On 23 September 2019, the new statutory regime for the regulation of insurance intermediaries will take effect.
This represents the final stage of implementation of the insurance reforms which established the Insurance Authority (IA) as Hong Kong’s independent insurance regulator. The IA assumed the regulatory responsibilities of the Office of the Commissioner of Insurance in June 2017 and will take over the regulation of insurance intermediaries (agents and brokers) from the three self-regulatory organisations (SROs) on 23 September 2019. On the same day, the requirements relating to the intermediary management function, one of the control functions of an authorised insurer, will also come into effect.
The IA will be responsible for all aspects of regulation of insurance intermediaries, including issuing rules, codes and guidelines, approving licences, monitoring compliance, conducting inspections and investigations, and imposing disciplinary sanctions where breaches have occurred.
In the lead-up to 23 September 2019, authorised insurers and insurance intermediaries should conduct a final review (if they have not already done so) to ensure that they are ready to comply with all relevant requirements under the new regime.
In this e-bulletin, we provide an overview of the new rules, codes and guidelines which will apply under the new regime, as well as the transitional arrangements relating to licensing, approval of key persons in the intermediary management control function, and ongoing complaint and disciplinary cases.
Financial services firms conduct their business activities across markets and borders, often performing services and holding data in locations other than those in which they interact with their clients. Over a decade after the financial crisis, their regulators remain under sustained public and political pressure to improve customer outcomes and punish poor conduct. When issues arise, those regulators frequently need to seek assistance from their global counterparts to be able to unravel what has occurred, irrespective of where it took place.
Understanding how and when regulators interact with each other and with firms across borders, how firms are required, or expected, to respond, and how to handle multiple proceedings in different jurisdictions, is more critical than ever.
This fourth edition of “The Long Arm of Regulation: Responding to Cross-Border Financial Services Investigations”, Herbert Smith Freehills’ guide to cross-border financial services investigations, gives an overview of how to approach these issues, and aims to assist firms in navigating the differing regimes across 15 key jurisdictions, including, for the first time in this edition, South Africa. The guide covers a range of important topics, including the regulators’ breadth of powers, mechanisms for obtaining – and withholding – information, consequences for failing to comply, and the management of competing confidentiality and reporting obligations.
In producing this publication, we have drawn on the expertise of our financial services regulation practice across our international network of offices and through our formal alliance with Prolegis (Singapore). In addition, we are enormously grateful for contributions from law firms Anderson Mori & Tomotsune (Japan), Stibbe (the Netherlands) and Homburger (Switzerland).
Following the Financial Action Task Force (FATF) and the Asia/Pacific Group on Money Laundering’s inspection of Hong Kong in October and November 2018, their much anticipated Mutual Evaluation Report (Report) on Hong Kong was published on 4 September 2019. Our previous bulletin on 25 June 2019 gave early insights into the expected findings.
The Securities and Futures Commission (SFC) has recently issued a circular on the outcome of its survey and inspection of selected fund managers regarding their liquidity risk management practices.
The SFC noted inadequacies and deficiencies in a number of areas. These are set out in the appendix to the circular, together with observations and examples of such inadequacies and deficiencies, and the SFC’s expected standards (see overview below).
Last Friday, the Securities and Futures Commission (SFC) issued a circular to announce the launch of a key risk indicator (KRI) platform to collect and analyse KRI data from selected licensed corporations (LCs).
The platform is aimed at facilitating the SFC’s supervision of global firms which are exposed to the changing dynamics of global markets. It supplements the SFC’s existing monitoring tools and enhances the SFC’s information gathering and analytical capabilities to better identify and manage existing and emerging risks.
The Hong Kong Stock Exchange has finalised its proposed amendments to the Listing Rules to tighten restrictions on backdoor listings and continuing listing criteria. The changes are aimed at combatting listed company shell activities which have been the subject of ongoing regulatory scrutiny in recent years. Continue reading
Last Friday, the Hong Kong Monetary Authority (HKMA) published its money laundering and terrorist financing (ML/TF) risk assessment report for the stored value facility (SVF) sector in Hong Kong.
