to protect client assets.

Finally, the SFC reminded LCs that they must exercise due skill, care and diligence in selecting and appointing custodians especially if the custodian is not a bank. Therefore, this would be a good time to review current agreements in place with custodians, develop a timeline to ensure all executed acknowledgement letters are in place by 31 July 2020, and revisit other relevant compliance and operational processes to ensure a smooth transition.

How are you getting on with your CPT hours?

As the second quarter of 2019 is already behind us, it is time to remind all licensed individuals to check their 2019 CPT hours in order to avoid a year-end rush.

Licensed individuals are generally required to complete 5 CPT hours per calendar year for each regulated activity which they may carry out. The important point to note is that the training topics must be relevant to the functions to be performed by the individual.

If certain regulatory activities fall under the same competence group, then the SFC will consider CPT hours to apply to all the regulated activities under that competence group. For instance, an individual engaging in Types 1 and 4 regulated activities has to take only five CPT hours per calendar year as these are under the same competence group. However, if an individual carries on regulated activities Types 1, 4 and 9, he or she has to take 10 CPT hours per calendar year as Type 9 regulated activity (asset management) falls under a different competence group.

If a licensed individual can show that a particular course is relevant to more than one competence group, he or she may claim it as CPT in respect of all the relevant regulated activities. For example, the recent SFC Compliance Forum which was held on 17 June 2019 may be considered relevant to all regulated activities, even though they may fall into different competence groups.

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