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Oct 18 Legal Update

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SFC enforcement updates

SFC’s Head of Enforcement gave a speech at a regulatory summit regarding its strategic approaches in enforcement.  (Click: speech).

SFC is partnering with other enforcement agencies (ICAC, the police) in targeting “nefarious networks”. These groups of highly organized people (controlling listed companies, licensed dealers, money lenders, financial advisory services and placing agents) enrich themselves at the expense of investors.

Methods used include “share warehousing”, use of nominees to disguise actual voting control, sale of assets with extreme pricing, usually coupled with some form of “market manipulation”.

SFC also issued a circular to intermediaries, reminding them of the improper use of “nominees and share warehousing arrangements” to facilitate market and corporate misconduct. Intermediaries should be mindful of “red flags”, make proper enquiries with clients, and report promptly to SFC where needed. (Click: circular to intermediaries).

In the meanwhile, SFC introduced online forms via its website to make it easier for the public to report (i) suspected corporate fraud and market misconduct, and (ii) information about key suspects SFC is trying to locate. (Click: press release; “Reporting corporate fraud/market misconduct” webpage; “Have you seen these people” webpage)

What you should know:

  • “Traditional” approach to enforcement
    — Focus: Corporate fraud
    — Aim: complete investigations of around 100 more entities by year-end
    — Aim: legal proceedings against 60 companies and individuals by 1H 2019
    Deterrent message: since 2017, doubled the number of directors removed/ banned for fraud/ misfeasance/ breaches under the Securities and Futures Ordinance
  • “Non-traditional” approach to enforcement
    “Front-loaded” approach
    “Nefarious networks”
    — Partnering with ICAC, the police


Also in this issue


The Competition Commission published a decision that the “Code of Banking Practice” is not excluded from the “First Conduct Rule”, by virtue of the “legal requirements exclusion” under the Competition Ordinance (“CO”).  It is in response to an application of 14 Authorized Institutions (“AIs”) seeking exclusion on this ground.

The Commission also confirmed that it has no current intention to pursue further investigative/ enforcement action regarding the Code. (Click: press release; Statement of Reasons).

What you should know/watch out for:

  • Background
    — The Code is an industry code of practice jointly issued by the Hong Kong Association of Banks and the Hong Kong Association of Restricted Licence Banks and Deposit-taking companies, and endorsed by HKMA
    — Relates to AIs’ provision of services to private HK customers; recommendations on banking practice covering various services
    — Stated to be voluntary and non-statutory
    — Certain provisions relate to imposition and level of fees/ interest rates/ charges. E.g. should not in specific circumstances impose particular fees or charges on customers).
  • Case focus: the “legal requirement” exclusion
    Not assessing the Code for compliance with “First Conduct Rule”
  • Commission: no current intention to pursue further actions
     Its enforcement policy targets conduct that is clearly harmful to competition and customers in HK
    The Code may in fact benefit customers in particular ways; intended to promote good banking practices
  • “Legal requirement” exclusion narrowly construed
     Not a legal requirement imposed “by” or “under” the Banking Ordinance within the meaning of the CO
     Existence of monitoring procedures not sufficient to demonstrate a “legal requirement” to comply with the Code


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