Financial Services Risk and Regulation - PwC · the financial services industry.” ... devising these guidelines. For further details on these developments, please refer to the following

Financial Services Risk and Regulation

Regulatory updates newsletterJuly 2019

Regulatory Updates Newsletter — July 2019 PwC · 2

Executive Summary HKMA’s consultation on

market risk capital charges

and updates on Basel

standards

HKMA report on money

laundering and terrorist

financing risk assessment

in stored value facility

sector

SFC circulars on remote

onboarding of overseas individual

clients and amendments to

paragraph 5.1 of the Code of

Conduct

IA’s guidelines on exercising

power to impose pecuniary

penalty (GL22), enterprise risk

management (GL21), and

cybersecurity (GL20)

Other Regulatory

Updates

Glossary

Contents

Executive Summary 3

HKMA’s consultation on market risk capital charges and updates on Basel standards 4

HKMA report on money laundering and terrorist financing risk assessment in stored value facility sector 5

SFC circulars on remote onboarding of overseas individual clients and amendments to paragraph 5.1 of the Code of

Conduct

6

IA’s guidelines on exercising power to impose pecuniary penalty (GL22), enterprise risk management (GL21), and


7

Other Regulatory Updates 9

Glossary 10

Emily Lam

Partner

+852 2289 1247

PwC HK FS Risk and

Regulation

“The regulators continue to focus on

strengthening the financial services landscape

in Hong Kong. With this newsletter, we will

continue to keep you up to speed with

significant regulatory developments across

the financial services industry.”


After the HKMA issued eight virtual bank licences in Hong

Kong early this year, the Monetary Authority of Singapore

(MAS) announced that it will issue up to five new digital

bank licences in Singapore.

We at PwC launched a publication on how the newly

licensed Virtual Banks will disrupt the financial services

sector in Hong Kong and how established banks can

respond to stay relevant.

In this month’s newsletter, we discuss the following

developments:

• The HKMA issued a consultation and several circulars

on Basel standards. The consultation outlines the

HKMA’s plans for implementing the revised market risk

framework in Hong Kong.

• The HKMA also released a report which updates the

money laundering and terrorist financing (ML/TF) risk

assessment for the stored value facility (SVF) sector.

The report includes analysis of threats and

vulnerabilities as well as areas for further actions by

SVF sector.

• The SFC issued two circulars on remote onboarding of

overseas individual clients and amendments to

paragraph 5.1 of the Code of Conduct, respectively.

These guidelines cater for the need for intermediaries to

adapt their practices as business activities are

increasingly conducted online.

• The IA issued several circulars including guidelines on

exercising power to impose pecuniary penalty (GL22),

enterprise risk management (GL21), and cybersecurity

(GL20). The IA had actively engaged insurance

practitioners and Self-Regulatory Organisations in

devising these guidelines.

For further details on these developments, please refer to

the following sections in this publication.

Emily Lam

FS Risk and Regulation

+852 2289 1247

[email protected]

Executive Summary




standards



financing risk assessment in

stored value facility sector





Conduct






Other Regulatory

Updates

Glossary


HKMA’s consultation on market risk capital charges and updates on

Basel standards

The HKMA issued a consultation

and several circulars on

implementation of Basel standards

The HKMA issued a consultation paper

on 28th June setting out its proposal for

revising the current regulations on the

market risk capital charges in the

Banking (Capital) Rules (BCR).

The consultation follows the BCBS’

revised Minimum capital requirements

for market risk, commonly referred to as

the “Fundamental Review of the Trading

Book” (FRTB), issued in January 2019.

This consultation paper outlines the

HKMA’s plans for implementing the

revised market risk framework in Hong

Kong. It covers the:

• new Standardised Approach,

• new Internal Models Approach,

• Simplified Standardised Approach,

• requirements related to the boundary

between the trading book and

banking book, and

• details on the qualifying criteria for

using de-minimis exemptions.

The risks subject to market risk capital

charges include:

• Interest rate risk, credit spread risk,

equity risk, foreign exchange risk,

commodities risk and default risk for

trading book instruments; and

• Foreign exchange risk and

commodities risk for banking book

instruments.

The HKMA invites comments on the

proposal of this paper by 30 September

2019.

HKMA circular on Applicable

Jurisdictional Countercyclical Capital

Buffer (CCyB) Ratio for Hong Kong

In addition, the HKMA issued a circular

to notify that in accordance with section

3Q(10) of the BCR, the CCyB ratio for

Hong Kong will remain at 2.5%.