The latest assessment confirms that the SVF sector continues to carry a medium level of ML/TF risk.
While the majority of the sector continues to be characterised by lower ML/TF risks (as indicated by the use of SVF products for low value transport and retail transactions), some pockets of higher ML/TF risks have emerged, arising from SVF products with functions such as overseas cash withdrawal and cross-border remittances.
SVF licensees should consider the HKMA’s report, and (where necessary) update their institutional ML/TF risk assessments and enhance their internal systems and controls.
The SFC has recently published its Statement on the conduct and duties of directors when considering corporate acquisitions or disposals.
- outlines the recurring types of misconduct relating to corporate acquisitions and disposals which the SFC observed over the past two or so years, since it adopted a front-loaded regulatory approach;
- reminds listed company directors and their advisers to comply with their statutory and other legal duties when evaluating or approving such corporate transactions; and
- warns listed company directors and their advisers that where the SFC has serious concerns that an announced acquisition or disposal may be structured or conducted in a manner that constitutes a breach under the Securities and Futures Ordinance (SFO) or other applicable laws, it will have no hesitation in using its powers under the SFO and the Securities and Futures (Stock Market Listing) Rules (SMLR) to protect market integrity and the investing public.
Front-loaded regulatory approach in action since 2017
Over the last two or so years, the SFC has been using its powers under the SMLR and the SFO to intervene at an early stage in serious cases of corporate misconduct, as part of its “front-loaded” or “real time” regulatory approach.
As the name suggests, the approach involves “nipping problems in the bud” through early targeted intervention (such as making inquiries or directing the stock exchange to suspend trading in the listed company’s shares) to minimise damage to the market. It also involves being more direct, upfront and transparent about how it regulates as a gatekeeper (such as issuing statements, guidelines and bulletins) to prompt fast behavioural changes. This is in addition to the enforcement work which the SFC will continue to conduct at the back end.
The SFC has issued a series of bulletins – SFC Regulatory Bulletin: Listed Corporations – to provide guidance on the manner in which it performs its functions under the SMLR and the SFO. The series can be accessed here and contains numerous case examples.
Recurring types of misconduct relating to corporate acquisitions and disposals
In the present statement, the SFC focuses on the recurring types of misconduct relating to acquisition and disposal transactions. The SFC notes that more than 55% of the cases in which it issued letters of concern in 2017 and 2018 involved corporate acquisitions and disposals.
Some of the recurring types of misconduct highlighted by the SFC include:
- lack of independent professional valuation for a planned acquisition or disposal;
- lack of independent judgment in considering valuation reports by external valuers and profit forecasts from vendors;
- performing little or no independent due diligence on the forecasts, assumptions, or business plans provided by the vendors or the management of the targets;
- cherry picking companies rather than using a representative sample of comparable companies for the purpose of valuation;
- failing to assess the potential negative impact of a planned acquisition on the resources and financial position of the listed issuer;
- no verification of the vendor’s ability to pay compensation or other safeguards to protect the listed issuer’s interests, where the issuer has paid consideration upfront based on the vendor’s profit forecast and the projected profits are not met;
- suspicious transactions that suggest undisclosed relationships or arrangements among purported independent third parties.
Last week, the Hong Kong Securities and Futures Commission (SFC) signed a tripartite memorandum of understanding (MOU) with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China (MOF) regarding audit working papers in the Mainland arising from the audits of Hong Kong-listed Mainland companies.
Last Friday, the Hong Kong Insurance Authority published its Guideline on Cybersecurity (GL 20) for authorised insurers. GL 20 will take effect on 1 January 2020.
Cybersecurity is a global regulatory focus and a top priority area for the Insurance Authority, given the growing exposure to cyber risk as a result of increased digital connectivity.