An increased number of financial crimes, market misconduct and compliance oversight has drawn increased regulatory attention. In consideration of the rising threat, the Securities and Futures Commission (SFC) is taking stricter regulatory and enforcement actions in Hong Kong.
Ongoing focus of SFC
Anti-money laundering/ Counter-terrorist financing. Criminals continuously seek new ways to convert illegally obtained money into a legitimate source under Hong Kong’s open financial system. In response, the SFC regularly reviews and amends the Anti-money Laundering and Counter-terrorist Financing Ordinance (AMLO).
Insider dealing. Recently in June 2022, the SFC proposed to broaden the scope of the insider dealing provisions. If the proposal is implemented, SFC would be enabled to address insider dealing perpetrated in Hong Kong involving overseas-listed securities and insider dealing involving Hong Kong-listed securities perpetrated elsewhere.
Suitability obligations. Fund managers are obliged to ensure that their investment recommendations and solicitations are reasonably suitable for their clients. Considering that more financial institutions sell investment products through online platforms, the SFC issued Guidelines on Online Distribution and Advisory Platforms (opens a new window) to provide more tailored guidance to the industry on suitability requirements. Additionally, to protect investors from the evolving ESG risk, the SFC requires fund managers managing collective investment schemes to take climate-related risk into consideration in investment and make appropriate disclosures
Unlicensed activities. Financial institutions and fund managers are required to be licensed and registered by the SFC. To warn investors about financial crimes and unlicensed activities, the SFC produced an alert list consisting of unlicensed entities targeting Hong Kong investors.
Lax internal control. According to SFC’s Annual Report 2021-22 (opens a new window), the majority of breaches (427 out of 1416) during on-site inspections are relevant to internal control weaknesses. It reflects that financial entities need to spend more effort on areas, including management review and supervision, operational controls over the handling of client accounts, segregation of duties, information management, and audit trail for internal control purposes.
Consequences of Non-compliance
Offenders of the Securities and Futures Ordinance (SFO) may face fines and suspension of license. For instance, failing to discharge its obligations as a sponsor, UBS was fined $375 million and suspended (opens a new window) from giving advice on corporate finance for one year; the sponsor principal in charge of that project also faced a two-year suspension of license. And Citigroup Global Markets Asia Limited was fined $348.25 million for serious regulatory breaches in relation to the issuance of indications of interest and client facilitation activities by its cash equities business.
However, instead of fines, litigation expenses often account for the largest portion of cost in a breach. A court case can go on for years and years, and hiring a legal team to defend against the claim can pose a heavy financial burden on the company. In addition, companies and fund managers who have breached the ordinance may suffer from a reputational damage and loss of client’s confidence, affecting their businesses detrimentally.
Why is insurance necessary?
Investment professionals owe duties to regulators, shareholders, investors and employees, and are exposed to management and professional liabilities which may significantly damage their reputation, bottom line and future business.
Investment Managers Insurance (“IMI”) is a blended program offering protection in an environment of increasing regulatory risk and comprises of:
Professional Indemnity Insurance (“PI”) which protects an investment manager / advisor and its funds as well as its employees from delivering or failure to deliver investment services;
Directors & Officers Liability Insurance (“D&O”) which covers the personal liabilities arising from claims of actual or alleged error, omission or breaches of management duties; and
Crime Insurance (“Crime”) which protects funds against direct financial loss resulting from employee dishonesty and third-party fraud.
IMI offers the cover to a broad range of funds against claims from trade errors to breaches of investment mandate as well as costs and expenses pertaining to regulatory investigations.
If you wish to discuss with our experts on your insurance coverage, please do not hesitate to contact:
Melody Qian, Head of Global Professional & Financial Risks (GPFR), Greater China | +852 2250 2672 | Melody.Qian@lockton.com (opens a new window)