Hong Kong – Proposed Legislation To Enable SFC To Provide Active Assistance To Overseas Regulators On Supervisory Matters.

21 July, 2015

 

On 12 June 2015, the Securities and Futures (Amendment) Bill 2015 (Bill) was tabled before the Legislative Council. The Bill proposes, among other things, amendments to the Securities and Futures Ordinance (SFO) to enable the Securities and Futures Commission (SFC) to provide supervisory assistance to overseas regulators. Such amendments originate from a 1-month consultation exercise launched by the SFC in December 2014, in relation to which the SFC published its conclusions in early June 2015.

 

The SFC's consultation conclusions (Consultation Conclusions) largely adopted the proposals set out in its December 2014 consultation paper (Consultation Paper), apart from a few small enhancements to take into account concerns raised by the public during the consultation period. Our briefing on the Consultation Paper can be found here.

 

Subject to satisfying certain requirements and safeguards, the new supervisory powers will enable the SFC to provide greater assistance to overseas regulators beyond the realm of enforcement by:

 

1. obtaining records and documents from a licensed corporation or a related corporation of a licensed corporation that are otherwise not available to the overseas regulator; and 
2. making enquiries about such records and documents and related transactions and activities.

 

Regulated entities which operate in multiple jurisdictions will likely be subject to more scrutiny and information requests in Hong Kong and overseas and may need to put in place new protocols to handle requests in view of the SFC's proposed new supervisory powers.

 

BRIEF RECAP OF CONSULTATION PAPER PROPOSALS

 

Current legislative framework for providing assistance to overseas regulators

 

As mentioned in our briefing on the Consultation Paper, the SFC already has a power to provide information to overseas regulators, but the SFO does not permit it to seek out information on behalf of an overseas regulator unless the request is made in the course of an investigation. The proposed amendments in the Bill address that gap and allow active assistance in a supervisory context.

 

With the enactment of the Bill, the SFC hopes to be able to supervise licensed corporations which operate in multiple jurisdictions more effectively and comprehensively, and secure access for Hong Kong licensed corporations to certain overseas markets, which are only open to jurisdictions that are parties to international cooperation arrangements.

 

Purposes and scope of supervisory assistance

 

In the Consultation Paper, the SFC proposed to only exercise its supervisory assistance powers for the overseas regulator's supervisory purpose(s) of ascertaining:

 

1. the risks to and the impact on the stability of the financial system in its jurisdiction; and/or
2. compliance with legal or regulatory requirements that it administers in relation to transactions and activities regarding securities, futures contracts, leveraged foreign exchange contracts, collective investment schemes, over-the-counter derivative products or other similar transactions that it regulates.

 

(together, the Supervisory Matters)

The relevant supervisory purpose(s) must relate to:

 

1. a licensed corporation that is regulated by the SFC and the overseas regulator; and/or
2. a related corporation of a licensed corporation (i.e. holding company, subsidiary or subsidiary of the same holding company of the licensed corporation) where the related corporation is regulated by the overseas regulator.

 

Power to gather information for supervisory assistance

 

The SFC's proposed supervisory assistance powers included:

 

1. obtaining records and documents from a licensed corporation or a related corporation of a licensed corporation that are otherwise not available to the overseas regulator; and
2. making enquiries about such records and documents and related transactions and activities.

 

The records and documents referred to above must relate to:

 

1. any regulated activity carried on by the licensed corporation; or
2. any transaction or activity which was undertaken in the course of, or which may affect, any regulated activity carried on by the licensed corporation.

 

Safeguards for providing supervisory assistance

 

In terms of safeguards, it was proposed in the Consultation Paper that the overseas regulator would be required to provide written undertakings to the SFC to the effect that it would:

 

1. use the information obtained from the SFC as a result of the request for assistance solely for ascertaining the Supervisory Matters, and not use the information in any proceedings unless it has made a separate request for investigation assistance and the SFC has agreed to provide such information pursuant to the latter request;
2. treat the information as confidential and not disclose it to any other person for any purpose without the consent of the SFC;
3. inform the SFC as soon as reasonably practicable in the event that it receives a legally enforceable demand for disclosure of any of the information and assist in preserving the confidentiality of the information by taking all appropriate measures; and
4. cooperate with the SFC in any action or proceedings which seek to safeguard the confidentiality of the information.

 

KEY CHANGES TO PROPOSALS AND CLARIFICATIONS MADE FOLLOWING CONSULTATION

 

In the Consultation Conclusions, the SFC sets out the enhancements made to its proposals, as well as its responses to and clarifications on various issues, in response to the concerns raised during the consultation. The key issues include the following:

 

Where the overseas regulator can obtain the information itself through reasonable means

 

The SFC agrees that it should not provide assistance where the overseas regulator can obtain the information itself through reasonable means. It has therefore proposed that the overseas regulator be required additionally to confirm in writing that it has not been (and will not be able to) obtain the requested information by any other reasonable means and fully ascertain the Supervisory Matters without such information.

 

"Financial system"

 

In view of concerns about the lack of definition of "financial system" in the formulation of the Supervisory Matters above, the SFC has proposed revising the wording from "stability of the financial system" to "financial stability" (of the overseas jurisdiction in question).

 

However, under the revised wording, the question of what affects "financial stability" will still be subject to the interpretation of the overseas regulator who is requesting the information.

 

Other issues regarding the scope of supervisory assistance

 

The SFC has not considered it necessary to impose "gravity" or "materiality" thresholds on the matters subject to supervisory assistance.

 

The SFC has also refused to confine the scope of assistance to licensed corporations which are dual registered in Hong Kong and overseas. As indicated in its Consultation Paper, the SFC is of the view that the extension of scope to related corporations of licensed corporations would greatly assist group-wide supervision and monitoring of financial stability. The activities of related corporations can create material risks for one another, including those in other jurisdictions.

 

Protections

 

In its Consultation Conclusions, the SFC confirmed that the proposals do not alter the existing positions regarding legal professional privilege and privilege against self-incrimination. The SFC also confirmed that disclosing client information to the SFC when complying with the SFC's request would not be in breach of the Personal Data (Privacy) Ordinance.

 

COMMENTARY

 

Under the current legislative framework, the SFC is only able to share information already in its possession with an overseas regulator, but is not able to exercise its supervisory powers to obtain information for the purpose of assisting an overseas regulator in non-enforcement related matters. This will change once the Bill is passed.

The proposed amendments in relation to supervisory assistance will bring Hong Kong in line with international standards and enable the SFC to enter into supervisory cooperation agreements with overseas regulators.

Going forward, it is likely that both Hong Kong licensed corporations and their overseas related regulated entities will be subject to an increasing amount of information requests from regulators on matters which may be unrelated to compliance with local regulatory requirements, whether or not they are licensed or regulated by that regulator. As such, Hong Kong licensed corporations which are part of multi-national regulated groups should ensure that they have in place a protocol that will enable them to properly handle requests from regulators.