Hong Kong's "Manager in Charge" Regime Seen as a Burden to Compliance Staff

A recently announced regime for mapping managers in charge of financial firms' regulated activities in HongKong will be a burden to locally-based compliance and legal staff, sources said. The Securities and Futures Commission ("SFC") said it wanted to hold individuals in the industry more accountable but critics said the lack of upfront industry input and scant details would make implementation of its plan cumbersome.

The regulator published a circular late on 16 December, along with a list of 40 frequently asked questions (FAQs) for guidance purposes. 

Under the new regime, licensed firms should submit up-to-date management structure information and organisational charts to it by July 17, 2017. In addition, managers in charge who are not already responsible officers will have to apply for approval to become responsible officers by 16 October 2017.

"It will mean adding another significant task to their [in-house compliance and legal departments] plans for 2017. Frankly, we are concerned how the industry can implement this complex regime in such a short timeframe," said Patrick Pang, managing director and head of fixed income and compliance at the Asia Securities Industry and Financial Markets Association ("ASIFMA") in Hong Kong.

ASIFMA said there was a great deal to do in the next 10 months for the 2,000 affected entities in Hong Kong as they needed to review the organisational structure for each of their business lines, identify all those deemed to be 'managers in charge' and finally, submit that information to the SFC by July 2017.

Compliance Implications

Those with overall management oversight and those in charge of key functions would need approval to act as "responsible officers," the SFC said. Its new "managers in charge" regime, which will increase scrutiny of executives in HongKong's finance sector and raise their accountability, is part of a worldwide push by regulators to raise conduct standards in the industry. The SFC is the first Asian regulator to adopt such a regime after the UK Financial Conduct Authority ("FCA") introduced similar rules following more than two years of consultation.

"The global trend is to make senior managers accountable … It is higher risk to be at the helm from pre-financial crisis years," said Mohan Datwani, senior director at the Hong Kong Institute of Chartered Secretaries ("HKICS"). "In the securities industry, there are 'built-in' … rewards because of a person's management position and therefore, there needs to be an understanding that these people need to bear the risks," he said.

Firms will need to review and possibly overhaul and re-document all reporting lines, governance structures and job descriptions. Many unlicensed managers, even those overseas, may also need to become directly licensed and accredited by the SFC.

"Senior managers bear primary responsibility for the effective and efficient management of their firms, and they should be well aware of the obligations currently imposed on them as well as their potential liability if they fail to discharge their responsibilities," said Ashley Alder, the SFC's chief executive.

The responsible officers of each firm will have to be aligned with their "managers in charge", and new 'responsible officers' must file their registration with the SFC by October 2017. Also, given the number of licensed corporations in Hong Kong that are parts of groups headquartered overseas, the number of managers in charge based outside Hong Kong will be much higher than for the UK, which recently introduced a senior managers regime, Pang said. 

"It will take some time for these firms to identify the appropriate managers in charge for each of its eight core functions and set them out in an organisational chart as required by the circular," he said. "Practically, some of those based overseas that are identified as managers in charge may be uncomfortable to be regulated under a Hong Kong regime."

Firms may have to switch responsibilities to a Hong Kong-based manager or even recruit to fill the role locally, all of which takes time, he said. 

The new rules will also encompass executives involved in the day-to-day running of SFC-regulated activities but who are based overseas, as the SFC is concerned that it does not know the identities of many of those with crucial responsibilities at the 2,000 or so companies it regulates, market participants said.

"It is important to remember that there was a very rigorous consultation process for the equivalent senior managers regime in the UK, which provided a two-year timeframe for compliance, staggered by industry, as opposed to the 10 months that the SFC is giving firms, regardless of industry, to comply in Hong Kong," Pang said.

Lack of Industry Input

While there were reports that the SFC had privately briefed banks and funds beforehand, the fact that it did not issue a public consultation has sparked concern among some industry participants, who fear it is being rushed in.

"We are concerned with how the industry will implement the complex regime in such a short timeframe," Pang said.

ASIFMA said the industry was concerned that there had been no formal consultation on the introduction of a regime that would hold not only SFC-licensed individuals, but also unlicensed individuals responsible for the management of a licensed corporation. 

"The informal consultation with the industry has not been afforded the time and rigorous process appropriate for such a significant regulatory change," ASIFMA said in a statement.

Syren Johnstone, adjunct associate professor of law at the University of Hong Kong, said the SFC had interpreted the Securities and Futures Ordinance ("SFO") "in a manner that achieved a result it considered desirable, something the courts have in the past warned against. 

"This leaves its position open to challenge and renders effective discipline uncertain. I would have preferred to see accountability progressed on a more solid basis following a public consultation exercise involving all stakeholders," he said.

Others noted similarities with the way regulators in mainland China operate. 

"I understand the SFC engaged in an informal consultation with a few people. It seems power is becoming more concentrated, just like up north [mainland China]," said a senior local lawyer, speaking on condition of anonymity.

Questionable FAQs

ASIFMA also said the industry was concerned that the SFC's circular and FAQs were insufficient to achieve the regulator's objectives "without going through what we would expect to be a long and iterative process". 

"The lack of detail so far may hinder implementation, but also complicate compliance and later enforcement," said Will Hallatt, partner at law firm Herbert Smith Freehills in Hong Kong. He queried whether the details in the circular and FAQs were adequate to address the many different situations of the thousands of firms captured by the regime, in order for them to complete the process by next October and produce an effective outcome for the SFC.

"Without further detailed guidance being provided to firms, the SFC may need to keep coming back to the firms for clarification, making it an inefficient process. At this stage, it is difficult to predict how effectively the regime will be implemented as every firm's structure and reporting lines are different, so one size will not fit all. The issue could deepen for firms and affected individuals once the regime is in operation. In the absence of more extensive detailed guidance, firms and individuals will need to wait for the results of enforcement actions to understand fully how the SFC expects the regime to operate," Hallatt said.

Despite local objections, the SFC would appear to be undeterred.

Datwani said: "This cannot be viewed in isolated manner. There is a global phenomenon to holding those in senior position accountable. We can talk about the processes, but regulators are increasingly of the view that if it is right, in their views of course, to push things through."


Ajay Shamdasani is a senior staff writer with Thomson Reuters Regulatory Intelligence in Hong Kong. He covers regulatory developments in Hong Kong, India and South Korea. He also writes about money laundering, fraud, corruption, data privacy and cybercrime.