SFC Notifies Industry of Licensing Concerns
The Hong Kong Securities and Futures Commission (SFC) issued a circular (Circular) on 2 June 2017 to SFC-licensed corporations (LCs), outlining its expectations and areas of concern when considering licensing applications for corporations and individuals. These emerge from the SFC's recent observation of persons acquiring dormant LCs, and hiring individuals who are responsible officers (ROs) in name only, but who do not genuinely participate in the firm's management or operations. The SFC has made it clear that this form of "backdoor licensing" is unacceptable and that suspected applications will be subject to greater scrutiny and potential disciplinary action.
The SFC cautions LCs that if there is reason to believe that an RO is not genuinely carrying on a business in a regulated activity, or has insufficient authority to do so, it may indicate that both the LC and the RO are not fit and proper persons to be licensed, potentially leading to public reprimand or licence revocation. RO applicants are expected to provide the SFC with a description of their specific responsibilities in relation to supervising the LC's business. If this is demonstrably not true in practice, both the LC and the RO may have committed an offence of providing false or misleading information to the SFC in support of their license applications.
The SFC also highlights that an RO's ability to properly manage potential conflicts of interests will be a key part of the fit and proper assessment. In this regard, the SFC is unlikely to be satisfied that a person will be fit and proper to be licensed as an RO to act for more than one LC, unless the LCs are in the same corporate group or controlled by the same shareholders. An RO acting as a director or external advisor of other LCs or applicants will raise similar conflict of interest concerns.
The SFC stresses that it will pay particular attention to substantial shareholder applications where the LC being acquired has little or no business. Accordingly, unless a substantial shareholder is able to satisfy the SFC that it meets, and that the LC continues to meet, the Fit and Proper Guidelines, an application to become a substantial shareholder is likely to be refused. To underscore this point, the SFC reminds substantial shareholders that they will be subject to comparably stringent assessment and vetting processes as new LC applications, including a possible enquiry into their source of funding and financial strength in order to confirm the legitimacy of the funds and the substantial shareholder's status as an ultimate beneficial owner.
The SFC will also assess any potential changes to the LCs business plan and senior management following a change of ownership, to ensure the Board and senior management comprise individuals with the appropriate skills and experience to run the LC's activities. If an application represents that the LC’s business plan and senior management will remain unchanged following the change of ownership, the SFC may seek further information to verify what changes have actually occurred. The provision of false or misleading information in purported compliance with the SFC's request for information in this context is an offence punishable by a fine and imprisonment. LCs must notify the SFC within seven business days whenever certain changes occur, including significant changes to the LC's business plan and senior management.
The Circular lends support to a speech1 given by the SFC in May 2017, in which the Executive Director for Intermediaries makes it clear that the SFC's front-loaded approach to regulation starts with the Licensing Department's gatekeeping function, and that senior managers will be held accountable for the conduct and behaviour of the firm. LCs and their licensed persons can expect to be subject to a greater level of scrutiny from the SFC during the licence application and ongoing supervisory process, which will focus on qualitative factors that go beyond merely meeting quantitative thresholds.
1 "Supervision in a time of change - Hong Kong Securities and Investment Institute’s Senior Leaders Programme" Ms Julia Leung, Executive Director, Intermediaries, 4 May 2017