Financial Services Risk and Regulation

Transcription

1 Financial Services Risk and Regulation Regulatory Updates Newsletter October

2 regulatory treatment of accounting Other Regulatory Updates Contents Executive Summary 3 regulatory Proper criteria and Continuing Professional Development PwC 2

3 regulatory Executive Summary Emily Lam PwC HK FS Risk and Regulation Last month witnessed crucial international as well as Hong Kong specific regulatory updates. With this newsletter, we will continue to keep you up to speed with significant regulatory developments from the financial services industry. Last month saw Hong Kong hit by the strongest typhoon (Mangkhut) of the year yet. The typhoon and its aftermath brought to the forefront the resilience of Hong Kong and its people. And adding resilience to the financial services sector were the regulatory updates during the month. The regulatory developments during the last month included: The Basel Committee released a technical amendment on additional for those jurisdictions implementing an expected credit loss (ECL) accounting model as well as for those adopting transitional arrangements for the regulatory treatment of accounting. The HKMA has decided to generally exempt AIs incorporated outside Hong Kong from the new local IRRBB framework in cases where the parent group of the AI is not additionally represented in Hong Kong through a locally incorporated AI. The SFC released the key findings of a thematic inspection on 13 LCs for identifying and mitigating money laundering and terrorist financing (ML/TF) risks as well as reviews of the Anti-Money Laundering / Counter Financing of Terrorism (AML/CFT) policies, procedures and controls of around 270 LCs during the SFC s routine inspections. The HKMA announced the launch of the Faster Payment System (FPS) on 17 September FPS will bring new opportunities to the retail payment industry, it will also promote innovation in financial technology, providing greater convenience and new experience to the public. The IA launched a two-month public consultation on drafts of the Guideline on Fit and Proper Criteria for Licensed Insurance Intermediaries under the Insurance Ordinance, and Guideline on Continuing Professional Development for Licensed Insurance Intermediaries in preparation for commencement of the new regulatory regime for insurance intermediaries. For more details of these rules and regulations and other regulatory updates such as the SFC circular on compliance with notification requirement, please refer to the following sections in this publication. Emily Lam FS Risk and Regulation emily.lam@hk.pwc.com PwC 3

4 regulatory regulatory Brian Yiu Technical amendment on additional Pillar 3 disclosure The Basel Committee released a technical amendment on additional for those jurisdictions implementing an expected credit loss (ECL) accounting model as well as for those adopting transitional arrangements for the regulatory. The consolidated standard issued in March 2017 introduced two new disclosure templates (Templates KM1 and KM2) to provide users of Pillar 3 data with a set of key prudential metrics in a format that facilitates comparisons of a bank s performance and trends over time, improving market discipline in the process. Template KM1 will provide users of Pillar 3 data with a time series set of key prudential metrics covering a bank s available capital (including buffer and ratios), its risk weighted assets (RWA), leverage ratio, Liquidity Coverage Ratio and Net Stable Funding Ratio. Template KM2 requires G-SIBs to disclose key metrics on Total Loss-Absorbing Capacity (TLAC). Both templates must be published quarterly. In order to provide users with disclosures that fully reflect any transitional effects for the impact ECL accounting on regulatory capital, as well as to provide further information on the allocation of ECL accounting in the regulatory categories of general and specific for standardised exposures during the interim period, the following disclosures in the Pillar 3 standard will apply: Template KM2 (Key metrics Total Loss-Absorbing Capacity (TLAC) at resolution group level). Additional disclosures require banks to disclose the fully loaded impact of ECL transitional arrangements used in TLAC resources and ratios. Template CR1 (Credit quality of assets). Given that the existing regulatory distinction between general (GP) and special (SP) does not directly correspond to how would be measured under the new ECL accounting standards, additional disclosures are required on the allocation between general and specific for standardised approach exposures. Table CRB (Additional disclosures related to credit quality of assets). This amendment accompanies those related to CR1. Banks are required to disclose the rationale for their categorisation of ECL accounting in general and specific categories for standardized approach exposures. The application of ECL accounting models and introduction of any transitional arrangements took effect from 1 January The additional amendments to the Pillar 3 standard will therefore come into effect from 1 January 2019 and are applicable for banks using an ECL accounting model after this date as well as for those banks using transitional arrangements for the regulatory. PwC 4

