The PRA has published a consultation paper (CP2/21) setting out proposals for its updated approach to supervising the UK activities of banks and PRA authorised investment firms that are headquartered outside of the UK or part of a non-UK group. The consultation paper includes a draft supervisory statement to supersede the existing PRA Supervisory Statement 1/18 (the PRA’s current supervisory statement on its approach to supervising international banks).

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FCA’s Approach to International Firms

The FCA has published a consultation (CP20/20) on its general approach to international firms. The consultation and the finalised approach document published after consultation are intended to provide guidance that will help international firms understand the FCA’s expectations as they prepare for their applications for UK authorisation, informing firms’ decision about how they might want to structure their businesses to provide regulated financial services in the UK. The final approach document will supplement the FCA’s existing guidance on its approach to authorisation and supervision. Continue reading

PRA Dear CEO letter to firms on operational readiness for TPR

As the end of the Brexit transition period approaches, the PRA has published a letter from Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA, to CEOs of all PRA-regulated firms preparing for the end of the transition period and for entering the Temporary Permissions Regime (TPR). The letter stresses the need for firms to be operationally prepared to enter the TPR and to ensure that they are able to meet the PRA’s regulatory requirements once they are in the TPR. The transition period is due to end at 11pm on Thursday 31 December 2020 at which point the TPR will take effect.

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IOSCO proposes updated Outsourcing Principles as Covid-19 drives operational resilience to the top of the agenda

Having initially delayed its planned consultation exercise to allow the financial services sector to focus on responding to Covid-19, the International Organization of Securities Commissions (IOSCO) subsequently found the pandemic a catalyst to proceed. Therefore, at the end of May, IOSCO launched its consultation on proposed updates to the 2005 Outsourcing Principles for Market Intermediaries and the 2009 Outsourcing Principles for Markets; feedback on the proposed new Outsourcing Principles (OPs) is requested on or before 1 October 2020. The decision to proceed reflects the acknowledgement that outsourcing is a key element for consideration when assessing operational resilience across the sector.

This post gives a high level summary of the consultation, with a link to our briefing that focuses in more detail on: the scope of application; IOSCO’s definition of outsourcing; intragroup arrangements; concentration risk; and access and audit rights. To provide additional context to IOSCO’s proposals, the associated briefing also catalogues relevant proposals and initiatives which are running concurrent to the consultation exercise.

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Client facilitation – Key standards of conduct and internal controls identified and reiterated by Hong Kong SFC

Authors: William Hallatt, Hannah Cassidy and Jennifer Fong

On 14 May 2019, the Securities and Futures Commission (SFC) issued further guidance identifying and reiterating the key standards of conduct and internal controls relating to client facilitation expected of licensed corporations (LCs).

By way of background, conflicts of interest may arise in a facilitation transaction where LCs assume a risk-taking principal position against clients as opposed to acting as an agent. Such conflicts of interest have long been identified by the SFC as a recurring regulatory concern, which they take very seriously.

Guidance issued to date on client facilitation

Back in 2014, the SFC organised a supervisory briefing session so as to draw the industry’s attention to common deficiencies and vulnerabilities associated with the provision of client facilitation services identified during its routine inspections.

Two years on, the SFC commenced a thematic review in 2016, which assessed the effectiveness and adequacy of management supervision and controls concerning client facilitation.

In 2018, the SFC published detailed observations from its thematic review, and set out guidance on the standards of conduct and internal controls expected of LCs providing client facilitation services. Four main areas of expected standards of conduct and internal controls relating to client facilitation were identified:

  1. controls, monitoring and management supervision;
  2. segregation of agency and facilitation activities;
  3. consent and disclosure; and
  4. indications of interests (IOIs).

Most recently, on 14 May 2019, the SFC issued a circular to LCs to:

  • outline its inspection findings relating to client facilitation in recent years; and
  • remind LCs of the expected standards of conduct and internal controls in respect of providing client facilitation services.


Recent inspection findings

Since mid-2018, the SFC has reviewed the level of compliance with expected standards during the course of its inspections of selected brokers. In particular, the SFC found that certain traders:

  • misrepresented a house or client facilitation trade as an agency trade;
  • were silent or not transparent about whether facilitation would be involved in a trade; or
  • failed to obtain express consent from clients prior to effecting client facilitation trades;

The SFC also discovered that:

  • some IOIs were described as natural although they were not based on a genuine client intent to trade; and
  • some firms’ policies and procedures were not clear and failed to ensure compliance with the expected standards.


Expected standards of conduct and internal controls – the key ones

The SFC identified in its 14 May 2019 circular the standards of conduct and internal controls relating to client facilitation expected of LCs it considered were key, all of which were covered in the 2018 observations and are not new:

  • controls, monitoring and management supervision: establishing policies and procedures which cover key client facilitation controls such as client consent and accuracy of IOIs;
  • segregation of agency and facilitation activities: recording and monitoring on a timely basis communications between agency traders and client facilitation traders;
  • consent and disclosure: disclosing to clients the nature of trades and obtaining clients’ prior explicit consent to each client facilitation trade to ensure that they are fully informed of the inherent conflicts of interest; and
  • IOIs: disseminating IOIs with accuracy and sufficient details only in cases of a genuine client or proprietary intent to trade.


Way forward

Ensuring compliance with the SFC’s expected standards in relation to client facilitation, especially the key ones identified in the 14 May 2019 circular, is of utmost importance as it helps to protect clients who rely on LCs to act in their best interests and to maintain market integrity and confidence.

