Supervision
Supervising by inspections, stress tests
We conducted 252 risk-based inspections of licensed corporations at their premises last year. The financial soundness of individual firms and their custody of client assets, amongst other risk areas, have been our focus in many of our inspections. Some inspections covered specific areas of regulatory compliance across different firms, such as, the anti-money laundering regulations, selling practices requirements and conduct requirements for fund managers.
The European debt crisis raised market volatility, which might expose licensed corporations to higher financial risks. We also assessed the financial risk exposure of licensed corporations by conducting stress tests and analysing the reported risks. A cross-unit taskforce was set up to consider issues arising from the crisis. To prepare for the eventuality that the European sovereign debt problem worsens, the taskforce conducted desktop contingency rehearsals under hypothetical scenarios. We also shared information with the Hong Kong Monetary Authority (HKMA) regarding those licensed corporations affiliated with banking groups that may have exposure to European sovereign debts.
Managing closure of MF Global
On 1 November 2011, immediately after cessation of operation of MF Global Group, we took prompt action to preserve assets of clients by issuing a restriction notice to MF Global Hong Kong Ltd. We needed to act quickly to achieve an orderly resolution of the outstanding clients’ positions and settlement obligations. We directed the company to take all necessary steps to preserve the integrity of clients’ assets. On 2 November 2011, the court appointed provisional liquidators to take charge. We maintained close dialogue with the provisional liquidators, who obtained the court’s sanction in December 2011 for an interim distribution of clients’ funds.
In addition, we monitored the risks arising from the failure of MF Global Group with a view towards minimising the impact on Hong Kong investors and the local market.
Promoting compliance
During the year, we implemented the following initiatives to oversee the conduct of licensed corporations:
- Placing great emphasis on the industry’s compliance with the selling practices requirements, the SFC and HKMA conducted a mystery shopping programme, focusing on various areas, including the “know-your-client” procedures, product features explanation and risks disclosure as well as suitability assessment. Deficiencies identified in the selected licensed corporations during the programme included:
- insufficient understanding of the recommended products;
- inadequate/inaccurate explanation of the features and/or disclosure of risks of the products;
- inaccurate verbal representation of the SFC’s requirements or practices; and
- failure to take into account all the relevant personal circumstances of a client when making the suitability assessment.
- We published new guidelines to assist licensed corporations to comply with the requirements of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance applicable to specified financial institutions. The ordinance came into effect on 1 April 2012. Developed with industry engagement and in collaboration with other authorities, the new guidelines assist licensed corporations and associated entities in designing and implementing appropriate and effective policies, procedures and controls so as to comply with the relevant legal requirements and/or other applicable regulatory requirements. To enhance implementation readiness, we conducted training seminars for more than 1,100 industry professionals.
- To support the implementation of the proposed regulatory reform on OTC derivatives, we are conducting a review to update the capital requirements related to OTC derivatives under the Securities and Futures (Financial Resources) Rules, with reference to the international standards. We will consult the public on the subject in 2012.