Deacons Financial Services Client Seminar 2014 and Insights/Publication/20 · Deacons Financial Services

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  • Deacons Financial Services Client Seminar 2014General SFC Licensing and Compliance UpdateJane McBride, Partner & Head of Financial Services Licensing, Compliance and Regulatory 1:00 pm 2:00 pm, Monday, 10 November 2014

  • These materials are for general guidance only and should not be relied upon as, or treated as a substitute for, specific advice. Deacons accepts no responsibility for any loss which may arise from reliance on any of the information contained in these materials. If you would like advice on any of the issues raised, please contact us.


    Deacons 2014 1

  • Todays topics

    1. New SFC approach to compliance?

    2. Professional Investor Regime

    3. Disclosure in SFC Applications

    4. On-going SFC Notifications

    5. SFC Annual Report

    6. Enforcement by SFC

    Deacons 2014 2

  • 1. New SFC approach to compliance?

    SFC Supervisory briefing session (September 2014) Corporate culture

    Top down / Senior management approach General Principle 9 of the Code of Conduct

    No surprises culture communication with the SFC Inspections

    Electronic trading controls, AML and supervision Enforcement

    Top down approach Equal liability on both the firm and individuals Sanctions rather than solutions

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  • 1. New SFC approach to compliance?

    Supervision of intermediaries: key initiatives and focus in 2014 by James Shipton (Executive Director of Intermediaries)

    Culture Importantly, what is clear is that regulators around the world are now

    emphasising that culture is an important subject for regulators to focus on when supervising firms.

    When we speak of conduct, behaviour and processes at firms we have to take a step back and remember that all these things originate from decisions of individuals within firms and from decision-making processes by those firms.

    General Principles 1 and 2 requires licensees, both individual and corporate, to act honestly, fairly and in the best interests of its clients and the integrity of the market.

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  • 1. New SFC approach to compliance?

    Regulatory Inspections

    This drives home the need for a more judgment-based and forward-looking approach to supervision. To do this, we will examine the root causes of decision-making, conduct and behaviour at firms that is, looking beyond the mere existence of a compliance or control framework to see if it has a supporting culture. It also means that the SFC are adopting, as our own strategy, an outcomes-oriented and inquisitive approach.

    Deacons 2014 5

  • 1. New SFC approach to compliance?

    Regulatory Inspections This judgment-based and outcomes-oriented supervisory approach also

    means that we will be looking at the sum of the parts and joining the dotswhen we supervise firms. In other words we will not look narrowly at particular instances or incidents, whether in Hong Kong or abroad. Instead we will look to see what such incidents say about a firm's control environment and culture and how it reflects on its decisions and decision-making processes.

    This means, going forward, we will be taking an interest in: (i) how incentives and disincentives impact decisions and conduct within

    firms; (ii) the leadership and decision-making structures of firms; and (iii) the corporate values and professionalism of firms in other words

    their organisational culture.

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  • 1. New SFC approach to compliance?

    Senior management responsibility This means that the entire management structure has to take real

    responsibility for regulatory matters and avoid overly delegating responsibility to compliance or other control functions.

    In my experience it is the senior vice presidents and junior managing directors who are responsible for teams that are the crucial conduits in this regard. So it is important that these people in authority have the right professionalism, values and supporting culture.

    Deacons 2014 7

  • 2. Professional Investor Regime -Product Disclosure and Conduct Regulations Overview

    Two pillars

    Product disclosure

    Conduct Regulation (including Suitability Obligations)

    Conduct regulation is relevant to all intermediaries to all regulated services they provide regardless of whether the offering documents are exempted from SFC authorization

    Deacons 2014 8

  • 2. Professional Investor Regime -Product Disclosure

    The first pillar

    Companies (Winding Up and Miscellaneous Provisions) Ordinance (CO) - shares & debentures (prospectus regime)CO and SFO

    not subject to authorised product regulatory standards

    Private placement to PIs under either prospectus (CO) or as offer of investment (SFO)

    SFO, SFC Handbook - funds & structured products (offer of investment regime)

    Regulatory standardsPublic

    SourceOffering documentOffering

    Deacons 2014 9

  • 2. Professional Investor Regime -Conduct Regulation (Suitability Obligations)

    The second pillar key conduct requirements

    General Principle (GP)1 Honesty and fairness GP 2 Diligence

    GP 5 Information for clients

    e.g. disclosure before point of sale in terms of sales related information

    e.g. disclosure after sale in terms of reporting statements under the Contract Notes Rules

    Know your Client (KYC) process Suitability Obligations 5.2

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  • 2. Professional Investor Regime Category A PI

    Category A PI

    Regulated financial institution (e.g. bank, licensed corporation, investment service provider)

    Regulated insurance company

    Recognized exchange company


    Mandatory Provident Fund

    Occupational Retirement Scheme

    Government (e.g. HKSAR Government)

    Deacons 2014 11

  • 2. Professional Investor Regime Category B PI

    Category B PI ( HNW corporate / individual investor) Eg Hospital Authority is a Category B PI

    Investment vehicle owned by one / more of the above


    Trust Corporation

    Corporation / Partnership

    HK$ 40 million total assets

    HK$ 8 million portfolio


    Deacons 2014 12

  • 2. Professional Investor Regime Conduct Regulation Establishment of PI status

    Both Categories A and B PI status need to (i) be verified and (ii) keep evidence on file (one of the deficiencies in the thematic inspection report)


    Category A PIs automatic waiver no knowledge / experience assessment or (ii) consent / declaration required

    Category B PIs optional to go through the two-tier waiver process

    Go through the process?

    Option 1 - No comply with all investor protection provisions

    Option 2 - Yes waive most of the investor protection provisions

    See steps in next slide Deacons 2014 13

  • 2. Professional Investor Regime Conduct Regulation Table

    15.4(c)Y or NNNAnnual confirmation5

    NYNInvestment Protection Apply?6

    15.4(b)YNNObtain written and signed consent declaration4


    Provide written explanation including risks and consequences for being treated as PI3

    15.3 (a) to (e)YNNBright line knowledge / experience assessment2

    PI only condition orprivate placementYYYVerification of status1

    Source(Code unlessOtherwise stated)

    B (Option 2: waiver)

    B (Option 1: no waiver)ACategoryStep

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  • 2. Professional Investor Regime -Investor Protection Provisions which can be waived

    Code of Conduct (Code) requirements Know your client circumstances - 5.1(a) Investor characterization of derivative knowledge 5.1A Suitability obligation 5.2 For discretionary accounts, obtaining written authority before effecting

    transactions for clients and annual confirmation 5.4 Confirm promptly with client transaction features after effecting each

    transaction for client 8.2 Inform client about the licensed corporation 8.1 Disclosure certain benefits including sales related information 8.3A Written client agreement 6

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  • 2. Professional Investor Regime -Investor Protection Provisions which cannot be waived

    KYC Verify the true identity of client - 5.1(a)

    Derivative products - assure oneself client understand risks and has sufficient net worth to assume the risks and bear the potential loss -5.3

    Information for client Financial information of the licensed corporation if requested by client - 8.4

    Corporate actions in relation to client assets, only applicable if hold client assets - 8.5

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  • 2. Professional Investor Regime -PI Consultation Conclusions

    Conclusions (finally) published on 25 September 2014

    Conclusions on amendments to the PI regime

    Further Consultation on the client agre