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Authored by: Scott Carnachan and Connie Chan
The Securities and Futures Commission (SFC) announced on 23 January 2024 that it will commence in February 2024 a circularisation exercise which comprises a review of the internal controls of selected securities brokers and obtaining direct written confirmation from selected clients. The review will be conducted by the SFC in conjunction with an external accounting firm.
Focus of the internal control review
Client assets protection has always been one of the major focuses in the SFC’s supervision of licensed firms. The internal control review will focus on the brokers’ internal control systems that are designed to protect client assets as well as their compliance with the expected regulatory standards set out in the following SFC circulars in relation to safeguarding client assets and prevention of fraud:
i. Review of internal controls for the protection of client assets and supervision of account executives and a self-assessment checklist issued on 19 December 2018;
ii. Third-party deposits and payments issued on 31 May 2019;
iii. Operation of bank accounts issued on 28 June 2021; and
iv. Managing the risks of business email compromise issued on 24 March 2022.
The SFC’s findings after the circularisation exercise in 2017
The SFC conducted similar exercises in 2006, 2012 and 2017. The circularisation exercise in 2017 covered 11 small to medium-sized securities brokers. In its report following the circularisation exercise in 2017, the SFC identified a number of deficiencies, including (amongst others) the lack of effective written policies and procedures or maker-checker controls in key operational areas, the lack of controls over changes to client information, inadequate reviews to identify suspicious sharing of correspondence addresses, lack of policies to identify and protect dormant accounts, and insufficient compliance checks of client accounts.
The SFC also noted that most of the control deficiencies identified during the circularisation exercise in 2017 had been identified in previous SFC circulars.
In light of the upcoming circularisation exercise, now would be a good time for responsible officers of brokers to carefully consider the above-mentioned circulars again and review their internal controls to assess whether any enhancements are necessary. Where a broker has identified any problematic issues, the firm should work towards enhancing its controls to ensure compliance with the regulatory requirements. Even though there may not be enough time to address certain issues before this circularisation exercise, it would be preferable if the responsible officers are able to confirm to the SFC that the firm is in the process of enhancing its internal controls.
If you would like us to advise on client asset protection or conduct a review on the operations of your firm, please do not hesitate to contact us.
The SFC’s circular is available at this link.
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