The SFC’s current supervisory priorities and hot topics

1. 

Manager-in-Charge regime

Ms. Leung noted the importance of the Manager-in-Charge (MIC) regime in ensuring a culture of accountability from top to bottom. The SFC will communicate its supervision concerns to MICs and they could be held accountable for control failures and conduct issues. In order to bear primary responsibility for ensuring appropriate standards of conduct and compliance, the SFC expects MICs to understand their firm’s business strategy and the risk it is exposed to, in order to be able to identify red flags. If these are too complex for senior management to understand, it may be necessary to question whether the MIC and senior management are competent and whether the business activities and risks are suitable for their firm. It should be noted that the SFC’s revamped annual Business and Risk Management Questionnaire, introduced this year, includes questions related to how the firm keeps its MICs and senior management up to date with the latest business and compliance knowledge that have impact on their respective areas of responsibility.

2. 

Risk management

Ms. Leung focused heavily on risk management, reminding the industry that, “trends come and go but sound risk management is an immutable regulatory principle.”

In her discussions, she highlighted the SFC’s concerns about credit risks associated with securities margin financing, and stated that “even worse are those forms of credit risks which are obscure,” referring to complex or opaque financing arrangements involving multiple layers of funds and various group entities.

The complex arrangements include those mentioned in the circular issued jointly by the SFC and the HKMA on 24 April 2019, and margin financing activities disguised as investments as mentioned in the circular of 3 August 2018. In particular, where the complex financial arrangements involve various group entities, the SFC expects strong group-wide internal risk management to ensure financial risks and compliance issues are not concealed behind multi-layer structures.  

Ms. Leung also delivered a strong message to the industry that if licensed corporations are involved in dubious arrangements, either knowingly or due to serious inadequacies in their systems and controls, the SFC is prepared to take action.

3. 

Risk governance

Poor risk governance is another issue that Ms. Leung said the SFC is “laser focused on.” Ms. Leung noted that recent cases saw the failure of fund managers to adequately account for liquidity risks of their investments, and at times risk managers have relied on data without conducting independent oversight. She stressed that although private funds sold to professional investors do not require SFC authorisation, licensed fund managers must comply with the Fund Manager Code of Conduct. Irrespective of whether an asset manager is trading simple vanilla investments, or exotic derivatives or moving into novel products such as virtual assets, the SFC expects asset managers to properly manage risks.

4. 

People risk

Ms. Leung stressed the need for having capable senior management to prudently oversee a firm, supported by competent staff. She discussed the SFC’s recent initiatives to keep better track of “rolling bad apples,” described as “people with a record of misconduct which is wiped clean when they change jobs, allowing them to potentially repeat their misbehaviour at another firm.”  To tackle this problem, the SFC expects licensed corporations to notify the SFC whether a licensed individual who ceases to be employed with the firm was the subject of an internal investigation within six months preceding their cessation of accreditation. The SFC also expects the licensed corporation to notify it if an internal investigation of that individual is instigated after his or her departure.

5. 

Innovation and technology

In view of the rapid growth of technology-enabled businesses in the securities and futures industry, Ms. Leung emphasised the SFC’s priority to continue to keep its policies and processes up-to-date and stated that the SFC:

• will facilitate more efficient remote onboarding of clients. In its circular dated 28 June 2019, the SFC introduced new rules requiring the use of biometric technology to facilitate remote on-boarding of clients;

• will continue to focus on the risks associated with virtual assets;

• will revamp the financial returns submissions to update its software to collect more data to enhance its analytical framework; and

• uses a new and innovative supervisory technology known as Suptech to manage trading data and detect irregularities during inspections.

6. 

Securities and Futures (Professional Investor) Rules

Ms. Leung highlighted the importance of the private placement market as vital for Hong Kong’s economic development, and announced that the SFC will conduct an internal review of the monetary thresholds under the Securities and Futures (Professional Investor) Rules, which will help identify those investors who are financially sophisticated to participate in private placement activities.

7. 

SFC thematic reviews

Ms. Leung shared the SFC’s current and upcoming thematic reviews which include:

• remote booking and transfer pricing, operational and data risk management;

• book building exercise;

• cybersecurity; and

• spreads charged in bond trading.

Licensed individuals are encouraged to read these speeches to identify the SFC’s current priorities and regulatory expectations. Links to Ms. Leung’s speeches are available here:

• SFC Compliance Forum 2019 Opening Remarks – morning session

• SFC Compliance Forum 2019 Opening Remarks – afternoon session

• 2019 Risk Hong Kong Conference – keynote speech