5 regulatory Brian Yiu An impending change on the scope of authorised institutions (AIs) that will be subject to the new Framework The HKMA has decided to generally exempt AIs incorporated outside Hong Kong from the new local IRRBB framework in cases where the parent group of the AI is not additionally represented in Hong Kong through a locally incorporated AI. The HKMA took this decision on the basis of feedback received from industry associations that strongly suggested that the new local IRRBB framework may lead to disproportional costs for some AIs incorporated overseas, especially those with relatively simple and small-scale local operations in Hong Kong. In addition, the decision is based on an analysis weighing costs and benefits of requiring all AIs incorporated overseas to implement the new IRRBB framework. The exempted overseas incorporated AIs will continue to be subject to the existing local standards on interest rate risk, and they will be expected to additionally manage their IRRBB together with their parent groups based on the IRRBB standards of their home jurisdictions and in accordance with the BCBS standards. The HKMA will however reserve the discretion to require any of these exempted AIs to implement the new local IRRBB framework and to meet the corresponding reporting standards with a reasonable notice period for any reason that may be relevant for us in exercising our key functions. Further details on the outlined exemption will be provided in the finalised version of the IRRBB policy documents and HKMA s second-round response to the industry s feedback will be issued later this year. The HKMA is currently in the process of finalising the policy documents for the local implementation of the standards on IRRBB issued by the BCBS in April PwC 5

6 regulatory Hokee Fu Key findings from thematic inspection of licensed corporations (LCs) The SFC conducted a thematic inspection on 13 LCs measures and controls for identifying and mitigating money laundering and terrorist financing (ML/TF) risks as well as reviews of the Anti-Money Laundering / Counter Financing of Terrorism (AML/CFT) policies, procedures and controls of around 270 LCs during the SFC s routine inspections. In the inspections, the SFC detected a number of deficiencies in meeting the expected regulatory standards for AML/CFT which it stated in a circular released on 31 August The SFC has identified the following deficiencies in a firm s AML/CFT that LC s should avoid: Institutional risk assessment (IRA): Failure to evaluate the adequacy and appropriateness of the firm s existing AML/CFT policies, procedures and controls identified by IRAs, and lack of documentation to demonstrate that the IRA results have been reviewed and approved by senior management. Customer risk assessment (CRA): Failure to provide sufficient guidance to staff and to put in place adequate safeguards to ensure that staff conducts CRAs in compliance with the regulatory and the firm s policies. Initial and ongoing customer due diligence (CDD): Failure to include all beneficial owners of a customer in the customer identification process and the politically exposed person screening process, and failure to implement risk-based policies and procedures in a compliant and effective manner. Sanctions screening: Failure to conduct ongoing screening of existing customers against new or updated terrorist and sanctions designations, and lack of documentation of justifications for disposing of potential name matches to demonstrate that they have been followed up and handled properly. Suspicious transaction monitoring and reporting: Inadequate systems and controls to identify, or make follow-up enquiries about, customer transactions which exhibit major or common red flags indicating potentially suspicious transactions for timely evaluation, and failure to review business relationships which have been reported to the Joint Financial Intelligence Unit and to take appropriate risk mitigating measures. LCs should conduct an assessment to identify if the SFC identified deficiencies could be applicable. PwC 6

