SFC’s New Pact With FCA Raises Industry Unease
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Hong Kong’s fund industry is concerned about a new deal between the Securities & Futures Commission (SFC) and the UK’s Financial Conduct Authority (FCA) where the two regulators would provide greater assistance to each other in the supervision and oversight of cross-border regulated companies.
Initial response indicates industry players are uncomfortable with a clause in the agreement which says the FCA may join forces with the SFC to conduct on-site inspections of cross-border regulated companies in Hong Kong, where the local entities fall under the SFC’s jurisdiction but where the FCA may have a claim to authority.
The UK regulator may now conduct cross-border inspection visits with advance notice to the SFC, and if accompanied by the Hong Kong regulator. The SFC will have a chance to comment on the scope and purpose of the visit and receive the relevant reports before they are sent to the affected companies.
The new arrangements came to light when the SFC posted the full text of its memorandum of understanding with the FCA on its website on July 21.
“It is hard to believe that either authority can go to another jurisdiction to perform on-site visit and any information obtained may be shared with other local government agencies, such as its tax authority, easily,” a head of legal and compliance at a leading UK fund house tells Asia Asset Management. Speaking on condition of anonymity, he says his company is escalating the matter to the Hong Kong Investment Funds Association’s regulatory committee for an industry review.
“I really have big concern on it, and even worse is that the financial industries were not consulted at all,” he adds.
It’s not the first time the SFC has signed an agreement with a foreign regulator related to on-site visits.
A similar clause in an MOU with the US Securities and Exchange Commission in January allows for “any routine, sweep, review, examination or for for-cause regulatory inspection or the inspection of the books and records and premises of a cross-border regulated entity”.
The deal between the FCA and SFC adds to the scope of the kinds of information they may share with each other. It includes a range of intimate information on the financial and operational conditions of a cross-border company, as well as information that could affect its “competence and integrity”, such as investor complaints and referrals flagged by third-party regulators.
According to the agreement, the regulators “recognise that information is not to be gathered under the auspices of this MoU for enforcement purposes… No information under this MoU will be used in judicial proceedings”. But it recognises that a recipient authority may pass on information to a third-party if it receives a “legally enforceable demand” and if it receives written consent with the provider authority.
“Where cross-border cooperation is sought by a foreign regulator for enforcement purposes, there is an existing framework under section 186 [of the Securities & Futures Ordinance] for the SFC to lend assistance. Unfortunately, the safeguards in that framework may not always be followed through, as we have seen in the ‘AA and EA’ judicial review against the SFC,” says Melissa Chim, a consultant with the law firm Simmons & Simmons. (AA and EA are parties in an active suit against the SFC. Their names are kept confidential in the legal proceeding.)
“From a licensed corporation’s point of view, this [the written protection] gives limited comfort, since there is nothing to prevent an overseas regulator conducting its own investigations based on information gained during a Hong Kong site inspection, and it would be impossible to prove that evidence was the fruit of a poisonous tree,” Ms. Chim adds.
“It reflects a direction of travel where there are increasing levels of cross-border regulatory cooperation,” Mark Shipman, funds and investment management partner at Clifford Chance, tells Asia Asset Management (AAM).
The SFC did not directly address AAM’s request for comments. Instead, it provided multiple links, including a 2015 consultation on the ‘Proposed Amendments to the Securities and Futures Ordinance for Providing Assistance to Overseas Regulators in Certain Situations’ and its conclusion, which did not appear to have fully explained the current level of support pledged to the FCA.
“The industry lobbied about these powers on this point but as it typically the case with the SFC at the moment with most consultations, the points were not accepted,” says Philippa Allen, chief executive of ComplianceAsia Consulting, a regulatory consulting firm.
The new memorandum builds on a 1992 agreement signed between the UK’s Treasury and the then Securities & Investment Board and the SFC on cooperation and information sharing.
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