The HKMA has also issued further

guidance in the form of Frequently Asked

Questions in relation to “Sale and

Distribution of Debt Instruments with

Loss-absorption Features and Related

Products”.

The regulator is also recommending AIs

to familiarise themselves with the two

documents issued by the BCBS on

Leverage ratio treatment of client cleared

derivatives (Revised LR Treatment) and

Revisions to leverage ratio disclosure

requirements (Revised LR Disclosure

Requirements), on 26 June 2019.

Both the Revised LR Treatment and the

Revised LR Disclosure Requirements

will come into effect on 1 January 2022.

The HKMA intends to implement them

having regard to the BCBS timetable and

will consult the industry on its

implementation proposals in due course.

HKMA issued frequently asked

questions (FAQ) on reporting

treatment of transactions related to

initial public offerings

The HKMA also issued FAQs in

response to enquiries from AIs about the

reporting treatment of transactions

related to initial public offerings (IPOs) in

calculating capital and liquidity ratios.

Brian Yiu

Partner

+852 2289 1934

[email protected]




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Other Regulatory

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Glossary


The assessment and

recommendations are being

incorporated holistically into an

enhanced framework of SVF

account management

The HKMA has released a report which

updates the money laundering and

terrorist financing (ML/TF) risk

assessment for the stored value facility

(SVF) sector. The report includes

analysis of threats and vulnerabilities as

well as areas for further actions.

The latest assessment confirms that the

SVF sector continues to carry a medium

level of ML/TF risk.

The majority of the SVF sector continues

to be characterised by lower ML/TF risks

as determined by small stored value,

limited functionality and predominant use

for transport and low-value retail

transactions.

However, pockets of higher ML/TF risks

have emerged. These include some SVF

products with functions such as

overseas cash withdrawal, cross-border

remittance and person-to-person fund

transfers, which may introduce higher

vulnerability for illicit fund flows. The

findings and conclusions in the report

are consistent with those for other

jurisdictions.

Overall, based on analysis of the nature

and extent of suspected criminal

activities, the threat to the SVF sector is

assessed to be medium and

concentrated in:

• network-based SVFs being exploited

for various fraud-related activities;

• prepaid cards being loaded from

opaque funding sources and misused

for cash withdrawal in higher risk

countries; and

• P2P functionality being abused for

illegal bookmaking activities.

The HKMA has identified a number of

areas for further action:

1) Enhancing the regulatory framework

and thus the resilience of the SVF

sector to ML/TF risks, among other

risk areas, while maintaining

functionality aimed at customer

convenience and ease of use;

2) Strengthening further understanding

of ML/TF risks, by monitoring new

typologies and addressing any

information gaps. This will be

achieved through ongoing

cooperation with law enforcement

agencies and other financial

regulators;

3) Continuing risk-based supervision,

including thematic reviews and

industry training, to focus on areas

of higher ML/TF risk and target

effectiveness of AML/CFT Systems;

4) Strengthening the partnership with

the SVF sector through engagement

and guidance to enhance

understanding and mitigation of risks

by the licensees;

5) Furthering cooperation with

regulatory authorities in other

jurisdictions, in particular Mainland

China, in view of the increasing

cross-border usage of SVF products

and services; and

6) Supporting innovative means by

which SVF licensees implement

financial crime controls effectively

and exploring the greater use of

technology and analytical tools in

supervisory work.

HKMA report on money laundering and terrorist financing risk

assessment in stored value facility sector

Hokee Fu

Partner

+852 2289 2721

[email protected]




standards





sector





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Other Regulatory

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Glossary


The new guidelines are both

effective from 5 July 2019

The SFC issued a circular to inform

intermediaries of amendments to the

Code of Conduct to facilitate new

approaches for opening accounts. These

changes were made to cater for the need

for intermediaries to adapt their practices

as business activities are increasingly

conducted online.

Paragraph 5.1 of the Code of Conduct

requires intermediaries to take all

reasonable steps to establish the true and

full identity of each of their clients and

provides specific guidelines on the

acceptable approaches for opening

accounts. Following a review of these

requirements announced in a circular

dated 12 July 2018, the SFC has decided

to amend paragraph 5.1 of the Code of

Conduct. To help intermediaries comply

with paragraph 5.1 of the Code of

Conduct, acceptable account opening

approaches will now be published on a

designated webpage

(https://www.sfc.hk/web/EN/rules-and-

standards/account-opening/), which will

also feature relevant circulars and

frequently asked questions (FAQs).

