SFC Clarifies Client Identity Verification During Client On-boarding
Hong Kong’s Securities and Futures Commission (SFC) has issued guidance clarifying the approaches available to intermediaries to achieve effective client identity verification during non-face to face client account opening procedures.
Intermediaries have been given the green light to use overseas certification authorities whose electronic signature certificates (recognised signing certificates) are mutually recognised by the Hong Kong Government. This includes using recognised signing certificates to create e-signatures for clients to execute client agreements during the initial on-boarding process. Intermediaries should regularly review the list of overseas certification authorities that have obtained mutual recognition status when reviewing their account opening process for overseas clients.
In the case of ongoing client authentication, the SFC has considered proposals to apply innovative financial technology, such as biometrics, to client authentication, and has indicated its willingness to explore such technology to help intermediaries strengthen and optimise Know-Your-Client (KYC) when conducting subsequent transactional operations.
The SFC published a Circular on 24 October 2016, to remind intermediaries of the importance of client identity verification and authentication during the account opening process, particularly in guarding against fraud, money-laundering and other market abuses.
The requirements for KYC and account opening procedures that are currently set out in paragraph 5.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) have not changed. The focus of the Circular is to highlight their potential application to situations where a client is not physically present, such as where initial on-boarding is conducted online.
The SFC’s clarification on using recognised signing certificates as a means of facilitating cross-border account opening has been positively received by the industry. While the use of recognised certification services to verify client identity has always been permitted under the Code of Conduct, the clear acknowledgement that e-signatures may be relied on in certain circumstances during an online account opening process will no doubt benefit firms that are developing overseas markets, particularly in the Mainland. Currently the only overseas certification authorities to have been granted mutual recognition status are based in Guangdong Province, pursuant to arrangements in place between the two governments. However it is contemplated that certification authorities in other jurisdictions may be added in the future.
The SFC has also made it clear in the Circular that any affiliate performing client identity verification for the purpose of account opening should be a regulated financial institution.
Hong Kong licensed corporations and authorised institutions that hold licenses with regulators in one or more jurisdictions will therefore have a potential advantage when conducting cross-border client verification. Intermediaries that do not have licensed overseas affiliates to assist with cross-border KYC procedures should be aware that this is an area the SFC has indicated will be subject to greater regulatory scrutiny in the future.
Finally, cross-border client identity verification may also be effected by obtaining a signed client agreement and identity documents and comparing signatures against a cheque drawn from the client’s Hong Kong bank account.
For ongoing client authentication, the SFC recognises that the use of biometrics such as fingerprint, face or voice recognition is being increasingly explored or introduced by banks in Hong Kong when conducting subsequent transactions. The SFC has made it clear that this should be contrasted with the initial on-boarding process, where client identity should still be checked against a reliable source, such as a government-maintained national citizen identity database. Intermediaries should also note the SFC’s circular published on 12 May 2015 which made it clear that images or videos transmitted remotely by mobile phone or internet should not be relied on to carry out the initial certification process, without sufficient measures in accordance with paragraph 5.1 of the Code of Conduct to enable effective authentication.
Notwithstanding the SFC’s current approach to limiting the use of biometrics to ongoing client authentication, it has indicated that it is committed to continuing a dialogue with the industry regarding the use of technology for safe and effective client identity verification for account opening purposes.
Actions to consider
Intermediaries should consider the following when performing online or cross-border client verification during account opening and in ongoing transactions:
- review the list of overseas certification authorities that have mutual recognition status on the Office of the Government Chief Information Officer website (http://www.ogcio.gov.hk/en/index.htm) for possible application to account opening processes for relevant overseas clients
- ensure that only licensed or regulated affiliates or professional persons assist in the client verification process
- limit client verification for initial onboarding to the approaches outlined in paragraph 5.1 of the Code of Conduct
- continue to engage with the regulators on the latest technology developments designed to optimise KYC and onboarding procedures
The Circular does not change the SFC’s approach to client identification and verification, but it does provide intermediaries with clarity on the regulatory expectations in non-face-to-face account opening situations. Hong Kong licensed intermediaries which have overseas clients or are actively pursuing overseas business will welcome the guidance in conducting cross-border KYC.