The SFC’s quarterly report of December 2019

On 5 December 2019, the SFC published its quarterly report covering the three-month period from 1 July to 30 September 2019. In this article, we highlight the key messages included in the report (although we do not discuss any financial performance details). The report provides a good summary of what kept the SFC busy over Q3 2019 including all 14 circulars, and communication between the industry/industry associations and SFC senior management. The usual statistics are particularly useful for gaining insight to the SFC’s approach to regulation and regulatory priorities. The report also highlights the SFC’s regulatory engagement both in terms of international policy making through IOSCO and the FSB and regulator-to-regulator interaction.

SFC busy with inspections … and breaches and complaints

The SFC conducted 106 on-site inspections during the period (which is up 28.8% year-on-year). These are the top four areas of breach identified by the SFC during these inspections (note that the greatest year-on-year increase was with AML non-compliance – 153.5%!):

• Internal control weakness (116)
• Non-compliance with the SFC’s anti-money laundering guidelines (91)
• Breach of the SFC Code of Conduct for Persons Licensed by or Registered with the SFC (64)
• Breach of the SFC Fund Manager Code of Conduct (20)

The SFC only received 969 complaints over the quarter which means that year-on-year the figure was down by a significant 36%.

Combating financial crime 

Following the SFC’s joint operation with the Independent Commission Against Corruption (ICAC) in December 2017 involving an independent financial advisor, the ICAC charged five individuals with conspiracy to defraud during this period (after the ICAC first charged a former executive director of entity, with conspiracy to defraud in May 2019). The SFC entered into a memorandum of understanding with the ICAC in August 2019 to formalize and strengthen cooperation between the two organizations in combating financial crimes.

Proposed new Type 13 regulated activity

On 27 September 2019, the SFC launched a public consultation on its proposal to introduce a new type of regulated activity for trustees and custodians of SFC-authorized funds. It was proposed that depositaries operating in Hong Kong would need to be licensed and supervised by the SFC (or registered with and supervised by the HKMA). The consultation closed on 31 December 2019 and the SFC is expected to issue its conclusions as soon as practicable. This change is designed to better protect assets and retail investors generally.

Key figures for the quarter

• Disciplinary actions – Six licensed corporations and nine licensed representatives were disciplined; resulting in a total contribution to the Hong Kong Government coffers, through the fines, of over HK$15 million. These actions related to the mishandling of client money, transactions which had not been authorized by the client and internal control deficiencies and other regulatory breaches.

• Market Surveillance – 2,491 requests were made by the SFC to SFC licensees for trading and account records triggered by untoward price and turnover movements.

• Licensing – The total number of licensees and registrants totaled 47,635 by the end of the period. This was 3.4% greater than at the same time in 2018. The total number of licensed corporations grew year-on-year by 7.2% to 3,048. These were both record highs but in both cases the number of new applications was down year-on-year for the quarter. By the end of the quarter Hong Kong had 49 ATS providers authorized under Part III of the SFO and another 25 companies (including 15 dark pool operators) licensed under Part V to provide ATS.

• Fund authorizations – The SFC authorized 22 unit trusts and mutual funds and 80 unlisted structured investment products for public offering over the period while two private open-ended fund companies were set up under the still relatively new legislation. As of the end of the quarter the SFC had authorized 51 Mainland funds in total, while the CSRC had approved 20 Hong Kong funds.