Hong Kong SFC consults on new rules and code for open-ended fund company

On 28 June 2017, the Securities and Futures Commission ("SFC") launched a two-month consultation (the "consultation") on the detailed legal and regulatory requirements applicable to the new open-ended fund company ("OFC") structure.

Currently, investment funds in Hong Kong are established only in unit trust form. The OFC structure will allow investment funds to be established in corporate form. The Securities and Futures (Amendment) Ordinance 2016, which is yet to take effect, provides the basic legal framework of the OFC structure and also empowers the SFC to make subsidiary legislation and issue codes and guidelines for the regulation of OFCs.

On this basis, the SFC launched the consultation, which sets out the SFC’s proposed Securities and Futures (Open-ended Fund Companies) Rules ("OFC Rules") and Code on Open-ended Fund Companies ("OFC Code"). Drafts of the OFC Rules and the OFC Code are attached to the Consultation paper as Appendices A and B respectively.

All OFCs (whether publicly or privately offered) will be subject to the OFC Rules and the OFC Code. OFCs which are intended to be offered to the public will also have to obtain the SFC’s authorisation under Part IV of the Securities and Futures Ordinance unless an exemption applies (public OFCs). The public OFCs will also be subject to the authorisation and ongoing post-authorisation requirements set out in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products.

Our recent bulletin sets out the key proposals for the OFC Rules and the OFC Code in the consultation paper.  Further background regarding the proposed OFC structure and the previous round of consultation can be found in our e-bulletin of March 2016.

SFC and AMF sign MOU on mutual recognition of funds between Hong Kong and France

The SFC of Hong Kong has announced that it has signed a Memorandum of Understanding ("MOU") with the Autorité des Marchés Financiers ("AMF") of France on mutual recognition of funds ("MRF") between Hong Kong and France.

The MOU allows eligible Hong Kong funds and French UCITS funds to be distributed to retail investors in France and the public in Hong Kong respectively, through a streamlined authorisation process. The types of funds currently covered are equity funds, bond funds and mixed funds.

The MOU also stipulates a mechanism for regular dialogue and regulatory cooperation between the SFC and the AMF. Cooperation includes, amongst other things, consultation, exchange of information, cross-border supervisory on-site visits of covered management companies and matters of mutual supervisory interest, such as regulatory developments. However, the MOU states that this does not include enforcement actions which are covered by the International Organisation of Securities Commissions' Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information.

This is the first of such and arrangement between Hong Kong and a member of the European Union, and is part of Hong Kong's continuous development as an international asset management centre. The SFC entered into MRF arrangements with the Financial Market Supervisory Authority of Switzerland late last year and the China Securities Regulatory Commission in 2015.

Please see our recent bulletin for further details.

Hong Kong SFC closes consultation on proposed guidelines to reduce and mitigate hacking risks related to internet trading

On 7 July 2017, the consultation by the SFC on proposals to reduce and mitigate hacking risks associated with internet trading closed. The consultation follows on from the SFC’s thematic review of the resilience to hacking risks of brokers engaged in internet trading (internet brokers) in late 2016. The SFC aims to publish its consultation conclusions by September or October 2017. Internet brokers will then be allowed 6 months to implement the new requirements.

The existing requirements for cybersecurity management are set out in paragraph 18 and schedule 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission ("Code of Conduct").

The SFC proposes to issue the Guidelines for Reducing and Mitigating Hacking Risks associated with Internet Trading, which contain 20 cybersecurity control practices for internet brokers to reduce and mitigate hacking risks, and clarify expected minimum standards regarding cybersecurity controls.  Most of the requirements under the proposed guidelines are already featured in the Code of Conduct but require elaboration. The proposed guidelines also consolidate relevant guidance from previous SFC circulars. The 20 control practices are grouped into three categories: (a) protection of clients’ internet trading accounts; (b) infrastructure security management; and (c) cybersecurity management and supervision.

The control practices include preventive and detective controls, such as two-factor authentication for client login, prompt notification to clients through a second channel after certain activities take place in their internet trading accounts, and ensuring arrangements with third party service providers are formalised.

Our recent bulletin highlights the consultation proposals in further detail.

Company director sentenced to four months' imprisonment for small bribe to bank staff 

Last month we reported on two recent cases in which company directors offered small "rewards" to bank clerks for helping them to set up company bank accounts. The defendant in the most recent case has now also received a custodial sentence, highlighting that the mere offer of a relatively small advantage – even when it is turned down –  is not only sufficient to lead to prosecution in Hong Kong, but may quite possibly attract jail time as well.

