Resource review: Regulatory Handbook Volume 2 – Business Standard

What is it?

Volume 2 of the Hong Kong Securities and Futures Commission’s (SFC) Regulatory Handbook is the Business Standard for all companies licensed by, or seeking to be licensed by, the SFC.  It is the SFC’s attempt to collate all their current circulars, guidelines and codes of conduct into a document that is navigable by subject.

Why would I use it?

Finding circulars on a specific topic can be frustrating.  New circulars are generally published to a list on the SFC website where they are sorted by date.  This method of circulation is helpful for new updates, but poses a difficulty for finding all the rules that currently apply to a specific topic.  For example, finding all applicable circulars on Anti-Money Laundering (AML) requires searching through a large list of irrelevant information.

The Business Standard groups the SFC’s regulatory publications by broad subject areas.  If one were searching for AML circulars, one would find all of the SFC’s publications that are currently in force on the topic of AML grouped together under the heading of “Money Laundering” for easy reference.

Where can I find it?

The Business Standard can be found on the SFC’s website at the following URL: http://www.sfc.hk/sfcRegulatoryHandbook/EN/sfcRegulatoryHandbookServlet

Alternatively, you can locate it from the SFC’s homepage (www.sfc.hk) by hovering your mouse pointer over the heading Legislation & Regulatory Handbook, then clicking on the link to Regulatory Handbook that appears.

Next, click on Volume 2 – Business Standard as it appears at the left-hand side lower down on the screen.

How do I use it?

The Business Standard uses a drill down approach to finding information.  The contents of the document are listed in a hierarchy under seven broad headings:

• Part A - Licensing of Intermediaries and Continuing Obligations of Licensed Persons
• Part B - Specific Requirements for Regulated Activities
• Part C - Regulated Investment Products
• Part D - Corporate Finance
• Part E - Enforcement Related
• Part F - Securities and Futures Ordinance
• Part G - Miscellaneous

There are many entries listed under each heading.  Entries are often found within subcategories.  Taking the seven headings as the broadest level, the hierarchy has five levels at its narrowest.  An example would be:

• Part C - Regulated Investment Products
  • Collective Investment Schemes
    • Codes
      • SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (full version) (effective from 25 June 2010)
        • Section I – Overarching Principles Section

Using this system it is possible to find information on quite specific topics if one starts from the right level.

Alternatively, one can use the find function in one’s browser to search for keywords on the page if the drill down method is not successful.

What is good

• Clustering by subject.  If I want to know about licensing requirements for the Type 9 regulated activity, asset management, I can read all of information in Part A, and then the section of Part B on asset management.
• Authority.  These regulations are published directly by the SFC.
• Cost.  It is a very informative and useful resource that is provided by the SFC without any charge.
• Completeness/currency.  Although the SFC has put a disclaimer on the website to say that the standard may not be complete at a given time, the document is a fair representation of what SFC regulations are presently in force.
• Exclusive categories.  Each circular, code and guideline has its own place in the hierarchy that the SFC has created.  This feature reassures the reader that they have found the right information in the right category.

What could be better

• Inconsistent categorization.  Some categories are listed at the same level as circulars listed in the parent category.   The system could avoid this difficulty by providing a “General” category at the beginning of each section. A more consistent distinction between categories and actual documents would provide a more detailed list and easier navigation at the beginning of the document.
• Search references.  When searching the SFC website, it would be really helpful to have a related subject show up in the results based on the classification system used to organize the Business Standard.
• Unclear taxonomy.  Some categories are subdivided by subject, while the section on Collective Investment Schemes is subdivided by document type.
• Broad categories are too broad. The decision to keep licensing and ongoing obligations in the same category has made Part A really long.  This choice does not make it easier for finding information on ongoing obligations since one must scroll through the licensing section first.
• Cross-references.  Hierarchical systems require categories to be exclusive, but that does not mean that certain subjects are not related.  For example, finding information on suitability obligations requires looking in several different categories.  A cross-referencing system from one document to others on a related subject would be useful.
• Miscellaneous category.   Sixty is too high of a number to file under miscellaneous.  These documents should be filed elsewhere, possibly in new categories.

Summary

The SFC’s Business Standard is a useful tool and should be one of the first places to turn when looking for information on a specific topic related to SFC regulations.  Despite its shortcomings, it is one of the best free resources for finding information about the licensing process and related obligations for financial companies in Hong Kong.

Hong Kong's Financial Dispute Resolution Centre

On 10 March 2011, CliffordChance released a paper on the proposed Financial Dispute Resolution Centre (FDRC) in Hong Kong. It is hoped that the FDRC will be up and running by mid-2012. The FDRC is seen by the Government as a key development in promoting greater accountability and transparency for the consumer in the financial sector, and is a major development in the aftermath of the Global Financial Crisis and in particular the Lehman Brothers issues.

It appears that the FDRC will focus on monetary matters ($500,000 and under) and will not look at regulatory breaches. This will remain the responsibility of the various regulatory bodies, such as the SFC.

CliffordChance’s paper also looks at the process and fees involved.

For further details please use the following link.

HKMA reports first disciplinary action in relation to Lehman Brothers related investment product

On 20 November 2009 the Hong Kong Monetary Authority (HKMA) reported that it had suspended Ms Leung Wai Yu’s registration for three months from 20 November 2009 to 19 February 2010.

HKMA’s investigation found that in March 2006, Ms Leung, who at the time was an employee of DBS Bank (Hong Kong) Limited, in the course of selling a client Constellation Credit Linked Note, had:

• failed to diligently disclose and explain to the client the product’s risk; and
• failed to complete the risk disclosure statement for the client in accordance with the bank’s internal control procedures      

The Constellation Credit Linked Note had included a reference to Lehman Brothers Holdings Inc. in respect of the occurrence of a credit event.

Mr Raymond Li, the Executive Director of the HKMA responsible for Securities Enforcement said: "This is the first time the HKMA has taken disciplinary action against a relevant individual in connection with a Lehman Brothers-related investment product.  There are other disciplinary cases which have reached an advanced stage and will be announced in due course."

Please use the following link to access the HKMA press release

Hong Kong updates

10 July 2009 SFC to further study proposal to allow remote participants to access futures market On 27th February 2009, the SFC issued a consultation paper inviting comments on whether the definition in futures contracts should be changed to allow overseas participants to participate in that market without an SFC license provided certain preconditions were met. The SFC received 16 written submissions with mixed response and is hence going to further the study before a decision can be made.

Click to read more ...

Another SFC notice relating to swine flu

The SFC today notified all licensed corporations to ensure that they had sufficient business continuity procedures in place to handle and actual or suspected swine flu amongst employees of those firms.  Unlike previous notices of this type, the SFC specified that they must be immediately notified if any firm has an actual or suspected case of the virus.

The circulars published by the SFC and available on sfc.hk set out specific procedures to have in place to ensure continuity of the licensed firms in the event of an outbreak.