SFC enforcement action for multiple breaches results in HK$19.6 million fine

In a recent enforcement action, the Securities and Futures Commission (SFC) issued a public reprimand and a HK$19.6 million fine to a licensed corporation (LC) for a range of breaches and internal control shortcomings, including failures relating to:

1. 

 AML

2. 

 Authorisation for transactions

3. 

 Record keeping

4. 

 Handling of client complaints

5. 

 Telephone recording

6. 

 Margin lending 

7. 

 Timely notification of breaches to the SFC

The LC also agreed to engage an independent reviewer to conduct a review of its internal controls.

Whilst the disciplinary action appears to have been primarily focussed on the LC’s margin lending business, general lessons can be drawn from the issues raised: in particular, the importance of ensuring that polices are consistent with each other; that policies are followed in practice, and that any deviations are supported by adequate written explanations; that proper records are kept; that client complaints are dealt with promptly; and that material breaches are notified to the SFC without delay.

Key takeaways

LCs must ensure that

  • they satisfy themselves as to the source of client funds. LCs must be able to identify the source of all deposits made to their accounts, whether by bank transfer or cheque, and should be particularly alert to deposits received from third parties
  • transactions for clients are properly authorised, and that they know who ultimately originated the instruction for each transaction
  • orders are properly recorded and client identities and transaction details are properly confirmed in trade confirmations
  • client complaints are responded to promptly and investigated properly
  • material breaches are notified to the SFC promptly – paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission requires that material breaches are notified to the SFC immediately
  • in conducting margin lending business, clear policies to protect the capital of the LC are documented, particularly in relation to setting credit limits, making margin calls and forced liquidation, that such policies are (and can be shown to be) strictly adhered to, and that any exceptions are recorded with appropriate written explanations.