Hong Kong SFC licensing and compliance hints: protecting client assets

As mentioned in our article published on 3 April 2020, the deadline for compliance with the Securities and Futures Commission’s (SFC’s) circular of 8 July 2019 on new measures to protect client assets (Circular) was extended to 31 January 2021. With these new measures in place, intermediaries are now required to obtain confirmation from authorised institutions (AIs) (i.e. banks and deposit-taking companies) with whom they hold client assets that the relevant AI’s terms do not provide the AI with recourse to assets in the client’s account. Such confirmation should be in the form of a countersigned acknowledgement letter from the relevant AI before depositing any client money or securities into any new client asset accounts.

Under Paragraph 11.1(a) of the Code of Conduct, intermediaries are required to ensure that client assets are adequately safeguarded. Accordingly, the purpose of the Circular’s measures is to provide clients with enhanced protection in relation to payment of charges which are incidental to maintaining current, deposit or securities accounts that are client or trust accounts (Client Asset Accounts).

The Circular includes a template for the acknowledgement letter which should be adopted and executed by both the intermediary and the AI. The acknowledgement letter will be required where a Client Asset Account is opened with an AI in the name of an intermediary for the purpose of (a) holding client money; (b) holding client securities; or (c) holding non-repledged clients’ securities collateral.

Key elements of the acknowledgement letter

  1. Notification of purpose clauses: states the intermediary’s obligation to hold client assets and the purpose for doing so.

  2. No-recourse clause: prohibits recourse against client assets in Client Asset Accounts. Note that in cases of recourse against assets required by legislation or court order, the no-recourse clause does not apply. Furthermore, should an issuer default, any clawback by an AI of prepaid dividends or interest regarding the issuer’s securities would not be considered as recourse against client assets for the purposes of this requirement.

  3. Conflict clauses: ensures that in the event of any conflict between the acknowledgement letter and any other agreement between the parties in connection with the Client Asset Accounts, the acknowledgement letter shall prevail.

As a final word, the Circular reminds intermediaries that any arrangements for the holding and safeguarding of client assets should be in the best interests of its clients.