Hong Kong's Senior Management Regime to Drive Better Market Behaviour, says Regulator

Hong Kong's planned "Manager-In-Charge" regime, due to take effect later this year, will be a good opportunity for firms to evaluate whether their organisational structures and reporting lines are optimal, a top regulator said. 

Julia Leung, executive director in charge of licensing and supervision of intermediaries at the Securities and Futures Commission ("SFC"), said the MIC regime, which was announced in late December, would "go a long way in driving better ex-ante decisions and proper behaviour, starting from the top management and then cascading down through the organization". 

Speaking at the AIMA APAC Annual Forum in Hong Kong on Thursday, 19 January, Leung said the SFC's aim was for a regulatory outcome in which compliance was not only the prerogative of one department, and where front line managers nurture a culture of acting honestly, fairly and in the best interests of their clients and the integrity of the market.

"The concept of responsibility and accountability should not be too difficult to understand," she said. "Nobody seems to have any problems embracing this concept when it comes to allocating performance bonuses. Why should it be any different when it comes to allocating responsibility and owning up to the conduct behaviour of the corporation?"

Under the MIC regime, boards of licensed firms are expected to allocate responsibility, and identify and appoint fit and proper individuals to act as managers in charge of eight core functions, before 17 July. These managers will have to apply to the SFC for responsible officer ("RO") status before 16 October. 

Leung said some firms were already taking advantage of the regime to clarify their management responsibility and governance structure. 

"In some cases, it may mean reviewing the composition of the local firm's board to take into account the responsibility to own up to the decisions made," she said. "In other cases, it may mean a change in reporting line to require some senior executives who reside overseas to report to the board. And in yet other cases, the local managerial team may have to step up to take overall corporate responsibility and be held accountable for the decisions they take."

Not a New Concept

The concept of holding senior management of a corporation accountable for misconduct was nothing new, she said. Under the Code of Conduct for Persons Licensed by or Registered with the SFC, General Principle 9 already states that senior management should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the firm. 

The SFC has until now not spelled out precisely who should be regarded as senior management, apart from requiring a licensee to have two appointed ROs to be responsible and accountable for good governance and proper behaviour. This regime has generally worked well, but had gaps when it came to identifying who has responsibility, Leung said. 

"Some firms do not necessarily appoint their most senior managers as ROs. For example, in a recent review of the management structure of certain firms, we found a senior executive who was supervising six responsible officers but was himself only licensed as a representative," she said. 

"In some extreme cases, some junior executives are appointed ROs while the controlling minds of the firm stay in the shadows in the hope of escaping regulatory scrutiny."

There was also currently no systematic way for the SFC to collect management structure information, particularly for certain core functions such as risk management and compliance that do not constitute regulated activities, she added.

"That is why an important objective of the Manager-In-Charge initiative is to provide more guidance on who is regarded as senior management and who should seek to become ROs, as well as guidance on the management structure information which is required to be submitted to the SFC," she said.

Disciplinary Action

Leung said while the new measures do not seek to increase the SFC's powers, or make Managers-In-Charge more liable to disciplinary action, the regime should help drive better conduct and culture at licensed firms. Disciplinary action was an effective backstop but was not the whole solution, she said. 

"We hope to see more cases of misconduct detected by firms and reported to us, rather than having regulators detect them. We also hope to see front-line business managers take on the responsibility for compliance, instead of solely relying on the compliance department. Most of all, we hope to see a tone from the top that consistently and as a matter of course places client interests and the integrity of the market at the centre of business decisions. This, rather than mere reliance on disciplinary action to deter bad behaviour, is the key to ensuring proper behaviour and long-term business success," she said. 

Ultimately, the regime could also help reinforce the understanding of the SFC's disciplinary powers in the market. Leung said when the SFC consulted the industry on the regime, it found many industry participants were unaware they were subject to the SFC's existing disciplinary powers, such as those who were licensed but who manage functions such as information technology or risk management. 

"They now know that even before the Manager-In-Charge initiative was introduced, they were already within the regulatory net for potential SFC disciplinary action," she said.


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