2022年1月6日
资讯洞见
The Securities and Futures Commission (SFC) has publicly reprimanded and fined a bank HK$400 million in relation to overcharging practices and related internal control failures.
The bank overcharged its clients by increasing the spread after execution of trades without their knowledge and charging them fees in excess of standard disclosures or rates. The bank increased the spread charged to clients following the execution of trades in bonds and structured notes.
Where the execution price achieved in the market was better than the limit order price placed by the client in buy or sell trades, the bank’s staff would increase the spread within the bank’s order processing system, the difference being retained for the bank’s benefit.
On some occasions, bank staff misreported the execution price or spread to clients; and in some other cases, bank staff falsified quarterly statements issued to intermediaries authorized to trade for clients.
Such conduct clearly falls short of the standards expected of a regulated entity (and indeed the bank’s own marketing materials). The SFC’s statement of disciplinary action specifies in detail the various regulatory requirements held to be breached by such conduct, including the requirements to:
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(a) |
act honestly, fairly, with due skill, care and diligence, and in the best interests of clients; |
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(b) |
make adequate disclosure to clients of the monetary benefits received and relevant material information; |
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(c) |
avoid conflicts of interest and ensure fair treatment of clients; |
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(d) |
ensure that any representations made and information provided to clients are accurate and not misleading; |
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(e) |
ensure that the charges, mark-ups or fees affecting clients are fair and reasonable and characterized by good faith; |
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(f) |
execute client orders on the best available terms; and |
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(g) |
ensure that clients are provided with adequate information about the services provided including the nature and scope of fees, penalties and other charges. |
It seems that in many instances it was unclear whether the bank was acting as principal or agent in the relevant transaction, which raised serious concerns about how it could ensure compliance with relevant regulatory requirements.
The SFC found that the overcharging malpractices involved a combination of serious systemic failures for a prolonged period of time, including inadequate policies, procedures and system controls, lack of staff training and supervision, and failures of the bank’s first and second lines of defence functions.
These failures in turn provided grounds for claims of other regulatory failures by the bank including failures to:
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(a) |
ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act; |
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(b) |
ensure that it has adequate resources to supervise persons employed or appointed by it to conduct business on its behalf; |
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(c) |
ensure that it has internal control procedures and financial and operational capabilities to protect its operations, its clients and other licensed or registered persons from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions; |
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(d) |
implement and maintain measures appropriate to ensuring compliance with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market; |
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(e) |
(i) establish and maintain an appropriate and effective independent compliance function, (ii) ensure staff performing the compliance function possess the necessary skills, qualifications and experience to enable them to effectively execute their duties, (iii) enforce clear policies to ensure that the compliance function covers all relevant aspects of the bank’s operations, including the unfettered access to necessary records and documentation, and (iv) ensure staff performing the compliance function, in conjunction with management, establish, maintain and enforce effective compliance procedures; and |
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(f) |
establish and maintain effective policies and operational procedures and controls in relation to the bank’s day-to-day business operations, to ensure (i) the compliance by the bank and its staff with relevant legal and regulatory requirements, and (ii) that client orders are handled in a fair and equitable manner. |
To compound its failings, the bank failed to report the breaches promptly: the SFC found evidence that the bank had identified the relevant issue in 2014, but failed to report it until 2016.
The bank has agreed to compensate clients with interest, which is likely to cost a further HK$180 – 200 million, and to engage independent reviewers to (i) identify the root causes of the relevant conduct and assess the magnitude of its spread overcharge practices, (ii) validate the relevant overcharge and compensation arising, and (iii) review the adequacy and effectiveness of the bank’s remediation measures.
It does not appear that the staff involved benefitted directly from the overcharging, but it seems likely that their remuneration was impacted by it. Remuneration structures commonly adopted in the financial services industry often form the motivation for misconduct. Regulators have highlighted this as a concern, but the lesson has yet to be learned.