Financial Services Risk and Regulation

Transcription

1 Financial Services Risk and Regulation Regulatory Updates Newsletter October

2 Contents Executive Summary Fintech 7 Others 8 Glossary 10 PwC 2

3 Executive Summary Emily Lam PwC HK FS Risk and Regulation Welcome to our first edition of financial services risk and regulation update, which will keep you up to speed on significant regulation development from the financial services industry. Throughout September and October, regulators have continued a steady progress of regulatory developments; please see the following key highlights in this month s edition: 1. The HKMA has announced the implementation date of new IRRBB standards will be delayed from 1 January 2018 to 1 January 2019 in response to market participants feedback. 2. The HKMA issued by notice in a Gazette a revised version of SPM Modules CG-1 Corporate Governance of Locally Incorporated Authorized Institutions IC-1 Risk Management Framework as statutory guidance under section 7 (3) of the Banking Ordinance. The revisions to the modules were made to incorporate guidelines issued by the BCBS and the FSB as well as to update provisions for the board of locally incorporated AIs and its committees. AIs are expected to implement the requirements set out in the revised SPM modules with effect from 1 January From recent inspections of asset managers, the SFC identified many instances of non-compliance with relevant provisions of the Fund Manager Code of Conduct, the Code of Conduct and/or the Internal Control Guidelines. Asset managers should refer to the circular and review their control procedures and operational capabilities, and enhance them as needed to ensure that standards meet expectations of the SFC s. 4. Both the HKMA and SFC have announced certain initiatives for helping the development of FinTech in Financial Services Industry. 5. Both the HKMA and SFC update the address verification requirement under the AML/CFT regulatory requirements for FIs. For details of all relevant circulars or rules issued in September and October please refer to the following sections in this publication. Emily Lam FS Risk and Regulation emily.lam@hk.pwc.com PwC 3

4 Duncan Fitzgerald Adams Chan Revision of SPM Modules CG-1 and IC-1 The HKMA issued by notice in the Gazette a revised version of the mentioned SPM modules as statutory guidance under section 7 (3) of the Banking Ordinance. Revisions to the modules were made to incorporate guidelines issued by the BCBS and the FSB as well as to update provisions for the board of locally incorporated AIs and its committees. The revised modules provide more elaborate guidance on the following, With respect to CG-1: 1. The responsibilities of the board and senior management; 2. The role of the chair and the appropriate composition of independent non-executive directors as members; and 3. The governance issues in group structures, in the case where an AI acts as the parent company or where the AI is a regulatory subsidiary of an overseas-incorporated group. With respect to IC-1: 1. The key elements of an effective risk management framework; including, for example, delineation of the responsibilities of the Board, Risk Committee, and risk management function; 2. The operation of a risk appetite framework and regular formulation of a risk appetite statement to facilitate oversight of risk-taking activities and risk management process; and the maintenance of effective systems and procedures to facilitate firm-wide risk measurement and monitoring. AIs are expected to implement the requirements set out in the revised SPM modules with effect from 1 January PwC 4

