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On 20 August 2020, the Securities and Futures Commission (SFC) published its Quarterly Report of developments occurring during the period 1 April to 30 June 2020 (available here). This was the SFC’s first quarterly report where Hong Kong was suffering from COVID-19 for the entire period and it is also the first report to be issued from the SFC’s new premises in Quarry Bay. In this article we have summarised those key developments referred to in the report of relevance to asset managers.
Cybersecurity risk in remote office arrangements – On 29 April, the SFC issued a circular reminding the industry to assess their operational capabilities and to implement appropriate control measures to manage the cybersecurity risks associated with remote office arrangements. Those measures include stronger password protection, safety tips for using video conferencing platforms and adequate user training (see previous Deacons article of 19 May relating to this circular).
SFC remote office arrangements – The SFC’s split-team staff arrangements continued through the period.
Prohibition on gatherings – On 1 April, the SFC issued a joint statement with the Stock Exchange of Hong Kong providing guidance to listed companies as to when and how shareholder general meetings should be held. Although listed company AGMs and EGMs were exempted from the government’s prohibition on gatherings, the SFC guidance included a suggestion that listed companies consider delaying meetings where possible and tips on how to hold physical meetings safely.
Enforcement-related cooperation with the CSRC – The SFC worked actively with the China Securities Regulatory Commission (CSRC) during the period to enhance enforcement cooperation, and exchanged views with the CSRC in connection with anti-money laundering and the use of technology in enforcement work.
HSBC dividend – On 15 May, the SFC issued a statement in light of the significant public interest in HSBC Holdings plc’s (HSBC) cancellation of its fourth interim dividend for 2019 and the suspension of future dividends until the end of 2020.
The SFC received a large number of enquiries and complaints from the investing public and professional bodies in Hong Kong in relation to this. The SFC explained that it had only issued the statement in light of the significant public interest, acknowledging that matters relating to the banking and prudential supervision of HSBC lie outside the SFC’s regulatory ambit.
The SFC concluded however that there were no grounds for the SFC to pursue regulatory action against HSBC in relation to its cancellation of the dividend.
More SFC routine inspections but fewer breaches
The SFC intensified its supervisory efforts during the period in order to monitor licensees’ financial and operational resilience during the volatile market situation. It conducted 74 on-site inspections compared with only 53 in the last quarter: an almost 40% increase.
Among the breaches found during these inspections, breaches of the Fund Manager Code of Conduct increased by almost 50% (from 19 to 28) but otherwise fewer breaches were identified overall (from 324 to 232). 13 out of the 18 breach categories recorded fewer than ten breaches and six out of these 13 categories (including licensing condition breaches and failure to make notifications) recorded zero breaches. Breaches of the SFC Code of Conduct remained relatively high at 43 although this number had dropped by more than 30% compared with the last quarter. Finally, internal control weaknesses remained high with 102 breaches although this was an 8% drop compared with the last quarter.
Disciplinary actions with higher total amount of fines
The SFC disciplined eight licensed corporations and two individuals during the quarter, and this resulted in total fines of HK$67.5 million for the period, which was over five times more than the HK$11.2 million netted from fines during the last quarter (based on fine amounts included in quarterly and annual reports). Just three actions involving licensed firms’ AML/third party payment/transfer breaches amounted to over 70% of the total fines imposed during the quarter. There were also actions against firms relating to the selling of funds and Chapter 37 bonds.
There were eight times more complaints against licensed corporations relating to product disclosure over the period (74 compared with only eight in the last quarter). Complaints relating to scams and frauds, such as identity fraud and impersonation, increased by 74.4% (from 82 in the last quarter to 143). There was also a sharp increase of more than 200% in listing-related and disclosure of interests complaints.
OTC derivatives regime – On 10 June, the SFC released its consultation conclusions on refinements to the scope of the over-the-counter (OTC) derivatives licensing regime to exclude corporate treasury activities of non-financial groups and some portfolio compression services. The paper also sets out the competence requirements for those needing to be licensed under the regime.
Paperless securities market – On 8 April, the SFC concluded a joint consultation with Hong Kong Exchanges and Clearing Limited and the Federation of Share Registrars Limited on a proposed operational model for an uncertificated securities market.
No net increase in licensed corporations
During the quarter, the SFC received 1,043 licence applications including 54 corporate applications. As at 30 June 2020, the number of licensees and registrants totalled 46,824 (47,167 as at 31 March, 2020), of which 3,109 were licensed corporations, the same as at 31 March, 2020.
The SFC authorized 41 unit trusts and mutual funds including 28 funds domiciled in Hong Kong and 24 unlisted structured investment products for public offering in Hong Kong.
Mutual Recognition of Funds
Under the Mainland-Hong Kong Mutual Recognition of Funds scheme, the SFC authorized a total of 51 Mainland funds (including two umbrella funds), and the CSRC approved 29 Hong Kong funds.
MOU with the Competition Commission
On 16 April, the SFC signed a Memorandum of Understanding with the Competition Commission to enhance cooperation and exchange of information.
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