On 16 December 2016, the Hong Kong Securities and Futures Commission (SFC) introduced its new Manager-In-Charge of Core Functions (MIC) regime, with details set out in its Circular Regarding Measures for Augmenting the Accountability of Senior Management (Circular) and a related series of 40 Frequently Asked Questions (FAQs).
The MIC regime is a substantial change to the way in which the SFC seeks to exercise regulatory oversight of licensed corporations. The MIC regime will impose new reporting obligations on all licensed corporations and will require ongoing reporting of information about people in middle office and back office roles who may not be licensed with the SFC. For licensed corporations that are part of a wider group, the MIC regime may also require licensed corporations to identify and report information about individuals from other group companies (within or outside Hong Kong) that are not regulated by the SFC.
Overview of the MIC regime
In the Circular, the SFC sets out its view that the senior management of a licensed corporation includes MICs, in addition to directors and responsible officers (ROs). An MIC is an individual appointed by a licensed corporation to be principally responsible, either alone or with others, for managing any of the "Core Functions" of the licensed corporation. There are eight Core Functions, (i) Overall Management Oversight, (ii) Key Business Line, (iii) Operational Control and Review, (iv) Risk Management, (v) Finance and Accounting, (vi) Information Technology, (vii) Compliance and (viii) Anti-Money Laundering and Counter-Terrorist Financing. Licensed corporations will need to designate an individual as the MIC for each Core Function and will need to report information about its MICs, and any changes in this information, to the SFC.
The Circular identifies several reasons for the SFC to introduce the MIC regime. The MIC regime is intended to ensure that persons who are MICs for the Overall Management Oversight and Key Business Line functions of a licensed corporation become ROs of the licensed corporation, if they are not already ROs. The MIC regime is also intended to promote awareness of the responsibilities of the individuals identified as MICs. Although not expressed in the Circular, over time the MIC regime is also likely to increase the localisation of Core Functions in Hong Kong for licensed corporations that are part of a wider international group.
The key dates for implementation of the MIC regime are:
- 18 April 2017: The SFC will start to accept MIC information and management organisational charts from all licensed corporations and new corporate licence applicants
- 17 July 2017: Deadline for licensed corporations to submit MIC information and management organisational charts
- 16 October 2017: Deadline to submit applications to the SFC for MICs who need to be approved as ROs
A more detailed timeline is attached at the end of this client alert.
Summary of actions required
The actions each licensed corporation needs to take include:
- Read the Circular and the FAQs
- Inform the board of directors about the MIC regime
- Sign up to attend an SFC workshop on MIC filing procedures
By 17 July 2017
- Identify the individuals who are or will be MICs, brief them on the MIC regime and their obligations and get their acknowledgement of their appointment as an MIC
- Prepare descriptions of the roles of each MIC and a structure chart for the licensed corporation, including each MIC's reporting lines
- Prepare a formal board paper (a management structure paper) setting out the management structure of the licensed corporation, the roles, responsibilities, accountability and reporting lines of its senior management personnel
- Prepare relevant SFC forms
- Have the board of directors approve the management structure paper, the appointment of the MICs, the roles of each MIC, the structure chart and reporting lines, and the submission of information about the MICs to the SFC
- Submit information about the MICs to the SFC, including the structure chart and completed SFC forms
- Put in place a compliance process to monitor changes relating to MICs and to report such changes to the SFC
By 16 October 2017
- If the MIC responsible for Overall Management Oversight or a Key Business Line is not currently an RO, prepare and submit an application to the SFC for that person to become an RO
More on the MIC regime
1. Identifying MICs
The scope of the Core Functions is described in the Circular. A licensed corporation must identify and appoint an individual (either alone or with others) to take up principal responsibility for managing each Core Function. One person can be an MIC for more than one Core Function. An MIC may be located in or outside Hong Kong. An MIC may also be an RO and/or a director of the licensed corporation or an employee of a group company. The SFC also anticipates that in some circumstances two or more people may be appointed on a joint basis as MICs for a single Core Function.
The SFC expects an MIC to have authority (apparent or actual) over the Core Function(s) for which the MIC is responsible. The SFC expects an individual who is appointed as an MIC to have:
- a position in the licensed corporation which is of sufficient authority to enable the individual to exert a significant influence of the conduct of the Core Function;
- authority to make decisions (e.g. assume business risk within pre-set parameters or limits) for that Core Function;
- authority to allocate resources or incur expenditures in connection with the particular department, division or functional unit carrying on the Core Function; and
- authority to represent a particular department, division or functional unit carrying on that Core Function, e.g. at senior management meetings or in meetings with outside parties.