5 Brian Yiu Interest Rate Risk in the Banking Book: Local Implementation Timeline On 22 June 2017, the HKMA issued 2 consultation paper with proposed updates to the SPM IR-1 Interest Rate Risk Management, the return MA (BS) 12 Interest Rate Risk Exposures (IRR return) and the return MA(BS)12i Interest Rate Risk Exposures (Supplementary Information). From the originally intended timeline, banks were supposed to be ready to measure and report their IRRBB exposures using the proposed standardised framework by 2018, with the first report to be based on data as at 31 December However, industry responses expressed concerns on the tight timeline. In response of the industry s feedback, the HKMA consider that it would be more appropriate to revise the implementation date of the new IRRBB standards in Hong Kong to 1 January 2019, with the first report based on data as at 31 December This timeline is in line with BCBS timeline for implementation of IRRBB. Under the new BCBS standards set out by the Basel Committee in April 2016, banks are required to calculate their IRRBB exposures based on the impact on economic value of equity under a set of prescribed interest rate shock scenarios, by using either the standardised framework or internal models. Banks that have IRRBB exposures exceeding 15% of their Tier 1 capital are identified as outliers and considered as potentially having undue IRRBB and subject to review. Furthermore, banks are required to disclose their IRRBB exposures to the public on a regular basis. Revised capital, liquidity rules and amendment notice under Banking Ordinance gazette In order to implement recent international standards on banking regulation in Hong Kong, the Banking (Capital) (Amendment) Rules 2017, the Banking (Liquidity) (Amendment) Rules 2017 and the Banking (Specification of Multilateral Development Bank) (Amendment) Notice 2017 were gazetted on 20 October The two sets of Rules seek mainly to implement the Basel III-related capital and liquidity standards which are scheduled to take effect from January 1, 2018 in accordance with the international timeline. The coverage includes the net stable funding ratio and leverage ratio requirements, and the regulatory treatment of an authorised institution's securitisation exposures and expected loss provisions under Hong Kong Financial Reporting Standard 9. PwC 5

6 Carlyon Knight-Evans Helen Li Common Instances of and Discretionary Account From recent inspections of asset managers, the SFC identified instances of non-compliance with relevant provisions of the Fund Manager Code of Conduct, the Code of Conduct and/or the Internal Control Guidelines. Examples of instances of non-compliance identified are grouped into the following areas: 1. Inappropriate receipt of cash rebates giving rise to apparent conflicts of interest; 2. Failure to ensure suitability of funds or discretionary account mandates when making solicitations or recommendations of funds under their management, or providing discretionary account management services, to clients; 3. Failure to put in place a proper liquidity risk management process to ensure that liquidity risks of funds and discretionary accounts under management are adequately addressed; 4. Deficiencies in setting up a proper governance structure and implementing comprehensive policies and procedures for fair valuation of assets; 5. Deficiencies in systems and controls to ensure best execution; 6. Failure to ensure fair order allocation; 7. Inadequate systems and controls in relation to protection of client assets; 8. Inadequate systems and controls for ensuring compliance with investment restrictions and guidance; and 9. Inadequate systems and controls to address the risk of market misconduct. The SFC urges asset managers to review their existing internal control procedures and operational capabilities, and enhance them as needed so as to ensure that standards of conduct and control procedures meet SFC s expectations. PwC 6

7 Launches of New Initiatives for FinTech Development Henri Arslanian Consulting Director New Era of Smart Banking In the light of rapid development in the FinTech sector, the HKMA announced a series of initiatives that will help drive Hong Kong to move into a New Era of Smart Banking. In a keynote speech delivered during the Annual Banking Conference of the Hong Kong Institute of Bankers, Mr Norman Chan, Chief Executive of the HKMA, pointed out how the HKMA will take lead and assist the banking sector to better capture the opportunities brought about by the convergence of banking and technology. The initiatives to be launched by the HKMA include: 1. Faster Payment System 2. Enhanced Fintech Supervisory Sandbox 3. Promotion of Virtual Banking 4. Banking Made Easy initiative 5. Open Application Programming Interface Fintech Collaboration between the HKMA and MAS To strengthen co-operation on fintech,, the HKMA and the Monetary Authority of Singapore (MAS) signed and exchanged a Co-operation Agreement in Hong Kong which will strengthen bonds between the two cities and fostering fintech development within the region. The HKMA and MAS will collaborate on a number of initiatives to facilitate financial innovation in Hong Kong and Singapore. The Agreement, signed between heads of the two organisations, was exchanged at the Fintech Day organised by the HKMA. The two authorities have also committed to working on a strategy project on trade finance cross-border infrastructure, based on Distributed Ledger Technology, as their first collaborative initiative, which will facilitate cross-border trade and financing. Details will be announced by the two authorities next month. SFC Regulatory Sandbox The SFC recognises that firms employing innovative technologies and demonstrating commitment to carry on regulated activities through the use of Fintech may increase the range and quality of products and services for investors and benefit the Hong Kong financial services industry. Hence, the SFC launched the SFC Regulatory Sandbox to provide a confined regulatory environment for qualified firms to operate regulated activities under the SFO before Fintech is used on a fuller scale. The Sandbox would allow qualified firms, through close dialogue with and supervision by the SFC under the licensing regime, to readily identify and address any risks or concerns relevant to their regulated activities. 6. Closer cross-border collaboration 7. Enhanced research and talent development PwC 7