In doing so, licensed individuals should, when dealing with clients, always act honestly and fairly, disclose conflicts of interests and take all reasonable steps to ensure fair treatment of clients if such conflicts cannot be avoided.

In light of the SFC’s close scrutiny of non-compliance on the part of LCs and the increasing enforcement focus on individuals (including Managers-in-Charge), LCs are advised to critically review existing policies and procedures for client facilitation and implement all necessary measures to ensure full compliance with the SFC’s expected standards.


William Hallatt
William Hallatt
Head of Financial Services Regulatory, Asia Hong Kong
+852 2101 4036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Jennifer Fong
Jennifer Fong
Associate, Hong Kong
+852 2101 4244

Report into supervision of the Co-operative Bank: lessons not just for regulators but also for firms

Authors: Jenny Stainsby, Vicky Man and Cat Dankos

While there have been other reviews1 into the near failure of the Co-operative Bank (“Co-op Bank”), on 6 March 2018, HM Treasury announced that it had directed the Prudential Regulation Authority (“PRA”) to conduct a further investigation, specifically focused on the prudential supervision of Co-op Bank between 2008 and 2013 with a view to reporting on any lessons learned and making appropriate recommendations (“the Review”). The review period covers a significant period for the Co-op Bank, including its merger with Britannia Building Society (“Britannia”) in 2009 and its withdrawal from the bidding process to purchase 632 bank branches from Lloyds Banking Group in 2013.

This is the first example of the use of a statutory power enacted in 2012 whereby the Treasury may require the PRA (or Financial Conduct Authority (“FCA”)) to investigate where it considers that it is in the public interest that the PRA (or FCA) should carry out an investigation into ‘relevant events’ and it does not appear to the Treasury that such an investigation has been or is being undertaken2. The Government had announced its intention to invoke this power in 2013, stating at that time that the review would not commence until the conclusion of all regulatory enforcement action relating to Co-op Bank.

With Treasury’s approval, the PRA appointed Mark Zelmer as independent reviewer to conduct the Review. Mr Zelmer’s report was published on 27 March 2019. In it, Mr Zelmer addresses the eight areas of investigation which were set out by HM Treasury; and provides eight recommendations. The PRA and the Bank of England’s (“BoE”) Joint Response was published on the same day and welcomed the report.

Many of the observations made in the report are unsurprising, and to a considerable degree, as acknowledged in the report itself, the shortcomings in supervision during the period of the review will have been addressed during the restructure of the UK regulatory regime in 2013. While a clear theme coming from the Review is the need to ensure ongoing compliance with regulatory and statutory requirements, there are a handful of forward-looking points from the Review and Joint Response of particular note:

  • the Review draws particular attention to the importance of stress testing, and it seems likely that as stress testing methodology continues to evolve, it will do so with a particular eye to incorporating “the inherent uncertainty that would prevail as a stress scenario unfolds in real life”, the most recent ‘real life’ example to be included in stress tests being cyber stress tests;
  • the Review considers various threats to the safety and soundness arising from technology, (for example, cyber-attacks), but notably draws out the potential impact of Open Banking on bank runs which may highlight for some firms the need to review both “early warning” detection strategies and crisis management preparedness;
  • in the joint response, the PRA explains that it is considering whether to set either formal or informal asset encumbrance limits; should the PRA proceed with limits, this will have an impact on balance sheet calculations; and
  • the Review also notes that the PRA said that it intends to assign firms’ senior managers (as designated under the Senior Managers and Certification Regime or “SMCR”) to be accountable for actions in letters to the largest UK deposit takers; the September 2018 letter on LIBOR transition is an illustration of this.

Below we consider in more detail some of the key recommendations, the BoE and PRA response, and implications for firms.

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SFC publishes AML/CFT inspection findings and urges intermediaries to ensure compliance

The Securities and Futures Commission (SFC) issued a circular on 31 August 2018 highlighting both deficiencies and good practices observed in relation to anti-money laundering and counter financing of terrorism (AML/CFT) compliance by licensed corporations (LCs) and associated entities (AEs). The observations were made over the past year from the SFC’s review of AML/CFT measures, policies, procedures and controls (AML/CFT systems) belonging to 13 LCs during thematic inspections and around 270 LCs during routine inspections. This follows on from the SFC’s circular issued on 26 January 2017, setting out its observations relating to AML/CFT compliance from inspections conducted in 2016 (see our earlier bulletin here).  Continue reading

New Insurance Authority in Hong Kong commences regulation of insurers with enhanced powers

With effect from 26 June 2017, the independent Insurance Authority (IA) assumed its regulatory responsibilities and replaced the Office of the Commissioner of Insurance (OCI) in regulating insurers. The IA will be a much more powerful regulator than its predecessor, with enhanced authorisation and supervisory powers, as well as inspection, investigation and disciplinary powers over insurers.

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UK: Improving accountability of the FCA and the financial services industry through transparency and more effective disclosure

Being a transparent regulator is at the heart of the approach of the new Financial Conduct Authority (FCA).  Clearly there is a need to strike the right balance between fostering the public’s legitimate interest in transparency and refraining from disclosure where there would be unfairness in doing so, where the public interest might be harmed, or where other legal considerations might prevent it.  To stimulate debate about when and how the FCA should balance competing calls of transparency and sound regulation, the Financial Services Authority has today published a discussion paper on Transparency: DP13/1

Martin Wheatley, CEO designate of the FCA, sees this paper as a first step in what will be an ongoing process of identifying ways to increase transparency.  Comments on the paper are sought by 26 April 2013.       Continue reading