SFC Signs MOU with FCA on Enhanced Supervision of Cross-Border Regulated Entities

In late July, the Securities and Futures Commission (“SFC”) announced that it had entered into a supervisory memorandum of understanding (“MOU”) with the UK Financial Conduct Authority (“FCA”).  The MOU’s provisions are intended to support communication between the two regulators with respect to oversight and supervisory issues of common interest concerning regulated financial market participants and other entities operating on a cross-border basis in Hong Kong and the UK. 

This MOU follows on the heels of similar MOUs that the SFC has signed with other foreign regulators (such as the SEC, CFTC and FINRA in the US and the CSRC in China) after receiving new powers in 2015, which have enabled it to informally cooperate with overseas authorities.  These new powers have brought the SFC up to international standard, as previously, it was only empowered to co-operate with overseas regulators in a more restrictive manner, primarily in the context of enforcement.*

As for the recent MOU, it covers the scope of supervisory co-operation, cross-border on-site visits, execution of requests of assistance, and permissible uses of non-public information, enhancing existing information sharing arrangements between the UK and Hong Kong authorities.  While similar in structure to other MOUs the SFC has entered into, Mr. William Hallatt, partner at Herbert Smith Freehills in Hong Kong, notes that these most recent MOUs go farther than the others in two key respects.

The first provision is para. 21, which concerns unsolicited information.  It states: “[w]here an Authority has information which will assist or enable the other Authority in the performance of its supervisory functions, information may be provided on the initiative of one Authority to the other, without the necessity of a request.”

“This provision is significant because it states that one regulator can proactively share information with the other regulator without being specifically asked to do so.  It goes beyond the provisions of some other MOUs by creating a standard for cooperative information sharing whereby regulators are encouraged to be proactive and forthcoming, as opposed to reactive or secretive.  This provision is in line with current international standards and reflects the way many regulators are now operating,” Mr. Hallatt said.

The second is Article Four, which contains provisions concerning cross-border on-site visits.  Paragraph 23 states: “[e]ach Authority will give advance notice to the other Authority prior to carrying out any Cross-border On-site Visits, providing information that explains the scope and purpose of the visit.”  Paragraph 25 provides: “[t]he Authorities may conduct joint on-site visits on Cross-Border Regulated Entities in which case these will be led by the Authority in whose jurisdiction the visit takes place.”

Mr. Hallatt explained that Article Four (paras. 23 and 25, in particular) reflects the SFC’s recognition that foreign authorities may want to conduct on-site visits in Hong Kong and that the SFC, in turn, may want to pursue similar investigations overseas.  However, this section also carefully underscores certain limitations that are important to the SFC.  Namely, it provides for a reciprocal arrangement whereby a foreign authority will notify the local authority before conducting an on-site visit on the local authority’s sovereign land.  It also provides that the foreign authority will allow the local authority to arrange and lead a joint on-site visit.

As for the practical ramifications, Mr. Hallatt noted that certain banks with large-scale securities operations in Hong Kong and headquartered in the UK may face more joint on-site visits and multijurisdictional probes should regulatory concerns arise.  He also thinks this sets precedent for the SFC to pursue similar arrangements with other foreign regulators, who have already entered or will in the future enter into similar MOUs with the SFC, with respect to on-site visits.  With respect to the CSRC in particular, such arrangements could be very beneficial, given the Mutual Recognition of Funds scheme and the recently launched Bond Connect, among many other schemes that create cross-border regulatory issues between Hong Kong and Mainland China.

That being said, the SFC-FCA MOU neither creates legally binding obligations nor limits either regulator from unilaterally acting in fulfillment of its supervisory functions.  Albeit, that could change, as both regulators have indicated their intention to periodically review the MOU’s effectiveness and their willingness to expand or alter its scope in the event that it is deemed necessary.


* See Herbert Smith Freehills, SFC New Power to Provide Overseas Regulators with Supervisory Assistance – A Glimpse of the Regulator’s Future Cooperation, Hong Kong Regulation E-Bulletin (27 November 2015).

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《香港律師》編輯
Legal Media Group
湯森路透
cynthia.claytor@thomsonreuters.com