On 3 July 2024, the Hong Kong’s Securities and Futures Commission (SFC) issued a circular (Circular) regarding the governance and internal control standards of licensed corporations (LCs) for monitoring the adequacy of financial resources and compliance with the FRR.
The Circular outlines the expected FRR compliance standards.
Required liquid capital deficit incident report
Clients should note the following two changes as set out in the Circular:
1.Expected FRR compliance standards – prescriptive internal control measures
The SFC has set out the following prescriptive internal control measures in relation to the expected FRR compliance standards:
(a) sound accounting policies and procedures, including month-end and year-end closing procedures, for timely and proper recognition of revenues, accruals and provisions;
(b) a maker and checker mechanism for the calculation, monitoring and reporting of liquid capital;
(c) effective processes for ongoing liquid capital monitoring commensurate with the nature, scope, size and complexity of the LC’s business activities and operations;
(d) regular liquid capital projections for preparing and maintaining a sufficient liquid capital buffer;
(e) a liquidity management framework for handling thin excess liquid capital situations that entails effective alerts, relevant mitigation measures and escalation procedures with clear steps and timelines;
(f) procedures for ensuring compliance with all relevant notification requirements; and;
(g) where applicable, clear allocation of scope, roles and responsibilities between the LC and its external service providers regarding outsourced accounting and FRR compliance functions.
2. Reporting deficiency in minimum required liquid capital using prescribed form within three weeks
An LC that incurs a deficit in the minimum required liquid capital (RLC deficit) is now expected to submit an incident report to the SFC in the prescribed form (as set out in Appendix B of the Circular) within three weeks from the date of first identifying the RLC deficit.
For the avoidance of doubt, the submission of the incident report in the new prescribed form is not a substitute for the need to notify the SFC of the RLC deficit before the report is submitted. The LC is still expected to notify the SFC of the RLC as soon as practicable, and subsequently submit the incident report to the SFC within three weeks. Furthermore, the LC should immediately cease carrying on the regulated activity for which it is licensed and should notify its clients of the same as soon as practicable.
In addition, the existing requirements to notify the SFC if the liquid capital falls below 120% of the required minimum amount or 50% of the liquid capital stated in its last submitted return still remain the same at “as soon as practicable and in any event within one business day of becoming aware” and in writing. There is no prescribed form for the aforementioned notifications.
How can Deacons help?
LC clients are reminded that their “liquid” capital must always exceed its “required” liquid capital under the FRR. Furthermore, LC clients are reminded to abide with the relevant notification requirements to the SFC in relation to liquid capital as applicable.
Deacons regularly advises LC clients on regulatory issues and assists them in implementing internal control measures in relation to financial resources requirements and compliance with the FRR, including the preparation and review of policies and procedures, compliance health-checks and preparation for SFC routine inspections.