Previously, the ICAC reported in a press release that it had charged a company director with offering an advantage to an agent, contrary to Section 9(2)(a) of the Prevention of Bribery Ordinance, after he allegedly twice offered a mobile phone and 9,999 Renminbi as a reward to an employee of a bank for assisting him in opening an account for his company. The employee of the bank declined the defendant’s offer on each occasion, and subsequently reported the matter to the bank's management. The director's application to open a company account was declined.

The ICAC has recently reported that the company director has now pleaded guilty, and has been sentenced to four months' imprisonment.

This is similar to a case earlier in the year in which another company director was sentenced to 10 weeks' imprisonment for offering a HK$1000 bribe to a bank clerk, also for assisting him in setting up a bank account. The director was found guilty of offering an advantage to an agent contrary to section 9(2) of the Prevention of Bribery Ordinance. The bribe was also declined in this case.

Russian money laundering revelations lead to call for private-public cooperation on KYC

After a recent report revealed the extent to which Hong Kong and mainland China banks were allegedly being used to launder Russian money, a number of banks have committed further resources to fight money laundering and called for better private-public cooperation in gathering information on customers.

A report by the Organised Crime and Corruption Reporting Project, published in March, revealed that up to $80 billion may have been funnelled out of Russia from 2010 to 2014 through banks in Latvia and Moldova. Over $1 billion of that is believed to have been routed through major banks in Hong Kong and mainland China.

Hong Kong's attractiveness to Russian money-launderers is thought to be due to both its corporate secrecy rules, and the currency being pegged to the dollar, making it a good substitute as sanctions in Russia lead to increasing de-dollarisation.  

All of the banks allegedly involved have committed more resources to tackle money-laundering in response to the investigation, and said public-private cooperation must be strengthened to improve the effectiveness of KYC procedures.

HKMA and PWMA in Hong Kong collaborate to develop a treat customers fairly charter for the PWM industry  

On 8 June 2017, the Hong Kong Monetary Authority ("HKMA") announced that it has been working together with the Private Wealth Management Association to develop a Treat Customers Fairly Charter(the "Charter") to further promote a customer-centric culture in the private wealth management ("PWM") industry. The Charter is designed to complement, not change, current laws and regulations and the existing terms and conditions between banks and their customers.  It is stated to be a commitment by PWM institutions in Hong Kong to support and implement the principle of treating customers fairly.

The Charter draws reference from good practices locally and overseas and from the G20 High-Level Principles on Financial Consumer Protection.  For example, it bears resemblance to the UK FCA's consumer outcomes, in particular principle 6 which requires a firm to pay "due regard to the interests of its customers and treat them fairly".  It comprises five high-level principles (the "TCF principles") which are supplemented by examples to illustrate how such principles may be implemented by PWM institutions. However, these examples are not comprehensive, but are stated to be illustrations to enhance understanding of the "spirit" of the TCF principles.

The HKMA expects all Authorised Institutions which operate as private banks, or which have dedicated private banking units, to follow the TCF principles. It has stated that it expects senior management and boards of directors to ensure that their institutions and relevant staff abide by the TCF principles. Our recent bulletin outlines further details on each principle.

SFC annual report published

SFC thematic inspections are set to continue, and may be a contributing factor to a fall in AML guidelines breaches. On 14 June 2017, the SFC published its Annual Report for 2016-2017. It noted that instances of non-compliance with AML guidelines were down by 10%. This number was up by 91% during 2015-16 (201 instances in 2016-17, 223 instances in 2015-16, and 117 instances in 2014-15)

Since 2015-16, the SFC has been conducting thematic inspections of anti-money laundering and counter-terrorist financing compliance, which may account for the decline. In its report, the SFC indicated that these thematic inspections will continue to be on selected licensed corporations to assess the effectiveness of their measures to mitigate money laundering and terrorist financing risks.


ICAC chief visits Guangzhou and Shenzen to foster ties in graft fight 

ICAC Commissioner Simon Peh Yun-lu led a delegation to visit the Shenzhen Municipal People’s Procuratorate anti-corruption authorities in Guangzhou and Shenzhen to "exchange experience and foster closer ties in graft-fighting work", paving the way for mainland-Hong Kong co-operation in fighting corruption.