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Notification obligations: information overload?

A look at the rationale behind the notification obligations that Hong Kong-regulated firms must comply with, and the latest regulatory expectations in this evolving area.

Regulated firms have long been subject to a wide range of notification obligations to regulators and enforcement agencies concerning a range of information and events, to demonstrate compliance and also when things “go wrong” – including any ongoing overseas investigations.

However, the notification requirements in Hong Kong are not all as well known by firms and their management/compliance personnel, possibly because they are not consolidated in a single rulebook but are instead found in different legislation, subsidiary legislation, rules of conduct, and supervisory guidance issued and administered by different regulators and enforcement agencies. This has sometimes led to supervisory inquiries from regulators, follow-up inspections, and even criticism for late notification in enforcement sanctions by the Securities and Futures Commission (“SFC”).

At the end of this article, we will provide a non-exhaustive snapshot of the main SFC and Hong Kong Monetary Authority (“HKMA”) notification requirements with which financial institutions must comply. It can be seen from the summary that regulated firms in Hong Kong are faced with a range of obligations to notify and self-report events that concern their own conduct, as well as the conduct of employees, affiliates and even clients. The range of information in which the regulators are interested is extensive, in the nature of the information, its geographical origin, and the governing regulatory framework (e.g. the wide-ranging Basel III disclosure requirements administered by the HKMA). This aspect of notification is especially significant for firms which operate on a cross-border or group basis.

Further, following the proliferating global Libor and FX investigations, firms are under increased pressure to manage the many channels of internal reporting and external reporting to their regulators globally about regulatory investigations and risks. The global investigations have also signalled a watershed of cross-border cooperation between regulators, who have expressed a clear dislike of surprises about findings by their overseas counterparts that may have consequences in their local market.

In seeking to obtain an increasing amount of information from regulated firms as well as from their overseas counterparts (and to provide greater assistance to those counterparts), the Hong Kong regulators want to remain informed and reassured on an ongoing basis that global matrix-managed firms and their representatives are “right” for the operation and integrity of the Hong Kong financial markets and the protection of investors, notwithstanding any change to their circumstances or business models. These regulatory objectives have been highlighted in a recent Circular issued by the SFC, reminding the market about the notification obligations under the Securities and Futures Ordinance (“SFO”), the Securities and Futures (Licensing and Registration) (Information) Rules (“Information Rules”), and the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct”).

In a similar vein, the SFC has also consulted on providing greater supervisory assistance to overseas regulators, underlining the importance it attaches to an open flow of information from regulated firms.

Amid the climate of global investigations, the SFC reminded intermediaries in its 11 May 2015 Circular to Intermediaries Regarding Compliance with Notification Requirements that their notification obligations are not limited to information about regulated activities in Hong Kong or information about the intermediaries themselves. Rather, the scope of the notification obligations extends to cover information regarding substantial shareholders or directors, as well as group entities i.e. other businesses owned or managed by those substantial shareholders or directors.

To illustrate the geographical reach of some of the reporting requirements, the SFC cited as an example the requirement to notify the SFC and the HKMA (if applicable) of any change in the “relevant information” concerning an intermediary and/or its group entities, whether the change has occurred in Hong Kong or overseas.

The SFC further highlighted in the Circular the importance of: (i) recognising that a firm’s circumstances may be impacted by events concerning their group entities; and (ii) having the appropriate systems and controls in place to enable effective communication of information from other group entities. The SFC would expect a firm to notify it and the HKMA (if applicable) of an event which:

• directly involves the firm or any of its representatives and may impact on their fitness and properness;

• may have a significant impact on the operations or viability of the firm’s corporate group as a whole; or

• arises from a material failure of systems and controls, even if the failure occurred outside Hong Kong to other group entities.

Meanwhile, as an active provider of information to overseas regulators, the SFC is contemplating ways in which it can provide greater assistance to its overseas counterparts beyond the realm of enforcement. In its December 2014 Consultation Paper on Proposed Amendments to the Securities and Futures Ordinance for Providing Assistance to Overseas Regulators in Certain Situations, the SFC proposed amending the SFO so that the SFC would be empowered to obtain information for the purposes of assisting an overseas regulator in supervisory matters. In contrast with the current legal framework under which the SFC may only obtain information for its own supervisory purposes, the proposals would allow the SFC to make enquiries and to obtain from a licensed corporation (or a related corporation), upon request by an overseas regulator and at the SFC’s discretion, records and documents in relation to any regulated activity carried on by the licensed corporation.

As a reflection of the SFC’s increasing focus on cross-border group-wide supervision and regulation, the supervisory information obtained under the proposed power would assist the overseas regulator to ascertain compliance by: (i) an SFC-licensed corporation which is also regulated by the requesting overseas regulator; and (ii) a related corporation of an SFC-licensed corporation regulated by the overseas regulator (even where the SFC-licensed corporation is not itself regulated by that overseas regulator). Regarding the extension of coverage to firms which fall under (ii) above, the SFC’s rationale is that an overseas regulator may better understand its regulated entities and the impact on its financial system with additional information about a related Hong Kong-licensed corporation. The SFC also made clear in the consultation paper that by being able to provide overseas regulators with information about their regulated entities’ group companies, it would be in a position to negotiate reciprocal arrangements with overseas regulators which would assist the SFC in performing its own statutory supervisory functions.

Unless regulators are to move to a purely localised model, it is clear that they will continue to demand and expect an increasing amount and range of information from their regulated entities (and their affiliates). This has been evident in the UK, where the Financial Conduct Authority (“FCA”) has taken action against firms for their failure to be open and cooperative in their communications with the regulator in breach of Principle 11 (including a £60 million fine for JP Morgan in 2013 and an over £100 million fine for Deutsche Bank this year).

Although the Hong Kong regulators have yet to follow in the FCA’s footsteps in levying fines for similar failure, it clearly expects firms to be cooperative, open and fully aware of their local notification obligations in relation to their global business. And in light of the SFC Intermediaries Supervision Division’s emphasis on management embedding the right culture throughout firms, we expect to see senior management of firms becoming increasingly involved in direct dialogue with their regulators.

For more information please contact:
Stephen Fletcher
[email protected]

Gavin Lewis
[email protected]

This article was co-authored by Wings Turkington, Managing Professional Support Lawyer

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