In addition, the SFC issued another

circular to inform intermediaries of a new

approach for the online onboarding of

overseas individual clients which is

acceptable from 5 July 2019 when

amendments to paragraph 5.1 of the

Code of Conduct took effect.

From 5 July 2019, the SFC will accept the

following approach to verify the identity of

an overseas individual client provided that

all steps listed below are completed:

• Identity document authentication:

Access the embedded data in the

client’s official identification (ID)

document, or obtain an electronic copy

of the relevant sections of the ID

Document. Use appropriate and

effective processes and technologies

to authenticate the client’s ID

Document. Obtain prior consent from

client to engage a third party to carry

out account opening procedures

involving clients’ personal information.

• Identity verification: Use appropriate

and effective processes and

technologies to obtain the client’s

biometric data and match it with the

authenticated data in the client’s ID

Document or other reliable and

independent sources to verify the

client’s identity. Implement appropriate

safeguards to protect the client’s

biometric data.

• Execution of client agreements:

Obtain a client agreement signed by

the client with an electronic signature.

• Designated overseas bank

accounts: Conduct all future deposits

and withdrawals for the client’s

investment account only through a

Designated Overseas Bank Account.

• Record keeping: Maintain proper

records for each client’s account

opening process in a manner which is

readily accessible for compliance

checking and audit purposes.

• Training: Intermediaries should

ensure that staff responsible for online

onboarding possess adequate training

and skills to perform and oversee the

relevant procedures.

• Assessment: Conduct at least an

annual comprehensive assessment to

evaluate the appropriateness and

effectiveness of the adopted

processes and technologies prior to

implementation.

The SFC also issued another circular to

remind intermediaries of their obligations

to comply with the requirements under

the Code of Conduct when they are in

possession or control of client assets.

SFC circulars on remote onboarding of overseas individual clients and

amendments to paragraph 5.1 of the Code of Conduct

Hokee Fu

Partner

+852 2289 2721

[email protected]




standards



financing risk assessment in

stored value facility sector





Conduct






Other Regulatory

Updates

Glossary


The IA had actively engaged

insurance practitioners and Self-

Regulatory Organisations in

devising the new guidelines

GL22 sets out the considerations that the

IA will take into account when

determining whether to impose a

pecuniary penalty on regulated persons

and the amount of the penalty. GL22 will

come into effect immediately upon the

implementation of the new statutory

regulatory regime for insurance

intermediaries on 23 September 2019.

This Guideline is made pursuant to

section 83 of the Insurance Ordinance

(Cap. 41) (“the Ordinance”). Pursuant to

section 81(1) of the Ordinance, the IA

may impose on a person a pecuniary

penalty either on its own or together with

other disciplinary sanctions under section

81(4) if:

• the person is, or was at any time,

guilty of misconduct when the person

is a regulated person;

• the person was at any time guilty of

misconduct when the person was a

regulated person; or

• the IA is of the opinion that:

o at the time when the person is a

regulated person, the person is not

a fit and proper person; or

oat a time when the person was a

regulated person, the person was

not a fit and proper person.

GL21 sets out the objectives and

requirements on enterprise risk

management (“ERM”) and the Own Risk

and Solvency Assessment. It also

provides the impetus for insurers to

establish effective tools to identify,

monitor, manage and mitigate risks.

The main objective of this Guideline is to

nurture a sound risk culture in the

insurance industry that should be

reflected in the values, attitudes and

norms of business behaviour. The board

of directors and senior management of

an authorised insurer should take

ownership for shaping a sound risk

culture to drive the insurer’s business

practices and decisions.

This Guideline shall take effect from 1

January 2020.

GL20 sets the minimum standard for

cybersecurity that authorised insurers are

expected to have in place and the

general guiding principles which the IA

uses in assessing the effectiveness of an

insurer’s cybersecurity framework. The

guidelines will be effective on 1 January

2020.

The key highlights of GL20 are:

• Authorised insurers should establish

and maintain a cybersecurity strategy

and framework tailored to mitigate

relevant cyber risks that are

commensurate with the nature, size and

complexity of their business. The

cybersecurity strategy and framework

should be endorsed by the Board of the

insurer.

• A self-assessment tool for the overall

cyber risk management program should

be put in place, as part of an enterprise

risk management program.

• There should be effective monitoring

measures including, among others,

network monitoring, testing, internal

audit and external audit.

