SFC Q4 2019 quarterly report

On 21 February 2020, Hong Kong’s Securities and Futures Commission (SFC) published its quarterly report for the period 1 October to 31 December 2019. In this article we analyse and interpret the key messages in that report with a view to providing readers with insight on the SFC’s current approach to its regulation of financial services intermediaries to help them plan their own priorities for this year.

In tandem with the market’s ever increasing attention to environmental protection and climate change, the rapid development of novel technologies and dynamic business models and the ongoing risk from money laundering and terrorist financing amid the uncertain political and challenging economic environment, the SFC is continuing to enhance the regulatory environment and we focus on some of these key areas below.

Environmental, social and governance (ESG) issues

In cooperation with the SFC, the Stock Exchange of Hong Kong Limited (SEHK) issued its consultation conclusions on proposed changes to its ESG reporting framework and published a new ESG Reporting Guide for listed companies in December, making some disclosures mandatory. These changes will not take effect until after 1 July 2020 so although both ESG factors generally and the avoidance of green-washing are important to the SFC, it seems to be willing to give listed companies time to prepare for the new reporting regime.

Besides enhancing listed companies’ reporting, the SFC encourages its licensees and registrants to consider ESG factors in their investment and risk management process, and is facilitating the development of green or ESG-related products. In the same month the SFC published a report on its six-month survey on integrating ESG factors and climate risk into asset management – following this, more guidance can be expected this year. It also launched a central database of SFC-authorized green or ESG funds on its website to enhance transparency but also the visibility of these funds.

Virtual assets (VAs)

After adding VA portfolio managers and VA fund distributors into its regulatory net in 2018, the SFC issued a position paper on 6 November further broadening its oversight of VA business despite the limitations of the SFO, by bringing VA trading platforms under its regulatory wing. The SFC had already published a proforma set of terms and conditions for VA portfolio managers in October, so these initiatives show us that the SFC is determined to improve investor protection by imposing regulatory requirements on more VA businesses.

Open-ended fund companies (OFCs)

The SFC seems to have listened to the voices calling for Hong Kong to take more steps towards becoming a recognised fund domicile location, as evidenced by its launch in December of a two-month consultation on enhancements to the as yet only one-and-a-half-year-old OFC regime. These voices have been calling for some of the changes the SFC has proposed even before the OFC regime was rolled out in 2018. The proposed changes revolve around custody arrangements, modification of investment restrictions on private OFCs, introduction of a statutory mechanism for re-domiciling overseas funds and requiring OFCs to keep a register of beneficial shareholders.

14 circulars!

Separately, the SFC issued 14 circulars over this three-month period, prescribing requirements and providing guidance in various areas, including the use of external data storage providers for the keeping of regulatory records (although discussions on this with various industry associations are continuing), the identification of “dubious” asset management arrangements, as well as a streamlining of the requirements for allowing SFC-authorized feeder ETFs to invest into non-SFC authorized overseas master ETFs.

Consultation conclusions

The SFC released two consultation conclusions, one on the margin requirements for non-centrally cleared OTC derivatives which will take effect from 1 September 2020; the other on its decision to raise the investor compensation limit by more than twice from HK$150,000 to HK$500,000 per investor per default from 1 January 2020. The compensation scheme now also covers northbound trading under the Mainland–HK Stock Connect scheme.

Cooperation with CSRC

The SFC has worked closely with the China Securities Regulatory Commission to launch an investor identification regime for Mainland-HK Stock Connect southbound trading.

HK$413.3 million in fines

The SFC was busy at the end of last year with proceedings against current or former listed corporations’ chairmen, directors and senior personnel for breaches of duty and insider dealing. The SFC also disciplined five licensed corporations and five individuals, resulting in total fines of HK$413.3 million (which the SFC needs to pay to the Government).

Annual fee waiver

The SFC has waived all annual licensing fees for the financial year 2020/21, i.e. up to 31 March 2021.

Key performance statistics

  • Listing

The SFC only vetted 51 listing applications, which shows a double-digit decline when comparing the total for nine months ended 31 December 2019 to that of 2018.

  • Licensing

The number of license applications continued to drop year-on-year, and specifically, corporate applications were down 39.7% compared to the previous quarter, and down 30.2% year-on-year. It’s not all bad news though because, despite this drop in new application numbers, the total numbers of licensees (and registrants) and the total number of licensed corporations continued to grow over this period albeit at a slightly slower pace.

  • Products

50 unit trusts / mutual funds, one paper gold scheme, one REIT and 18 unlisted structured investment products were authorized during the quarter but the total number of SFC-authorized collective investment schemes stood at only 2,761 by the end of last year, shrinking slightly for a second quarter.

  • Inspections

The SFC conducted 76 on-site inspections during this quarter, bringing the total number of inspections conducted in 2019 to 350, which is up 19.8% compared to that in 2018 (faster than the growth of the total number of licensed corporations). This means that the SFC is actively continuing its policy of inspecting all firms every few years and not just those posing a higher than normal risk, so licensed corporations need to be prepared for when the SFC comes calling.

The top four breach areas identified in these inspections was, however, the same as the previous quarter:


Internal control weakness (123 – more than one-third of all breaches)


Non-compliance with anti-money laundering guidelines (87 – a year-on-year increase of almost 100% so it is very clear that the SFC’s focus on this area will not wane)


Breach of Code of Conduct for Person Licensed by or Registered with the SFC (54)


Breach of Fund Manager Code of Conduct (23)

The highest growth was recorded in online trading breaches, increasing year-on-year by a massive 200% continuing to show us that online trading platform operators are sticking out to the SFC at their peril.

  • Complaints

The SFC received 1,406 complaints and although the number of complaints against listed companies and disclosure of interests retained top-billing (accounting for almost two-thirds of all complaints), there were 154 complaints about the conduct of SFC licensees, and this number continues to see double-digit growth year-on-year. This is a timely reminder that for some businesses, complaints are inevitable so those firms need to have proper complaint handling infrastructure in place.

  • Enforcement

The SFC only started 32 new investigations this quarter while it brought 55 investigations to a close. Both figures have had a double-digit decline over the nine months ended 31 December 2019 compared to the same period in 2018.

No new criminal charges were laid in this quarter, keeping the total number for the entire financial year to date less than 10. The SFC issued 11 notices of decision for disciplinary action however and this means that the total for the first nine months in this financial year amounts to 37, which is one-third up compared with the same period in 2018. The number of individuals and corporations subject to ongoing civil proceedings was also two-thirds more than it had been compared to the previous year.

These numbers show us that although the overall number of open investigations and criminal matters decreased, the SFC’s enforcement staff remain very busy, seemingly opting in 2019 at least to handle more matters themselves or choosing to take more civil and fewer criminal proceedings presumably because the burden of proof and therefore level of evidence required is lower.









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