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SFC reminded firms to maintain financial well-being against systemic risk

  • Hong Kong
  • China
  • Financial services disputes and investigations


In a speech delivered in Chinese on 7 September 2018 (Chinese version is here and English translation of which is here), Ms. Julia Leung, Deputy Chief Executive Officer and Executive Director of Intermediaries of the Securities and Futures Commission, reminded firms not to focus too much on economies of scale and short term benefits and ignore risk controls and compliance. Three specific areas were highlighted by Ms. Leung where she expected firms to raise their awareness, namely, strong corporate governance culture, prudential risk management mechanismand robust compliance system.

For the first time, Ms. Leung used the term “Mainland-backed firms” (MBFs) in light of the fact that MBFs are playing a more and more significant role in the Hong Kong market in that:

  • MBFs shared 60% of Hong Kong’s IPO sponsor business
  • BFs contributed 20% of Hong Kong total daily turnover of stocks
  • MBFs contributed 55% of margin loans and among the 20 securities margin financing providers, 12 are Mainland-backed

Ms. Leung emphasized the SFC’s new supervisory approach which is more front-loaded, targeted and real-time. We have seen the SFC taking action to intervene directly at an early stage when it identifies emerging risks in the market to prevent the problem from spreading. The risks that the SFC has identified are:

  • corporate misconduct, conduct of sponsors and related issues,
  • securities margin financing and
  • senior management responsibility

Corporate misconduct, conduct of sponsors and related issues

In tackling corporate misconduct, we have seen the SFC jealously guarding against the listing of “bogus” companies and it will not hesitate to suspend the trading in shares of listed companies involved in serious breaches. In terms of sponsors, the SFC is seeking to further enhance the relevant regulation. In practice, SFC is actively taking the following steps:

  1. exercise the statutory power conferred to it under sections 6 and 8 of the Securities and Futures (Stock Market Listing) Rules (SMLR) to object to listing applications and suspend dealings in securities,
  2. conduct inquiries and take investigation actions pursuant to powers under the Securities and Futures Ordinance (SFO),
  3. intervene in serious cases at an early stage to safeguard the investing public and suppress illegal, dishonourable and improper market practices,
  4. at the listing application stage, conduct investigation into the listing applicant, the sponsors and other parties involved in the listing process when it suspects a potential breach of the SMLR,
  5. whether or not the listing application is withdrawn, it will take enforcement action if it is confirmed that there is a breach of the SFO,
  6. conduct more frequent inspection visits in relation those sponsors with a history of returned or rejected listing applications or serious deficiencies and instances of non-compliance which cast doubt on a sponsor’s capability to discharge its responsibilities, and
  7. future listing applications submitted by the above sponsors may be subject to closer scrutiny.

Securities Margin Financing

With regard to the risk posed by securities margin financing, the SFC noticed that margin loans granted by brokers have grown nine times over the past 11 years. More importantly, the SFC detected a deterioration in the loan quality and slack risk controls. In addressing this emerging risk, the SFC has suggested additional guidelines to brokers to further strengthen their risk management of securities margin financing activities and it is consulting the public on the relevant guidelines.

More specifically, the SFC has recently issued warning letters to brokers with serious problems or those which have failed to address high risks in a proper and timely manner. It is possible that licensing conditions would be imposed upon and restriction notices would be issued to brokers who have demonstrated no improvement, especially when there are problems which present considerable risks to investors or the market. We can see that investigation will be commenced by the SFC against non-compliance brokers and enforcement action would be taken in appropriate cases.

Manager-In-Charge (MIC) Regime

After the full implementation of the MIC regime last year, it is the SFC’s expectation that firms are now having a stronger sense of senior management responsibility and a compliance culture to drive proper conduct and behavior. More specifically, firms should be able to show significant improvement in management transparency, terms of reference and accountability of the senior managers of firms, including MBFs. The SFC has repeatedly emphasized that the MIC Regime will increase the effectiveness of its enforcement work. To this end, we expect the SFC will continue to focus on individual responsibilities in all investigations commenced from now on.


Major challenges for firms in 2018/2019 are focused on the growth and speed of financial markets where technology allows transactions to occur in split seconds, new rules for manager responsibility and the importance of compliance as a priority for financial services organisations, at board level and on a global scale.

MBFs have become major players in the Hong Kong market in recent years and some have even achieved great success in the global stage. Substantial resources were devoted by MBFs in the past in raising the standard of their risk controls and compliance to be in line with their international counterparts. In view of the ever-changing legal and regulatory landscape, it is important for the senior management of MBFs to ensure that additional resources commensurate with those assigned for the further development of business (including timely access to advice from external regulatory professionals) is available in 2018/2019 and beyond to further enhance their risk controls and compliance.