On 14 June 2017, the SFC published its Annual Report 2016-2017 and provided key statistics and inspection priorities.
- Almost 2,500 licensed corporations, up 13% from the previous year and a record high since 2003
- 387 new corporate applications, up by more than 50%
- 2,780 SFC authorised collective investment schemes, up by 3%
Risk-based, on-site inspections
According to the report, the SFC conducted 312 risked-based, on-site inspections of licensed intermediaries during its last financial year (i.e. 1 April 2016 to 31 March 2017). There are only six more inspections compared with the previous year and the number of breaches identified on the inspections was up by 2%. (This number was up 52% during the 2015-2016 financial year.)
Nature of breaches
- Non-compliance with AML guidelines was down by 10%. This number was up by 91% during 2015-2016. The drop in AML breaches may be due to thematic inspections on this area, which the SFC conducted for two consecutive years since its 2015-2016 assessment of money laundering and terrorist financing risks in the securities sector, resulting in an increase in industry focus on AML compliance.
- Internal control weaknesses, i.e. deficiencies in management review and supervision, segregation of duties, adequacy of audit trail for internal control purposes, information management and operational controls over handling of client accounts, was up by 5%.
- Code of Conduct breaches increased by 14% - main areas being risk management, record keeping, client agreements, management responsibility as well as safeguarding of client assets and management responsibilities.
The SFC indicates in the report that it will continue to conduct thematic inspections on selected licensed corporations to assess the effectiveness of their measures to mitigate money laundering and terrorist financing risks. The SFC issued a circular and related guidance on 26 January 2017 highlighting anti-money laundering and counter-terrorist financing common deficiencies in firm-level risk assessment, customer due diligence, suspicious transaction monitoring and reporting. We also expect the SFC to continue focusing on internal controls weaknesses.
What to expect?
We expect that the number of Code of Conduct breaches may continue to increase as a result of the June 2017 changes to the Code of Conduct client agreement requirements, including the suitability anti-avoidance clause, and the March 2016 professional investor regime, taking into account the December 2016 guidance relating to suitability obligations. In addition, SFC inspections going forward are likely to include an assessment of compliance with the new Managers-in-Charge regime.