Hong Kong Regulatory Update: Recent Enforcement Actions and Regulatory Enhancements Highlighted in the SFC’s Annual Report 2022-23

On 21 June 2023, Hong Kong’s Securities and Futures Commission (SFC) issued its 2022-23 Annual Report, covering key regulatory developments and providing insight into the latest enforcement trends during the financial year of 2022-23.

The major enforcement trends and themes reflected in the SFC’s 2022-23 Annual Report are summarized in the tables and sections below.

Highlights of the 2022-23 enforcement actions

Please note that the table below includes only a selection of notable enforcement cases from the SFC’s 2022-23 Annual Report.

Key trends in relation to the SFC’s recent enforcement activities

The SFC remained highly active in its enforcement activities, and there were some interesting and notable trends observed (as compared to this time last year):

1. The number of overall inquiries raised (including requests for production of documents and records through section 179 directions, section 181 inquiries, and section 182 investigations) reduced by around 25%.
2. The number of investigations commenced reduced (from 220 to 135 — a decrease by around 40%).
3. The number of investigations completed raised (from 131 to 164 — an increase by around 25%).
4. The number of criminal charges laid significantly increased (from 28 to 115 — reflecting a more than 400% increase).
5. The number of individuals/corporations charged in criminal proceedings raised (from 4 to 25 — reflecting a 625% increase).
6. The number of compliance letters issued reduced (from 162 to 113 — a decrease of around 30%).

The SFC also conducted 226 on-site inspections of licensed corporations and associated entities to review their compliance with the applicable regulatory requirements. Among the 1,230 breaches identified during the on-site inspections, over 70% of the breaches were related to the following categories: internal control weaknesses (35%), breaches of the Code of Conduct for Persons Licensed by or Registered with the SFC (20%), and non-compliance with anti-money laundering guidelines (17%). The internal control weaknesses identified included, among others, deficiencies in management review and supervision, operational controls over the handling of client accounts, segregation of duties, information management, and the adequacy of audit trails for internal control purposes.

Highlights of the regulatory enhancements

The SFC, in conjunction with other regulators, implemented various enhancements to the regulatory regime, including:

1. Investor identification regime – Launched an investor identification regime for the Hong Kong securities market on 20 March 2023.
2. Virtual assets – Conducted a public consultation on the proposed regulatory requirements for virtual asset trading platforms, as part of Hong Kong’s new licensing regime for these platforms.
3. Uncertificated securities market – Commenced a public consultation on the subsidiary legislation for the implementation of an uncertificated securities market in Hong Kong.
4. Depositaries of SFC-authorised funds – Concluded a public consultation on proposed amendments to subsidiary legislation and the SFC codes and guidelines to implement a new Type 13 regulated activity, being a new regime to regulate depositaries of SFC-authorised collective investment schemes.
5. Enforcement powers – Commenced a public consultation on proposals to amend the Securities and Futures Ordinance to facilitate more effective enforcement action.
6. Dealing in futures contracts – Commenced a public consultation on the proposed risk management guidelines for licensed persons dealing in futures contracts, which is intended to provide guidance for futures brokers to better manage business-related risks.
7. Position limits – Conducted a public consultation on proposed changes to the position limits regime for listed futures and options contracts and further consulted on additional amendments related to funds and certain contracts.
8. Over-the-counter (OTC) derivatives – Together with the Hong Kong Monetary Authority, consulted the public on proposed changes to the types of transactions subject to clearing obligations under the Clearing Rules for OTC derivatives.

Collaboration with other regulators, enforcement agencies, and authorities

The SFC continued to collaborate closely with other enforcement agencies, including conducting:

1. two joint operations with the Independent Commission Against Corruption concerning suspected ramp and dump schemes involving the stocks of six Hong Kong-listed companies, other market misconduct and suspected corruption offences; and
2. a joint operation with the Hong Kong Police Force concerning suspected bogus transactions involving a company formerly listed on the Hong Kong Stock Exchange.

The SFC has also continued its ongoing dialogue with the China Securities Regulatory Commission (CSRC) and held various high-level meetings to discuss cross-boundary regulatory issues, market development initiatives, and enforcement cooperation and collaboration.

The SFC has also signed the following agreements to further enhance cooperation with the Mainland and international regulators, which are expected to have an impact on cases which involve a cross-border element:

1. a memorandum of understanding (MOU) with the CSRC with respect to the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies issued by the CSRC;
2. an MOU with the Bank of England regarding mutual assistance in the supervision and oversight of cross-border regulated entities; and
3. the IOSCO Asia-Pacific Regional Committee’s Multilateral MOU for Supervisory Cooperation.

With respect to requests for regulatory assistance, the SFC received 196 enforcement- and licensing-related requests for assistance.

Conclusion

The above highlights of the recent enforcement actions, statistics, and regulatory enhancements reported in the SFC’s 2022-23 Annual Report demonstrate that the SFC has been in a transition and consolidation phase during the year, and it has been focusing on completing existing investigations as opposed to pursuing new inquiries. This may be partly in response to the change in leadership following the recent departures of Mr. Ashley Alder (former CEO) and Mr. Thomas Atkinson (former executive director of enforcement) and the introduction of Ms. Julia Leung (current CEO) and Mr. Christopher Wilson (current executive director of enforcement).

It remains to be seen whether the SFC will take enforcement in a new direction under the new leadership. For now, the SFC remains strongly committed to tackling fraud and protecting investor interests, particularly in its efforts to crack down on social media ramp and dump scams by identifying and disrupting the operations of active ramp and dump syndicates through joint operations with the Hong Kong Police Force and the Independent Commission Against Corruption. This is also reflected in the enforcement statistics, which show a significant uptick in criminal charges and proceedings being pursued by the SFC.

In view of the ongoing discoveries of non-compliance issues particularly concerning internal control weaknesses during the SFC’s annual suite of on-site inspections, financial institutions and licensed persons and corporations are reminded to regularly review their internal controls and systems and identify any potential weaknesses and deficiencies so they can be remediated in advance and as a matter of priority, without necessitating a subsequent substantive, costly, and prolonged regulatory investigation. It is also worthwhile to stay up to date on the latest consultations being conducted by the SFC, some of which contain proposals which are expected to have widespread ramifications to the regulatory landscape in the years to come.