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Record fines, but fewer actions: Hong Kong regulatory enforcement in 2020
• One large fine pushed the total fines levied by the Securities and Futures Commission in 2020 to a record HK$2.8bn
• But number of enforcement actions against both individuals and corporations fell to lowest levels in past five years
Hong Kong’s Securities and Futures Commission (SFC) levied a record total of HK$2.8bn in fines last year, according to new research from international law firm Freshfields Bruckhaus Deringer (Freshfields). At the same time, the number of enforcement actions taken against corporations (23) and individuals (56) both fell from 71 during 2019 – the lowest numbers in the past five years.
Money laundering remained a key focus for the regulator, with further actions against licensed firms and their senior management in 2020 for failures to comply with anti-money laundering (AML) requirements, while the focus on third party fund flows continued. AML concerns led to one global bank being fined HK$2.71bn. However, if this one large fine is excluded, the total amount of fines imposed in 2019 was in fact much lower in 2020 than in 2019, primarily due to the large fines imposed in IPO sponsor cases in 2019.
Hong Kong’s regulators accelerated their efforts in several key areas, partly driven by pre-existing regulatory policies, and partly in response to market developments closely linked to the pandemic. As well as AML, regulation of virtual assets, and the use, storage and surveillance of data have all been key areas of focus for the SFC. In the insurance space, the Insurance Authority has ramped up its preparatory efforts, issuing a number of consultations and new guidance, while building out its enforcement toolkit by publishing an overview of its disciplinary process , establishing the new Disciplinary Panel Pool , as well as an Expert Advisor Panel which will act as a source of technical advice and market intelligence.
“The SFC’s enforcement “staple diet”, including intermediary misconduct, market misconduct, IPO sponsor failures, and senior management accountability, all remained targets in 2020,” said Tim Mak, dispute resolution partner at Freshfields. “At the same time, the SFC’s ongoing focus on “high impact” cases and “front-loaded regulation”, which prioritises prevention and early resolution, means the trend in recent years of fewer enforcement outcomes continues. There are indications that the SFC is planning ahead in areas such as data, cybersecurity and the regulation of virtual assets, and we can expect to see those areas feature in enforcement cases in future.”
Freshfields’ analysis goes on to make a number of predictions for the year ahead.
• Both the SFC and Hong Kong Monetary Authority (HKMA) are likely to continue to focus on risk management following a number of thematic reviews and surveys in 2020, many of which were driven by the increasingly complex and cross-border nature of financial services businesses and the inherent risks in them.
• The SFC continues to pursue cross-agency working relationships with its counterparts locally and in other jurisdictions. With the further expansion of the Stock Connect scheme, growing investment in the Mainland China bond market via Bond Connect, and the launch of the Wealth Management Connect pilot, cross-border market activities and capital flows are set to rise, which may lead to information sharing and investigative cooperation between Hong Kong and mainland Chinese regulators.
• Sustainability factors will be seen as increasingly important, with regulators emphasising self-assessment, disclosure and risk management. The HKMA is set to launch a formal consultation on the appropriate supervisory approach to address climate-related issues this year, while the SFC is seeking to introduce a regulatory requirement where fund managers must consider and disclose climate risks as part of their investment and risk management processes . Related supervisory and enforcement efforts are likely to follow.
• Licensing. Those providing regulated services to Hong Kong investors will come under greater scrutiny as the SFC considers the new online channels for offering products and services into Hong Kong without being physically present. This will be particularly acute for those businesses that are currently not licensed and engage with Hong Kong customers from offshore while hoping to stay under the SFC’s radar.
To download Freshfields’ Hong Kong regulatory enforcement trends 2020 analysis, click here.
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