Looking ahead to 2018 - a view from APAC
Enforcement activity continues to focus on trying to ensure that egregious breaches of the rules, including insider dealing, market abuse, corporate fraud, and intermediary misconduct, will generally mean that perpetrators will face strengthened penalties. By way of illustration, in Hong Kong, figures from the SFC show a fall in the number of new investigations and notices of proposed disciplinary activity, but an increased emphasis on bigger ticket investigations and actions.
Similarly, the Australian government is keen to show its commitment to enforcement and has announced a Royal Commission into misconduct in the banking, superannuation, and financial services industry. Those under the microscope will include not only banks, insurers (life and non-life), superannuation funds, and holders of Australian financial services licences (such as non-bank finance providers and financial planners), but also their directors, officers, and employers, and those acting on their behalf, including brokers. While the draft terms of reference outline that the Commission is to provide the interim report by September 2018, with the final report to follow within 12 months, the exact scope of the investigation is still a work in progress.
There is no appetite among regional regulators to soften their stance on malpractice: for example Australia is taking steps towards a single comprehensive whistleblowers’ protection regime in the Corporations Act, which may pave the way for wider take up in the region. The draft of the Treasury Laws Amendment (Whistleblowers) Bill intends to cover the corporate, financial, and credit sectors. It expands the definition of “eligible” whistleblowers to protect a wider range of people and also provides for increased measures on the confidentiality of a whistleblower’s identity and the right to compensation. While the road to implementing whistleblower protection has not been smooth, the implementation of the proposed amendments would be a positive change.
Since the global financial crisis, progress has been made to roll out measures for over-the-counter derivatives trades to be standardised, exchange-traded, and cleared through central counterparties, and reported; all designed to avoid or soften future problems.
September 2017 marked the commencement of initial margin requirements in Hong Kong and Singapore. The developments involve essentially a new collateral holding structure (ie two way gross posting and segregation of the collateral posted). Further developments such as in the context of variation margin are also on the radar, including for example the implementation steps that we have worked on with eight of our major banking clients on MarginMatrix.
The goal is a coherent reporting, clearing, and trading regime globally.
The adoption of new technologies in the financial services sector has revolutionised the way business is done. The past few years have demonstrated the rapid rise of FinTech start-ups.
As FinTech has evolved, regulatory “sandboxes” across the APAC region have followed suit. In Australia, the Federal Government has introduced draft legislation for an enhanced regulatory sandbox for new FinTech services to be tested in Australia beyond that launched by ASIC in late 2016. Regulators are also now joined up like never before, with multiple countries signing up to FinTech bridge agreements.
It is yet to be seen how FinTech start-ups will revolutionise payments, KYC/AML processes, and the use of artificial intelligence and robo-advice. However, regulators are actively engaging in the debate about ways in which to control how these developments will be spun out. In reality, it is difficult for regulators and regulations to keep pace, and the potential for arbitrage and unforeseen consequences in this area is high.
From 16 November 2017, the Managers-in-Charge (MIC) regime has been fully implemented in Hong Kong by the Securities and Futures Commission (SFC),with complementary measures (the Management Accountability Initiative or MAI) introduced by the Hong Kong Monetary Authority. The stated purpose of the MIC regime is to “clarify the accountability of the senior management of licensed firms and promote greater awareness of their obligations”.
In a similar vein, The Banking Executive Accountability Regime (BEAR) regime in Australia introduces obligations covering accountability, deferred remuneration, and notification for authorised banks, their subsidiaries, branches of foreign banks with operations in Australia, and their “accountable persons”, along similar lines to the MIC and MAI regimes in Hong Kong. In addition to the usual honesty and diligence requirements, reasonable steps must be taken in relation to governance, control, and risk management.
Failure to meet BEAR obligations will trigger amongst other things monetary penalties and disqualification.
Other APAC jurisdictions will be considering whether to follow the same path.
Anti-money laundering (AML)
Combatting global terrorism remains high on the agenda of all regional jurisdictions. AML and counter-terrorism themes are perhaps more immediately on the agenda in Hong Kong at present than elsewhere, with the prospect of the scheduled 2018 FATF mutual evaluation. In an effort to ensure the continuing suitability of the Hong Kong regime, new legislation was introduced in Hong Kong in 2017 to strengthen the regime, for implementation on 1 March 2018.
Data management/ transfer
Handling sensitive personal and confidential data remains a key practical issue for businesses in Asia, who must navigate a complex web of restrictions and prohibitions, and requirements for consents, opt-ins, and opt-outs, which all create difficult challenges within day-to-day business, direct marketing, and information management during, for example, acquisitions and investigations. The picture within the region remains highly fragmented given the multiplicity of regulatory regimes and enforcement attitudes.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – email@example.com, or tel +44 20 3088 3710.