The Hong Kong Monetary Authority (HKMA) has recently released its first Guidance Note on Cooperation with the HKMA in Investigations and Enforcement Proceedings.
In releasing the guidance note, the HKMA has expressly signalled its desire to encourage and facilitate cooperation, noting that its benefits include time, cost and resource savings to both the HKMA and institution or individual concerned.
The guidance note covers several key topics, as set out below, including the:
- types of proceedings covered by the guidance note;
- forms of cooperation; and
- recognition given by the HKMA for cooperation.
The HKMA’s release of the guidance note follows the example of the Securities and Futures Commission (SFC), which in December 2017 updated its 2006 guidance note on the same topic (see our earlier bulletin). However, there are some key differences between the HKMA guidance note and that of the SFC, particularly in relation to the forms of cooperation recognised by the two regulators. These are discussed below and will mean that there are important differences in how HKMA and SFC-regulated institutions consider cooperation.
Proceedings covered by guidance note
The guidance note applies to investigations and enforcement proceedings involving authorised institutions, approved money brokers, stored value facility licensees, system operators and settlement institutions of designated systems.
However, it does not apply to criminal cases, over which the Department of Justice retains sole discretion.
Forms of cooperation
The guidance note establishes that there are a number of forms of cooperation which may take place before, during and after an investigation, such as:
- full and frank disclosure of all relevant information;
- taking a proactive approach to assist the HKMA’s investigation;
- agreeing to a voluntary waiver of legal professional privilege; and
- accepting responsibility, including by accepting investigation findings and proposed sanctions.
However, merely fulfilling statutory or regulatory obligations (such as self-reporting obligations) will not constitute cooperation.
Many of the forms of cooperation identified by the HKMA mirror those identified by the SFC in its guidance. However, there are a number of key differences between the forms of cooperation identified by the HKMA and those identified by the SFC, and these differences are likely to play an important role in how HKMA and SFC regulated institutions approach cooperation:
- Third party reviews: The SFC has indicated that in order to receive cooperation credit for a third party fact-finding or internal control review, the subject of investigation must engage the reviewer jointly with the SFC, allow the SFC to devise the terms of the review, and accept the reviewer’s findings without an opportunity to first review the report before it goes to the SFC or request changes to the report. However, the HKMA has stated only that a form of cooperation includes proactively carrying out effective remediation and rectification, including by appointing a third party reviewer and implementing their recommendations; and
- Settlement agreements with customers: The HKMA has indicated that entering into “appropriate settlements” with or making compensation to customers will be recognised as a form of cooperation and may be taken into consideration. This is a lower bar than that set by the SFC, which identified “making full and prompt compensation to the affected investors for their losses” as a form of cooperation it would recognise.
Recognition given for cooperation
While there are important differences in the types of cooperation recognised by the HKMA and the SFC, both the HKMA and the SFC have taken a similar stance as to how they will grant recognition for cooperation.
The guidance note states that the HKMA will consider all relevant circumstances in assessing cooperation, but will generally consider the:
- nature of the cooperation, including its timeliness, usefulness and costs and resources saved by the HKMA as a result of the cooperation;
- nature, seriousness and impact of the breach or misconduct and the degree of cooperation in proportion to those matters; and
- general conduct of the person after the breach or misconduct.
The guidance note also indicates that the HKMA will consider uncooperative conduct in determining what enforcement action is appropriate. This is similar to the SFC’s stance on uncooperative conduct, but differs from the SFC in that the guidance note expressly identifies the failure to comply with notices to produce information within the stipulated timeframe (unless there is a reasonable excuse for doing so) as a form of uncooperative conduct.
The guidance note does however mirror the SFC’s guidance in establishing that the maximum recognition given for cooperation will generally depend on when the cooperation is provided. The HKMA has, similar to the SFC, divided its disciplinary proceedings into three stages:
- Stage 1: This stage takes place from the detection of the breach or misconduct, up until the issue of a Notice of Intention to Take Disciplinary Action (NID). Cooperation during this stage may result in the reduction of proposed sanctions (eg pecuniary penalty or period of suspension / prohibition) by up to 30%;
- Stage 2: This stage takes place from the issue of an NID up to the deadline for written submissions in response to the NID. Cooperation during this stage may result in the reduction of proposed sanctions (eg pecuniary penalty or period of suspension / prohibition) by up to 20%; and
- Stage 3: This stage takes place from the deadline for making written submissions up to the issue of a Notice of Disciplinary Decision. Cooperation during this stage may result in the reduction of proposed sanctions (eg pecuniary penalty or period of suspension/prohibition) by up to 10%.
The guidance note provides important guidance as to the approach of the HKMA to cooperation by firms and individuals, and in particular identifies some key differences between the approach of the HKMA and the SFC to this issue.
Emily RumbleAssociate, Hong Kong
+852 2101 4225