16 July 2020
Currently, we have more clients undergoing concurrent Hong Kong Securities and Futures Commission (SFC) routine inspections than we have ever had before. Further, in a bow to the COVID-19 pandemic (and possibly the SFC’s relocation out of the Hong Kong central business district to Quarry Bay on the eastern-side of Hong Kong), this round of inspections is being conducted remotely, typically without any visits to the client’s office.
It may be that the SFC decided to step up its reviews of licensed firms following its issuance of the circular to intermediaries and circular to management companies and trustees and custodians of SFC-authorised funds on 27 March 2020 reminding firms of the suitability requirements and the obligation to properly manage fund liquidity and ensure fair treatment of investors, in light of the pandemic. Please also refer to our articles of 8 April 2020 and 21 April 2020 for a summary of these circulars.
During this routine inspection blitz, it is more important than ever that firms which have not been inspected for three or four years (or firms which otherwise may be high-risk) remain ready for the inevitable “call” from the SFC to schedule a routine inspection (commencing from the opening meeting). Before the pandemic, when people were travelling frequently, some firms needed to ask the SFC to delay the opening meeting until key stakeholders could all be in Hong Kong but now inspections are tending to start within a few weeks of the call.
The SFC has made it clear that it expects the individuals who manage the business of the licensed firm to be accountable for the conduct and behaviour of its staff and to be responsible for the firm’s compliance culture, i.e. that they cannot simply delegate this to their legal and compliance colleagues. This means it is important that the Managers-In-Charge and all the Responsible Officers (and where relevant even the non-executive directors) all get involved in the whole routine inspection process and attend and speak at the opening meeting. The opening meeting (which can last up to two hours) provides the perfect opportunity for a firm to explain their business activities and internal control framework and compliance infrastructure in detail to the SFC, and set the scene for the rest of the inspection. Please refer to our client alert of 3 October 2019 for tips for managing these meetings.
Licensed firms are also recommended to conduct self-assessments regularly in advance of the real thing, to identify (and resolve) any problematic or weak areas before the SFC does. It is also useful to review the types of breaches identified by the SFC during other inspections, as published in the SFC’s quarterly / annual reports. We will include an analysis of the SFC Annual Report 2019/2020 in our July newsletter. The SFC is continuing to focus on a firm’s new investor/investment take-on processes and procedures during its remote inspections and issued a circular on 27 March 2020 to remind firms of the suitability obligations (and this circular is specifically mentioned again in the SFC Annual Report 2019/2020).
Earlier this year, we published a four-part series of articles on the observations we’d noted on compliance “health checks” we’d conducted on different types of clients. These health checks involve operational reviews and interviews and are conducted to help clients prepare for SFC routine inspections. The articles are available here: asset managers (general), hedge fund managers, private equity managers and private placement agents.
For further information, please contact:
Connie Chan, Deacons
connie.chan@deacons.com.hk