Hong Kong SFC licensing and compliance hints: embracing change and the new (Covid-19) norm

Five months into its Covid-19 pandemic period, Hong Kong seems to have settled into a new “normal” mode of operating, while many other regions still face devastating challenges and live in fear of a “second peak”.

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Remote regulatory inspections

The SFC is busy again conducting routine inspections, even though they are not actually “knocking at your door” this time round. Inspections are now being conducted remotely, but this definitely does not mean they are less stringent. The SFC has added a new topic “Impact of Covid-19” to its requested opening meeting agendas no doubt to help the SFC understand how the pandemic has impacted the financial services industry and the business of the subject licensed corporation (LC). The SFC is also trying to find out how each LC is dealing with this “special” situation and the SFC’s observations in this regard may have a far-reaching and permanent effect on how the financial industry and acceptable business practices are shaped moving forward. It is probably inevitable that there will be adjustments, adaptations and / or changes in the SFC’s regulatory approach and regulation itself. We note the UK’s Financial Conduct Authority has this month started a financial resilience survey on 13,000 of its regulated firms in order to gather market intelligence.

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CPT

Because of Covid-19, the SFC announced several one-off Continuous Professional Training (CPT) relaxations on 31 March 2020. These are:

any uncompleted (normal) CPT hours for 2020, can be carried forward for completion in 2021 (this will mean however that licensed individuals will need to comply with any carried over 2020 CPT in 2021, in addition to their usual 2021 CPT obligation)

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any “additional” CPT which originally was due for completion by 30 September 2020, can now be completed three-months later, i.e. by 31 December 2020 (this is only relevant for those who have been granted a waiver from having to pass a licensing exam in exchange for doing extra CPT)

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Licensing examinations

The HKSI resumed licensing examination enrolments on 22 May 2020 after an almost two-month hiatus. Most of the places for the less frequently held exam papers (like paper 6) for June and July are however already gone because of the number of people needing to pass papers to be responsible officers of new LCs.

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BRMQ FAQs

On 29 May 2020, the SFC issued FAQs on the new Business and Risk Management Questionnaire (BRMQ).

All LCs need to submit a BRMQ annually through WINGS (the SFC e-submission platform launched in January 2019). By now all LCs have had to submit their first electronic BRMQ. In this regard many clients have asked us whether they are required to have in place all the internal control measures that are referred to in the BRMQ.

Q5 of these new FAQs was designed to help in this regard. The SFC has explained that the list is not mandatory but that at the same time it is not meant to be exhaustive either. In other words, there is no “one size fits all” solution to internal controls and the SFC expects LCs to design their own internal control measures, policies and procedures to fit their own specific business operations and to achieve full compliance with all the relevant Hong Kong regulatory obligations.

Responsibility for approving the BRMQ rests with the relevant responsible officers and Managers-in-Charge of Overall Management Oversight or Compliance even though currently only responsible officers are able to submit BRMQs (as they are the only ones who can log into WINGS).

It is possible to track previous submissions, merge responses (i.e. from multiple staff members) into one file for submission, and preview draft submissions in WINGS. We suggest clients to look at the online demonstration clips that are available on the SFC website, which show just how easy and hassle-free this process is.

The SFC also clarified in Q9 that an auditor’s opinion is not required for the purpose of the BRMQ, even though this forms part of the “financial statements and other documents” for the purpose of section 156(1)(a) of the SFO and should be filed together with the annual auditor’s report.

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Wet-ink signatures

Despite the growing popularity of paperless submissions, wet-ink signatures still remain an essential part of the SFC’s formal licensing application process. On a case by case basis however the SFC has demonstrated a willingness to be flexible. For example on individual temporary licence applications the SFC has been willing to approve the application based on scanned versions of the signature pages before delivery of the hard copies to the SFC.

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LC reprimanded and fined because of FRR breaches

LCs need to notify the SFC within one business day if they become aware that a previously submitted financial resources return contains any materially false or misleading information. The SFC’s stated aim is to regulate and not to punish, but nevertheless LCs will be punished in certain cases if they miscalculate figures in these returns and especially if they have been in breach for a long time only becoming aware of the breach when the SFC contacts them.

On 8 June 2020, an LC licensed for type 1 and type 9 activities was reprimanded and fined by the SFC for misinterpreting the Securities and Futures (Financial Resources) Rules (FRRs) resulting in the overstatement of its liquid capital for more than three years. The LC was not aware of the breach until the SFC pointed it out to them. The fine was HK$800,000. Although the facts are different, another LC was reprimanded and fined HK$2.6 million in December 2017 in connection with misinterpretation and breach of the FRRs.

The takeaway is that these returns must be checked and reviewed carefully before they are submitted, not only from an accounting and audit perspective but also from a regulatory perspective.

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Ashley Alder re-appointed as CEO of SFC for another three years

On 18 May 2020, the SFC announced its re-appointment of Ashley Alder as the Chief Executive Officer of the SFC for his fourth three-year term. This will take him up to October of 2023.