In February 2019, the Hong Kong Securities and Futures Commission (SFC) announced that it had revamped its licensing forms and issued a new version of its Licensing Handbook. One of the changes is aimed at combating the problem of so-called “rolling bad apples”, namely, the movement of individuals with poor conduct records between firms in the financial services sector without their misconduct being disclosed to the SFC or to their new employer.
Until recently, when a licensed representative or responsible officer (or, for registered institutions, an executive officer) ceased employment, the employer was required to notify the SFC by completing its Form 5, indicating the reasons for employment termination. In the updated form, Form 5U, an employer must also provide details of whether the employee was under any internal investigation in the six months prior to termination and notify the SFC if an internal investigation involving the employee commences post submission of the initial notification.
This requirement is intended to address the problem of employees resigning during an investigation, with the expectation that this would result in their employer simply ticking the “resignation” box. Thus, leaving them free to move on to another firm without disclosure of their misconduct (which may be relevant to whether the individual is a fit and proper person to be licensed or to remain licensed) to either the SFC or to their new employer.
With the new rules in effect since April 2019, the SFC has provided guidance on the issue of what does (and does not) constitute an investigation.
The guidance confirms the SFC expects licensed corporations (and, where applicable, registered institutions) to disclose information regarding all investigative actions (no matter how they are described) to the SFC.
The SFC has published a non-exhaustive list of examples of investigations involving an outgoing employee that a licensed corporation should disclose, as follows:
• investigations about suspected breach or breach of applicable laws, rules and regulations;
• investigations about suspected breach or breach of the licensed corporation’s internal policies or procedures;
• investigations about misconduct that are likely to give rise to concerns about the fitness and properness of the outgoing employee;
• investigations about any matter that may have an adverse market or client impact; and
• investigations about any matter potentially involving fraud, dishonesty and misfeasance.
It is clear from the above examples that the disclosure obligation is broad in scope and likely to cover most internal investigations.
The SFC has also advised that the disclosure should contain a clear description of the matter, and should include, without limitation:
• the nature and the background of the matter;
• the date(s) when the matter occurred;
• the duration of the matter;
• the role played by the outgoing employee in the matter;
• the (potential) impact to the market and clients and assessment of materiality;
• the status of the investigation; and
• the outcome of the investigation and the basis of its conclusion, if the investigation has been completed.
In instances where an investigation has been completed and there has been no adverse finding against the employee, the investigation must still be disclosed with the provision of a brief description of the nature of the matter and the basis for its conclusion.
The guidance also outlines that in the event of any new development (such as new information or an update on the outcome of the investigation) in an investigation previously disclosed to the SFC, a licensed corporation should provide such information to the SFC as soon as practicable, irrespective of whether the investigation was previously concluded.
Will this New Regime Expose Employers to Increased Legal Risk?
Concern about potential legal claims by ex-employees has been a key reason why regulated firms have tended not to share information voluntarily about prior misconduct. It remains to be seen whether a Form 5U disclosure might expose an employer to claims from a former employee if an incomplete, inaccurate or unfair notification means that an individual is unable to secure a new role.
In the meantime, the SFC has provided some comfort to employers by confirming that the SFC will treat any information collected under this disclosure requirement as confidential. Unless permitted by law, the SFC will not disclose information obtained in the performance of the SFC’s regulatory functions to any other person, including the outgoing employee and any prospective employer of the outgoing employee.
One of the potentially trickiest scenarios arising from this new requirement is a situation in which employment ends during an on-going investigation, which is typically because the employee has resigned early in the investigation process.
In these circumstances, employers should ensure that the notification clearly states that the investigation is ongoing and that no findings have been made. This is due to risk that the mere fact of an investigation taking place may imply wrongdoing by the outgoing employee in circumstances where information has not been fully verified.
It would also be desirable for the employer to complete the investigation, including offering the former employee an opportunity to take part in the process, and provide an update to the SFC at the end of that process.
Are There Any Other Potential Consequences of the New Regime?
One of the possible consequences of the new regime is that, where an employee has been the subject of an internal investigation, if the outcome of the investigation is an adverse finding against the individual and results in disciplinary action which is short of dismissal, there may now be an incentive for the individual to stay put in their role and not look to move to a new firm for a period of at least six months, in order to fall outside the scope of the new disclosure requirement.
How Does this Regime Compare with the Approach in the UK?
The SFC’s regime adopts a lighter touch than the approach taken by the UK regulators, the Financial Conduct Authority and the Prudential Regulation Authority. The UK regime places the emphasis on disclosure of an individual’s conduct history to their new employer, rather than to the regulator. This is achieved via a system of regulatory references with certain mandated content, including all information relevant to an assessment of whether the individual is fit and proper, and which must cover a candidate’s previous six years of employment.