SFC Enforcement Trends

The report highlights the SFC's regulatory work for the period dated April 2019 to March 2020 (the 2019/2020 Period). As part of this, the SFC has published information on its enforcement actions, in addition to its regular enforcement news alerts. A review of the annual report and the SFC's enforcement news alerts illustrates some key trends in the SFC's enforcement agenda. These are summarised below.

Our Enforcement Actions Table provides details of the SFC's enforcement actions from May 2011 where fines of more than HK$1 million have been imposed.

An increased focus on "high impact" cases and in the value of regulatory enforcement fines

The SFC continues to focus on "high impact" cases and adopts a targeted approach to enforcement. From 2015 to 2019, the total number of actions commenced by the SFC has declined while the value of total fines has significantly increased, as illustrated in the following table[1]. While the total number of actions commenced in the year 2019/2020 continued to decline, the value of total fines imposed decreased to approximately the same level as 2017/2018[2], but that was still high compared to the figure in 2016/2017. The value of total fines imposed in 2018/2019 was arguably exceptional because of the disciplinary actions against several sponsor firms and sponsor principals[3]. 

Specifically within the 2019/2020 Period, the SFC disciplined 20 corporations and 24 individuals, with the combined value of fines levied being HK$479 million. Of that sum, HK$400 million was a result of the SFC's disciplinary action against a single financial institution in respect of its serious internal control deficiencies, which led to it overcharging its clients through post-trade spread increases and excesses charges over a ten‑year period.

New fine guidelines

The evident increase in enforcement fines follows new disciplinary fining guidelines introduced in August 2018. According to the Securities and Futures Ordinance, where a regulated person is guilty of "misconduct" or is not fit and proper, the SFC may impose a fine up to the maximum of HK$10 million or three times of the profit gained or loss avoided as a result of the misconduct, whichever is greater. The Guidelines clarify that for this purpose "misconduct" may consist of a number of culpable acts or omissions. Accordingly, even if they are of the same generic nature, they may attract multiple penalties. The SFC may use the number of persons affected by the misconduct as the multiplier in assessing the appropriate level of pecuniary penalty.

Increased intervention in IPO applications

During the 2019/2020 Period, the SFC received 303 listing applications (a 23.1% decrease from 394 in 2018/2019) via the Stock Exchange of Hong Kong. The SFC directly intervened in 35 initial public offering applications (a 106% increase from 17 in 2018/2019) where it was aware of potentially serious disclosure or public interest issues, using its regulatory powers under the Securities and Futures (Stock Market Listing) Rules.

Internal control deficiencies remain one of the SFC's main areas of enforcement

Although the SFC has gradually been moving away from internal control deficiencies to "high impact" cases since 2016, out of the 44 disciplinary actions in the 2019/2020 Period, eight relate to internal control deficiencies. Moreover, from April to June 2020, all six of the enforcement actions published by the SFC where fines of HK$1 million or above were imposed for internal control deficiencies. In particular, a securities company was fined HK$25.2 million for multiple internal control failures and regulatory breaches in connection with anti-money laundering, handling of third party fund transfers and placing activities, as well as detection of wash trades and late reporting.

This serves as a timely reminder. Although there remains a greater focus on "high impact" cases, internal control deficiencies are still on the SFC's radar. Licensed corporations, registered institutions and individuals should be diligent in this respect, particularly so given the challenges to the operating environments arising from Covid-19. Intermediaries should note that in March 2020, the SFC published various circulars in light of the Covid-19 pandemic. Among other things, the SFC reminded licensed and registered persons of their obligations when distributing investment products, including the suitability obligation when making a solicitation or recommendation to clients, of the need to remain focused on internal controls to ensure financial and operational resilience, and of order recording obligations. Recent disruption to normal operations may be fertile ground for enforcement action moving forward.

Civil action versus criminal prosecution

The SFC can pursue enforcement action by way of criminal prosecution as well as civil, disciplinary and market misconduct proceedings. However, in recent years, the SFC has used its extensive civil enforcement measures. The number of individuals and corporations subject to ongoing civil proceedings and the number of criminal charges laid is set out in the table[4] below:

Management responsibility

For many years, regulators across the globe have been extolling the importance of proper culture and senior management accountability for financial institutions. In APAC, the SFC arguably led the charge with the introduction of its Manager In Charge regime in 2017.

Its focus on senior management accountability remains clear. In June 2020, the SFC banned of a former responsible officer (RO) from re-entering the industry for 12 months as a result of not taking any steps to rectify the licensed corporation's internal control deficiencies, to escalate the relevant breach to other members of the senior management, or to ensure the licensed corporation's staff adhered to its internal compliance manual. The SFC considered that the RO's conduct fell short of the standard required of an RO.

The Hong Kong Monetary Authority's Consultation Paper on the Implementation of the Mandatory Reference Checking Scheme to Address the "Rolling Bad Apples" Phenomenon also serves as a reminder of the priority regulators now place on conduct culture and governance in Hong Kong.

Conclusion

The SFC continues to focus its enforcement team on cases that have the potential to harm investors and cause serious reputational damage to Hong Kong. This is a trend that will continue. That said, intermediaries must not get complacent regarding smaller breaches as the SFC continues to pursue action in relation to internal control deficiencies. In the current environment, with numerous issues arising from Covid-19, it is important that intermediaries ensure strict compliance with regulations in order to prevent misconduct or failure to observe internal controls.

It is worth noting that following the global financial crisis in 2008, the SFC commented that in order to strengthen financial regulation, it would closely monitor systemic risks, extend regulatory oversight to unregulated institutions, markets and instructions, and share information among regulators. Intermediaries can expect the SFC to take the same steps moving forward given recent market disruption.

[1] Sources: Annual Reports of the SFC from 2015/2016 to 2019/2020.

[2] The biggest fine imposed by the SFC in 2017/2018 was HK$400 million against a bank for material systemic failures in the sale of structured products in the run-up to the global financial crisis in 2008.

[3] The SFC has imposed a total fine of approximately HK$72 million in 2018/2019, which are not related to sponsors activities. This is 23% lower than the total fines imposed in 2016/2017.

[4] Sources: Annual Reports of the SFC from 2015/2016 to 2019/2020.