Conduct and Internal Controls Dominate SFC Inspections, Finds Report

Breaches of the code of conduct and internal control deficiencies stood out as the most common breaches noted during inspections of firms licensed by the Securities and Futures Commission ("SFC") in Hong Kong in the first quarter, figures from the regulator showed.

In its first quarter report, the regulator said that out of 420 breaches noted during on-site inspections, some 126 were related to breaches of the code of conduct, while 117 involved control weaknesses in areas such as management review and supervision, operational controls over the handling of client accounts, segregation of duties, information management and adequacy of audit trail for internal control purposes. The breaches represented a 207 percent year-on-year rise for code of conduct issues, and 21.9 percent for internal control weaknesses.

Ashley Alder, the chief executive of the SFC, said in a June speech that conduct and transaction monitoring were among the top concerns for the regulator. He said the SFC was reviewing conduct expectations with a view to strengthening regulations in areas such as the responsibilities of fund managers. Insider dealing was also an area of focus, he said, with some firms in Hong Kong not yet having implemented proper surveillance or transaction monitoring to monitor irregular trading patterns.

"We continue to see control weaknesses during our inspections, for example, when functions are delegated or outsourced," he said.

During the quarter, the SFC's surveillance of untoward price and turnover movements resulted in 2,205 requests for trading and account records from intermediaries in the quarter, the regulator said.

"These requests produce vital information that enables us to monitor our markets and detect potential misconduct," the regulator said.

The regulator's first quarter report also showed that the total number of SFC-licensees and registrants reached 41,892 in the three months to 30 June, a record high since the implementation of the Securities and Futures Ordinance in April 2003.

The SFC also said it conducted risk-based on-site inspections of licensed corporations to review their compliance with relevant regulatory requirements, and to gauge their resilience to market volatility such as that following the Brexit vote in the UK. The SFC said it closely monitored firms following the Brexit vote, especially intermediaries with major businesses in the UK.

The SFC also said it was reviewing the suitability requirement, including how it should be implemented across different business models such as exchange and online fund distribution platforms and robo-advice, as well as in the more traditional broker channel. It said it would provide additional guidance to clarify its expectations on the suitability requirement.


North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.