The SFC has also indicated that it expects licensed corporations to be satisfied that MICs are "fit and proper" to act as MICs for the relevant Core Functions. In practice, that is likely to mean the individual has sufficient knowledge, skill and expertise to assume the authority and responsibility of a senior manager in respect of the relevant Core Function and has not been subject to a disciplinary, regulatory or other sanction that adversely affects his or her ability to perform the relevant Core Function.
Once an individual has been identified, the licensed corporation will need to obtain acknowledgement from the individual of his or her appointment as an MIC.
If an individual will be appointed as the MIC responsible for either the Overall Management Oversight or a Key Business Line function then the licensed corporation will need to apply for approval of the individual as an RO, if he or she is not currently an RO. For this purpose, the FAQs indicate that the SFC will take into account industry experience in operations, compliance and other back office roles, in addition to direct experience in regulated activities such as asset management or dealing in or advising on securities.
2. Personal liability of MICs
The MIC regime does not create any additional liabilities or give the SFC any additional enforcement powers. What the MIC regime does is ensure that the SFC has additional information about licensed corporations and the individuals who are responsible for each of the Core Functions. It also imposes an obligation on licensed corporations to keep this information up to date.
The SFC does not approve or license MICs. However, an individual appointed as the MIC responsible for either the Overall Management Oversight or a Key Business Line function is expected to be licensed as an RO of the licensed corporation.
3. Reviewing organisational structure, reporting lines
The MIC regime will require licensed corporations to review their organisational structure to ensure it reflects the Core Functions and the SFC's expectations of reporting lines of the MICs. Whilst the SFC does not mandate any particular structure, it generally expects that an MIC should:
- report directly to either the board of directors of the licensed corporation or to the MIC who assumes the Overall Management Oversight function; and
- be accountable for the performance or achievement of business objectives set by the board of directors of the licensed corporation, or by the MIC who assumes the Overall Management Oversight function.
Licensed corporations will need to consider whether current job descriptions and reporting lines are consistent with the MIC regime, and may need to revise their organisational structure accordingly. That may mean, for example, revising current job descriptions to give individuals sufficient authority to act as an MIC and / or additional reporting lines to the board of directors of the licensed corporation or to the MIC who assumes the Overall Management Oversight function. For international groups, it may also mean adding employees in Hong Kong to act as an MIC.
When reviewing its organisational structure, a licensed corporation should also keep in mind the segregation requirements under the Management, Supervision and Internal Control Guidelines, which require licensed corporations to segregate front office functions from back-office functions.
There is no need to change the job titles of individuals to match the Core Functions.
4. Ensuring board approval of MICs
Once a licensed corporation has identified its MICs and has finalised its organisational chart, the Circular requires that the board of directors of the licensed corporation:
- approve the management structure paper;
- approve the organisational chart;
- approve the appointment of the MICs; and
- ensure each MIC has acknowledged his or her appointment as an MIC and the Core Function(s) for which he or she is principally responsible.
5. Preparing SFC notification/application documents
The documents that a licensed corporation needs to submit to the SFC by 17 July 2017 include:
- Information about each MIC, in the form of Supplement 8A. Currently, the SFC has published a draft Supplement 8A. The final version of Supplement 8A will be gazetted shortly and made available on the SFC website; and
- Organisational structure chart. The SFC has not mandated a specified form. It will vary depending on the circumstances of each licensed corporation.
If the individual identified as the MIC responsible for Overall Management Oversight or a Key Business Line is not currently an RO, the licensed corporation will need to prepare and submit an application to the SFC for that person to become an RO by 16 October 2017. The competency requirements for an RO are set out in the SFC's Guidelines on Competence. The FAQs indicate that the SFC will take into account industry experience in operations, compliance and other back office roles, in addition to direct experience in regulated activities such as asset management or dealing in or advising on securities.
6. Reflecting MIC regime in internal documents and procedures
Licensed corporations will need to update their compliance manuals and policies to reflect the MIC regime.
Licensed corporations will also need to put in place a compliance process to monitor changes relating to MICs and to report such changes to the SFC.
Changes in the individuals who act as MIC for a Core Function and / or changes in organisational structure will also need to be approved by the board of directors of the licensed corporation.
Implementation timeline for MIC regime
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