16 November, 2016
Firms which apply to be licensed by the SFC will normally receive a set of “requisition” questions from the SFC as part of the application process. The purpose is to clarify the company’s business activities, internal controls, compliance set up and competence of responsible officers.
We have identified some trends in the types of questions asked recently by the SFC which may help firms who are planning to apply for a licence by highlighting recent focus areas by the SFC. Firms which are already licensed by the SFC may wish to revisit their internal policies to ascertain whether any updating is required or whether their policies and procedures need to be strengthened.
The recent trends can be divided into four main areas:
Compliance and internal controls
Outsourcing – The SFC has emphasised the need to ensure that outsourced functions are properly performed and that firms remain primarily responsible for all outsourced functions. The SFC continues to see control weaknesses during their inspections, when functions are delegated or outsourced. Firms should conduct due diligence on their service providers, monitor or review the outsourced functions on a regular basis and keep a record of their findings and action taken.
Compliance – In addition to compliance control measures, the SFC has also focused on the experience and qualifications of compliance officers. Firms should ensure that they recruit suitable and competent compliance officers who understand the compliance issues of SFC licensed corporations.
Managing conflicts – The SFC has asked for more detail on how firms manage conflicts of interest to achieve fair allocation of trades (in particular between funds and managed accounts), and on firms’ use and disclosure of soft commissions (from distributors or brokers). It is important that firms identify material conflicts and adopt robust compliance programmes to address them.
Responsibility of senior management
The SFC asks for details of the key person responsible for ensuring compliance with various functions such as financial resources, electronic trading systems and outsourced arrangements. This ties in with the SFC’s focus on senior management responsibility and decision making processes and making sure that senior management are engaged in the business. Responsible officers have responsibility over the overall regulated business, but the SFC will also look closely at whether firms recognise the importance of the role and responsibilities of the board of directors and other key personnel, whether or not they need to be licensed.
Substantial shareholders
The SFC has also reminded substantial shareholders in their requisition letters of their on-going notification obligations. The SFC issued the Circular to Intermediaries Regarding Compliance with Notification Requirements in May 2015 on this topic, so it is likely that the SFC has been focussing on whether substantial shareholders of firms are complying with their notification obligations which may affect the fitness and properness of firms to be licensed.
New Professional Investor regime and client agreements
PI regime – The SFC now also requires firms to confirm whether they have policies and procedures for the new professional investor regime which became effective in March 2016. Firms should have appropriate internal controls and systems in place to ensure compliance with the new regime.
Client agreements – The SFC also requires firms to confirm whether they are in compliance with the requirement to enter into client agreements when serving Individual Professional Investors and Corporate Professional Investors and to ensure suitability where applicable. Firms should be aware of the legal and practical implications on their day-to-day conduct of business and make related changes to their client agreements.
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