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On 24 June 2020, the Securities and Futures Commission (SFC) published its latest Annual Report, covering the 12-month period to 31 March 2020. As in previous years, the report provides a useful summary of what the SFC has done over the past year particularly in terms of achieving its publicly stated goals and providing insight into its priorities moving forward. What is different this time however is that the report covers the early months of the COVID-19 outbreak and so includes the specific measures taken and guidance issued by the SFC. We have summarized below the key information in the report for asset managers.
COVID-19 specific measures
|1.||COVID-19 page – In March 2020 the SFC launched a COVID-19 dedicated page to provide relevant regulatory information to the industry.|
|2.||Extension of deadlines – The SFC issued a circular on 31 March 2020 extending many regulatory deadlines by six months including the deadline for providing documents in connection with the keeping of records with external data storage providers (delayed from 30 June to 31 December 2020).|
|3.||Licensing FAQs – On the same day the SFC issued FAQs addressing various licensing matters arising from the prevalence of working from home arrangements including permitting licensees to carry forward any unfulfilled CPT hours to 2021 (see FAQ #3).|
|4.||Licensing FAQs – On the same day the SFC issued FAQs addressing various licensing matters arising from the prevalence of working from home arrangements including permitting licensees to carry forward any unfulfilled CPT hours to 2021 (see FAQ #3).|
|5.||Investment fund liquidity and redemption profiles – The SFC has tried to step up its supervisory efforts to manage risk. It has focused on investment fund liquidity and redemption profiles, as well as the fair treatment of fund investors, particularly where funds propose to activate liquidity risk management measures such as swing pricing or redemption suspensions (see SFC press release dated 21 April 2020).|
|6.||Sales practices including suitability – This remains one of the SFC’s top priorities and it is collaborating with the HKMA to monitor sales practices of non-exchange-traded investment products. The first annual joint product survey is being conducted and will cover sales of such products over the 2020 calendar year.|
|7.||Liquidity management practices – In light of market volatility and liquidity issues with some overseas funds, SFC routine inspections of fund managers will focus more on liquidity risk management practices.|
|8.||Conflicts of interest – The SFC continues to focus on conflicts of interest and misconduct where firms manage trades for clients with a continued focus on disclosure of spreads to clients. This topic will be the subject of another thematic review by the SFC.|
|9.||AML – The SFC will commence a periodic update of the risk assessment for the securities sector to take forward the recommendations of the Mutual Evaluation Report of Hong Kong published by the Financial Action Task Force (FATF) in September 2019. As a result, the SFC will propose changes to the SFC’s anti-money laundering guidelines to align these with the latest FATF standards and to provide additional risk-based guidance.|
|10.||Leverage in funds – The SFC plans to upgrade fund data reporting requirements based on the latest international trends and will issue guidance on the electronic dissemination of documentation for SFC-authorised products in light of the wider use of electronic media.|
|11.||New limited partnership for funds – The SFC was actively involved with the Government taskforce on establishing a new limited partnership regime for funds.|
|12.||Exchanged-traded funds – The SFC worked to facilitate issuers’ product applications under new streamlined measures for some SFC-authorised feeder ETFs. The SFC also worked with the China Securities Regulatory Commission and other stakeholders to facilitate ETF cross-listing between the Mainland and Hong Kong.|
|13.||Mutual Recognition of Funds (MRF) arrangements – The SFC signed a MRF agreement with The Netherlands Authority for the Financial Markets in May 2019 allowing eligible Dutch and Hong Kong public funds to be distributed in each other’s market through a streamlined vetting process. Under the Mainland-Hong Kong MRF regime, as of 31 March 2020, a total of 79 funds were approved (compared to 69 funds as of 31 March 2019) and the aggregate net subscriptions for both Mainland and Hong Kong MRF funds was about RMB15.6 billion (compared to RMB10 billion as of 31 March 2019).|
|14.||New type of regulated activity – The SFC has proposed a new type of regulated activity (Type 13) to regulate firms acting as depositories of SFC-authorised funds (see Consultation Paper and our article of 22 October 2019).|
|15.||Green finance – Supporting the development of green and sustainable finance remains one of the SFC’s key focuses. The SFC initiated the Green and Sustainable Finance Cross-Agency Steering Group (co-chaired by the SFC and HKMA) in order to develop Hong Kong as a green and sustainable finance centre. Among the initiatives of this Group, the Climate Change Technical Expert Group was established to develop expected standards, practical guidance and best practices for asset managers to incorporate climate-related risks in their investment and risk management processes.|
Front-loaded and risk-based on-site inspections
|16.||Slightly higher number of inspections – The SFC conducted 317 on-site inspections over the period (compared with 304 in 2018/19). This number includes thematic inspections on the same topics as 2018/19, i.e. AML/CFT, cybersecurity, intermediary misconduct in listed markets, complex and opaque financing arrangements, remote booking and operational and data risk management as well as book-building activities.|
|17.||Nature of breaches – The SFC noted 1,489 breaches (up from 1,236 in 2018/19) of the SFC’s rules as follows:
|Breaches||Examples||2018/19||2019/2020||Internal controls||deficiencies in management review and supervision, operational controls over the handling of client accounts, segregation of duties, information management and adequacy of audit trail for internal control purposes||451||443||AML guidelines||331||201||Code of Conduct||risk management, client agreements, safeguarding of client assets and information for or about clients||273||275|
|Internal controls||deficiencies in management review and supervision, operational controls over the handling of client accounts, segregation of duties, information management and adequacy of audit trail for internal control purposes||451||443|
|Code of Conduct||risk management, client agreements, safeguarding of client assets and information for or about clients||273||275|
|18.||Amount of fines dropped significantly – A total of HK$479 million in fines was recorded, a drop of about 50% compared to 2018/19, which saw a total of HK$940 million including $867.7 million in fines for sponsor failures.|
|19.||Other key enforcement actions – The SFC also imposed fines in cases involving internal control failures, anti-money laundering guideline breaches, mishandling of client money and securities, as well as bribery and theft.|
|20.||Number of SFC licensees increases – The number of SFC licensees (i.e. corporate and individual) increased to 47,055 (up by 1% compared to 2018/19). The number of licensed corporations rose to 3,109 (up by 5% compared to 2018/19).|
|21.||Fewer new licensing applications – 6,962 new licensing applications were made over the period (down by 22% compared to 2018/19).|
|22.||Fewer complaints – The SFC handled 4,491 complaints, down by 26% compared to 2018/19. Notably there were fewer complaints relating to listing-related matters and disclosure of interests.|
|23.||Performance pledges – 12,173 out of 14,172 (about 86%) licensing applications that were subject to performance pledges were processed within the applicable timeframe. According to the report, completion of most of the other 1,999 applications was delayed for reasons beyond the SFC’s control (for example, unresolved fitness and properness issues, outstanding vetting requests and applicants failing to provide material information).|
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