8 Others Ho Kee Fu AML/CFT Address Verification Requirements After reviews of various aspects of AML/CFT regulatory requirements for FIs and taking into account feedback from various stakeholders. The HKMA, SFC, IA and the other relevant authorities have agreed to remove the address verification requirements currently set out in the AML Guideline. As a result, FIs are only required to collect address information of customers and/or beneficial owners without the need to collect documentary evidence for AML/CFT purpose. Such amendments to the AML Guideline are expected to be gazetted tentatively in the first half of 2018, in conjunction with other revisions to the AML Guideline resulting from the passage of Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 ( Bill ). Mary Wong mary.wong@hk.pwc.com PwC 8

9 Others Clarification of relevant industry experience requirement for Responsible Officers The purpose of this circular is to clarify the SFC s approach in assessing, under the Guidelines on Competence ( Guidelines ), the relevant industry experience requirement for an individual applying to be a RO. The Guidelines set out the matters that the SFC would normally consider in assessing whether a person is competent to carry on any regulated activity under the Securities and Futures Ordinance. An applicant s previous experience may be considered relevant if the substance of such experience is directly relevant or crucial to the regulated activity carried on by his/her new principal and the role that the applicant will undertake. Where an RO applicant mainly relies on a technology background for the purpose of satisfying the relevant industry experience requirement, and subject to meeting other licensing requirements, the SFC may approve the RO application and impose a non-sole condition on the individual s licence. This means that the individual must, when actively participating in or directly supervising the regulated activity for which the firm is licensed, do so under the advice of another RO who is not subject to the same condition. In addition to the relevant industry experience requirement, an RO applicant is required to fulfil the other elements set out in the Guidelines, including passing the relevant local regulatory framework papers, unless an exemption applies. Securities Margin Financing From recent volatility in small cap stocks, the SFC expressed concerns that licensed corporations have failed to put in place appropriate risk management policies and internal controls for securities margin financing. The SFC reminds intermediaries and associated entities that the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) requires that a licensed corporation establishes a clear margin lending policy to provide a basis for protecting its capital and ensure that a consistent risk management policy and adequate procedures are in place to identify risks, carry out effective monitoring and take corrective action. Among other things, the SFC expects licensed corporations to: 1. Develop, document, communicate to all relevant staff and strictly enforce a clear and prudent margin lending policy 2. Identify, monitor and avoid excessive or concentrated exposure to stocks which have high correlation risk 3. Avoid excessive exposure to individual securities relative to their market liquidity or market capitalization 4. Maintain a list of acceptable securities collateral and assign appropriate haircuts for each collateral based on its liquidity and volatility 5. Identify and avoid concentration of lending to related margin clients 6. Prevent clients with outstanding margin calls from trading on margin 7. Promptly collect amounts due as margin PwC 9

10 Glossary AIs Authorised Institutions IA The Insurance Authority AML Anti-Money Laundering IC-1 General Risk Management Controls BCBS Basel Committee on Banking Supervision IR-1 Interest Rate Risk Management CFT Counter-Financing of Terrorism IRR Interest Rate Risk CG-1 Corporate Governance of Locally Incorporated Authorized Institutions IRRBB Interest Rate Risk in the Banking Book FinTech Financial Technology MA (BS) Assets & Liabilities FIs Financial Institutions RO Responsible Officer FSB Financial Stability Board SFC The Securities and Futures Commission HKMA The Hong Kong Monetary Authority SPM Supervisory At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. HK C1