In our Client Alert of 15 May 2017, we drew attention to concerns regarding “backdoor licensing” expressed by Julia Leung, Executive Director at the Securities and Futures Commission (SFC) in a recent speech to the Hong Kong Securities and Investment Institute. Below we summarise some of the other elements Julia Leung described regarding the SFC’s response to changes in the financial services industry.
The SFC is striving to adopt a more “front loaded” approach to regulation. This means identifying emerging risks in the market and taking intervening action at an early stage to prevent the problem from spreading.
One example she identified was the formation of the ICE unit, drawn from the Intermediaries, Corporate and Enforcement divisions at the SFC, in response to the unusual price volatility in many new Growth Enterprise Market (GEM) stock listings. ICE identified a number of practices in connection with GEM placings and in January this year the SFC issued a guideline for parties involved in the listing of GEM stocks on the conduct of placing activities. The SFC has observed that this action is already changing the behaviour of the parties involved in GEM listing applications.
Another issue causing concern is the practice of some listed companies acquiring assets at unreasonably high prices or selling assets at substantially undervalued prices. It is highly likely that the SFC will take action against the parties involved in such corporation transactions, and such action may involve the parties’ advisers. On 15 May 2017, the SFC issued a guidance note on directors’ duties and a circular to financial advisers regarding valuations in corporate transactions together with a statement on the liability of valuers for disclosure of false or misleading information.
The SFC has conducted an increasing number of thematic inspections and reviews to drive proper behaviour and a compliance culture.
In the past year, the SFC started or completed 45 thematic inspections focusing on a wide range of areas, including selling practices, alternative liquidity pools, best execution and client facilitation, anti-money laundering, placing of GEM IPO stocks and cybersecurity.
Transparency and signalling
As mentioned previously in our alerts and newsletters, the SFC often gives the industry due warning of areas of focus for enforcement action by issuing circulars.
Julia Leung confirmed that the SFC is placing greater emphasis on changing behaviour through signalling to the industry the focuses of inspections and the proper standards of behaviour by giving advance warning to firms to clean up their act before they are inspected. This is an example of front-loading regulation and supervision.
Real-time supervision and international co-operation
Other important resources and developments referred to in Julia Leung’s speech included: the SFC’s real-time monitoring capabilities, which are essential to the identification of market stress, market manipulation or misconduct, and to monitor threats to intermediaries’ compliance with the Financial Resources Rules, and strengthening supervisory cooperation with the SFC’s regulatory counterparts both in Hong Kong and overseas.