The SFC Disciplinary Fining Guidelines (Updated 10th August 2018) – Background and Insights

On 10th August 2018, the Securities and Futures Commission (“SFC”) published in the Gazette an updated Disciplinary Fining Guidelines (“Fining Guidelines”). The SFC noted that the update “codified” the principles accepted by the Securities and Futures Appeals Tribunal (“the Tribunal”) under HSBC Private Bank (Suisse) SA v SFC (SFAT Application No. 3 of 2015) handed down on 21st November 2017.

The updated Fining Guidelines specifies that “[t]he SFC may use the number of persons affected by the misconduct as the multiplier in assessing the appropriate level of pecuniary penalty. For example, where a regulated person has contravened the Code of Conduct resulting in a financial product being mis-sold to three persons, the SFC may impose a fine not exceeding HK$10 million for each affected person (ie HK$10 million x 3).”

Power of the SFC under s. 194(2) and s. 196(2) of the Securities and Futures Ordinance (“the Ordinance”)

The “SFC may order the regulated person to pay a pecuniary penalty not exceeding the amount which is greater of

(i) HK$10 million; or

(ii) three times the amount of the profits gained or loss avoided by the regulated person as a result of his misconduct”.

HSBC Private Bank (Suisse) SA v SFC

It was HSBCPB’s proposition that the SFC found six breaches of the Code and the SFC “should look to the singularity of each breach and not whether each breach had been multiplied by…a number of different clients affected by it”; thus the maximum penalty that could be imposed would be HK$60 million, being HK$10 million in respect of each breach (para 417). It was HSBCPB’s further proposition that total profits earned by the bank through the alleged transactions were HK$18 million (para 439).

The Tribunal’s decision was a fine of $400 million, being $5 million per breach per affected complainant.

HSBCPB was the first disciplinary case where the number of complainants were used as the “multiplier” in assessing the pecuniary penalty. The Tribunal reconciled this with s. 194(2) and s. 196(2) through a very broad based approach.

The Tribunal “does not accept the submission that the provisions of the Ordinance only permit the imposition of one pecuniary penalty for each generic breach identified……on an ordinary reading of the statute, a number of culpable acts…..even if they are of the same generic nature, may attract multiple penalties” (para 418). The Tribunal noted “the penalties set forth in s. 196 relate to the securities and futures industry, an industry not only of central importance to Hong Kong’s welfare, but also an industry which permits registered institutions to generate huge profits” (para 143); “…for the greater protection of the integrity of Hong Kong’s financial markets, it proves a stern warning that the principles of professional conduct must be adhered to…..penalties imposed for convenient avoidance of the requirements of the Code of Conduct will constitute something more severe than the mere ‘cost of doing business’.” (para 453).

The industry would have welcomed an appeal from HSBCPB on the point of law such that the legal principles, interpretation and applicability of s. 194(2) and s. 196(2) could be further debated and clarified. The Tribunal accepted the approach in using “the number of complainants” as the multiplier in assessing the pecuniary penalty, however as the Fining Guideline used is “for each affected person”, it is not necessarily that all affected persons would have lodged complaints. The Ordinance does not make any provision on “number of complainants” or “number of affected persons”. Is the broad based approach reconciling the Ordinance the most satisfactory way in defining the legal principles? The industry would only have the opportunity for such a debate in a next appeal case. In the meantime, the principles accepted by the Tribunal were “codified” in the Fining Guidelines.

The Fining Guidelines

While the multiplier principle is now adopted as one of the approaches, the Fining Guidelines said the multiplier approach “may not be appropriate in every case, the appropriate approach in each case will depend on its facts”.

Noah Holdings (Hong Kong) Limited (“Noah”)

On 29th May 2018, six months after the HSBCPB judgement, Noah was publicly reprimanded and fined HK$5 million under an agreement with the SFC pursuant to s. 201 of the Ordinance. Noah was alleged to have been in breach in five areas, namely relating to know your client, product due diligence, suitability assessment, information for clients and sales supervision and control. The breaches were fairly similar to the HSBCPB case, and there were 1,243 potential mis-matched transactions with a total investment of about US$523 million.

The SFC did not adopt the “multiplier” approach. The notable differences and considerations for the SFC when deciding on the sanction, amongst others, were whether Noah – engaged an independent reviewer to conduct a review; undertook to provide the SFC with remedial action reports; cooperated with the SFC in resolving its concerns and agreed to reimburse affected clients – all of which fell under “forms of cooperation” defined in the Guidance Note on Cooperation with the SFC.

Concluding Comment

The Fining Guidelines should be read in conjunction with the Guidance Note on Cooperation. Under the Fining Guidelines, the SFC can exercise a broad range of pecuniary penalty using either “fixed” approach or “multiplier” approach, and this will be dependent on circumstances as outlined in the Fining Guidelines and the Guidance Note on Cooperation.

Jurisdictions: 

Professor of Practice in Finance, The University of Hong Kong