IA’s guidelines on exercising power to impose pecuniary penalty

(GL22), enterprise risk management (GL21), and cybersecurity (GL20)

Billy Wong

Partner

+852 2289 1259

[email protected]




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PwC · 8

HKMA circular on Revised Return of Certificate of

Compliance (MA(BS)1F) and Return of Capital

Adequacy Ratio (MA(BS)3)

The HKMA have finalised the changes to the Return of

Certificate of Compliance (MA(BS)1F) (“Certificate”)

and Return of Capital Adequacy Ratio (MA(BS)3)

(“CAR Return”), together with the accompanying

Completion Instructions (CIs).

The revisions to the Certificate primarily seek to:

(i) replace as appropriate references to the Banking

Ordinance (BO) and the Banking (Exposure

Limits) Rules (Chapter 155R) which have been

made obsolete by the implementation of the new

Banking (Exposure Limits) Rules (Chapter 155S)

(BELR) and

(ii) add a new reporting field on “adjusted Tier 1

capital amount” to support the implementation of

the new 50% land exposure limit under Part 6 of

the BELR.

The revisions to the CAR Return primarily seek to

collect a new risk-weighted amount on sovereign

concentration risk under Part I for the calculation of the

capital adequacy ratio and introduce a new Part VI to

collect the detailed breakdown of that amount.

AIs are required to submit the revised returns starting

with the reporting position of 30 September 2019.

HKMA circular on Phase-one measures to promote

green and sustainable banking

After unveiling the adoption of a three-phased approach

to promote green and sustainable banking at the Green

Finance Forum on 7 May 2019, the HKMA has issued

this circular to set out its work plan for Phase I.

In Phase I, the HKMA will prioritise the development of

a common framework (the Framework) to enable

comprehensive assessments of the “greenness” of AIs.

The HKMA will collaborate with major industry

stakeholders to form a Working Group to carry out the

relevant work.

The first meeting of the working group is expected to be

held before the end of August 2019. The Working

Group aims to develop the Framework for industry

consultation by the end of this year.

The HKMA has recently joined the Central Banks and

Supervisors Network for Greening the Financial System

(NGFS) and will participate in the NGFS’s workstreams,

so that international insights would be considered in the

development of our local Framework.

Once the Framework is finalised by incorporating the

industry’s comments as appropriate, the HKMA will

conduct a comprehensive assessment, tentatively in the

second quarter of 2020, to inform future policy

development.

Joint consultation conclusions on the annual

update to the list of Financial Services Providers

(FSP List)

The HKMA and the SFC issued joint consultation

conclusions on the annual update to the list of Financial

Services Providers (FSP List) under the clearing

obligation for OTC derivative transactions.

The FSP List includes entities that meet the following

two criteria:

a) They belong to a group of companies appearing on

the list of global systemically important banks

published by the Financial Stability Board, or on the

list of dealer groups. This group undertook to the

OTC Derivatives Supervisors Group to work

collaboratively with central counterparties,

infrastructure providers and global supervisors to

continue to make structural improvements to the

global OTC derivatives markets; and

b) They are members of the largest central

counterparties offering clearing for interest rate

swaps in the United States, Europe, Japan and

Hong Kong.

Regulatory Updates Newsletter — July 2019

Other Regulatory Updates




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PwC · 9Regulatory Updates Newsletter — July 2019

Glossary

AI Authorised Institutions IC-2 Internal Audit Function

AML Anti-Money Laundering ICO Initial Coin Offering

BC Basel Committee IFRS International Financial Reporting Standard

BCBS Basel Committee on Banking Supervision IOSCO International Organization of Securities Commission

CFT Counter-Financing of Terrorism IR-1 Interest Rate Risk Management

CG-1 Corporate Governance of Locally Incorporated Authorized Institutions IRR Interest Rate Risk

FATF Financial Action Task Force IRRBB Interest Rate Risk in the Banking Book

FinTech Financial Technology LC Licensed Corporation

FMCC Fund Manager Code of Conduct MAS Monetary Authority of Singapore

FI Financial Institutions MoU Memorandum of Understanding

FSB Financial Stability Board RO Responsible Officer

HKMA The Hong Kong Monetary Authority RE-1 Recovery Planning

IA The Insurance Authority SFC The Securities and Futures Commission

IAF Internal Audit Function SFO Securities and Futures Ordinance

IC-1 Risk Management Framework SPM Supervisory Policy Manual




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Documents

Financial Services Risk and Regulation - PwC · the financial services industry.” ... devising these guidelines. For further details on these developments, please refer to the following