Since we published SFC Inspections – Hints for Smoothing the Process in May 2012, many clients have had their long-overdue SFC routine inspections including some that had previously only received a prudential visit. Others however have now had their second inspection during this period.
Some clients are being contacted by the SFC only four weeks before the inspection and one received just two weeks' advance notice. It is therefore more important than ever that everyone involved in the company's operations is always on standby for the SFC inspection call.
We included eight hints in our May 2012 publication for assisting licensed companies prepare and stay ready for the inevitable visit. We now add the following hints to that list:
1. Communicate with the SFC
The SFC has mentioned on several different public occasions that it encourages licensed companies to be proactive in communicating with the SFC. Licensed corporations are therefore advised to keep the SFC updated about their businesses, operations and even any issues. If a licensed company has maintained an open dialogue with the SFC, there should be “no surprises” when the SFC goes on-site which should bode well for the outcome. This approach is also advisable in handling the SFC’s document request list for an inspection.
2. Get senior management involved
The SFC has made it clear that it will widen its supervisory approach and pay more attention to the “drivers of decision-making and conduct within firms”. It wants to have dialogue with the heads of the company's business / functions on regulatory matters, and is no longer willing to just have these discussions with legal and compliance staff. The SFC is also focusing on ensuring that the right people are responsible officers for a licensed company.
There is no need for senior management (the responsible officers and department heads) to panic about an SFC inspection but the mindset needs to be that the company could get "the call" from the SFC tomorrow. This means members of senior management should be involved in regulatory and internal control issues and not just delegate them to legal and compliance staff.
During on-site inspections, senior management should try to stay around and should provide the SFC with a presentation in the opening meeting on the company's business operations, compliance monitoring and risk management culture and infrastructure. A well-prepared and detailed opening meeting will assist the SFC to better understand the company, its operation process, its inherent risks (and how they are being managed properly), which can only serve to smooth the inspection process.
3. Do your own inspection?
Based on the SFC’s first supervisory briefing, it is likely that it will continue to focus on AML / CDD issues, electronic trading controls, management accountability and supervision and internal control systems during routine inspections.
It is worth conducting self-assessments in advance of the real thing, to identify and resolve any issues before the SFC does. Taking KYC/AML as an example:
- Are the existing KYC/AML policies and procedures sufficient?
- Is the existing compliance monitoring on KYC/AML effective?
- Is the existing documentation sufficient to show that all the required steps are being properly carried out?
- Can staff explain the KYC/AML process to a regulator?
It is worthwhile for staff to get prepared to meet with and be interviewed by the SFC during an inspection.