7 regulatory (FPS) Gary Ng One of the seven Smart Banking initiatives for Hong Kong The HKMA announced the launch of the Faster (FPS) on 17 September Key highlights of the FPS are: The FPS operates on a round-theclock (24x7) basis and connects banks and stored-value facility (SVF) operators on the same platform. This will enable the public to transfer funds anytime, across different banks or SVFs with funds available almost immediately. The use of mobile number or address as account proxy for the payee will make fund transfer more user-friendly with the FPS also supporting both HKD and RMB payments. The HKD FPS and RMB FPS are subject to the HKMA s oversight under the s and Stored Value Facilities Ordinance (PSSVFO), similar to the HKD Clearing House Automated Transfer System (CHATS) and RMB CHATS. The PSSVFO also provides statutory backing to the finality of settlement for transactions made through the HKD FPS and RMB FPS by protecting the settlement finality from insolvency laws or any other laws. In addition, to promote the adoption of QR code payments in Hong Kong, the HKMA announced the Common QR Code Standard for Retail Payments in Hong Kong together with the launch of an associated free mobile application tool, named Hong Kong Common QR Code (HKQR). This can be used for converting multiple QR codes from different payment service providers into a single, combined QR code and would facilitate merchants, especially small and medium enterprises, to use a single QR code to accept different payment schemes, instead of displaying multiple QR codes to their customers. FPS will bring new opportunities to the retail payment industry, it will also promote innovation in financial technology, providing greater convenience and new experience to the public. PwC 7

8 regulatory Consultation on Fit and Proper criteria and Continuing Professional Development Billy Wong Under the new regime which is targeted to commence in mid-2019, the IA will take over the regulation of insurance intermediaries from the three selfregulatory organisations (SROs) The IA launched a two-month public consultation on drafts of the: i. Guideline on Fit and Proper Criteria for Licensed Insurance Intermediaries under the Insurance Ordinance (Cap. 41) ( F&P Guideline ), and ii. Guideline on Continuing Professional Development for Licensed Insurance Intermediaries ( CPD Guideline ) in preparation for commencement of the new regulatory regime for insurance intermediaries. Key highlights of the proposed guidelines are: The draft F&P Guideline outlines the key criteria and matters that the IA will normally consider in determining whether a person is fit and proper, which can be grouped into three categories professional competence, reputation, character, reliability and integrity of the person, and financial status or solvency. From the commencement date of the new regime, the IA proposes to set the minimum basic education standard for all new applicants as follows: level 2 or above in five subjects in the Hong Kong Diploma of Secondary Education Examination (HKDSE); and of these five subjects, the following two subjects are compulsory one language (either Chinese or English); and Mathematics. The IA also proposes to accept other education qualifications such as the Diploma Yi Jin, International Baccalaureate Diploma, and a range of well-established professional qualifications. The IA proposes to require responsible officers to possess at least a bachelor or a higher degree from a recognized university or tertiary education institution. The IA proposes to standardise, modernise and update existing CPD applicable to intermediaries. Key proposals include that online/elearning CPD activities should be recognized and a minimum of 15 CPD hours, including 3 compulsory CPD hours on Ethics and Regulations per annum has been proposed (a proposed increase of 5 CPD hours). In addition for smooth transition, insurance intermediaries who are validly registered with the SROs immediately before the commencement of the statutory licensing regime will be regarded as deemed licensees for three years. PwC 8

9 regulatory Circular on compliance with notification requirement The SFC circular issued on 14 September 2018, targets to remind intermediaries of the notification requirement under paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC Code of Conduct. Under this rule, intermediaries are required to report immediately to the SFC in case of, among other things, any material breach, infringement of or non-compliance with any law, rules, regulations and codes administered by the SFC or any such suspected breach, infringement or non-compliance. Prompt reporting from intermediaries is crucial to enable the SFC to swiftly assess the impact of the breach, take action to contain the damage (where necessary) and continuously appraise whether the intermediary (and its representatives) are fit and proper to remain licensed or registered. The SFC aims to remind intermediaries of the following obligations: This reporting obligation applies to both licensed corporations and registered institutions. While the HKMA is the frontline regulator of registered institutions, registered institutions are required to fulfil this reporting obligation by reporting directly to the SFC in addition to the HKMA; All material breaches and non-compliance (actual or suspected, irrespective of whether these were identified by the intermediary itself, stemmed from customer complaints or were identified through other sources) should be reported to the SFC (and the HKMA in case of registered institutions) as soon as possible upon identification. This means reporting before the intermediary has already completed its investigation, obtained legal advice or taken remedial actions; Failure to comply with the reporting obligation may result in disciplinary action being taken against the intermediaries and their management. Intermediaries should assess appropriate controls to ensure compliance with the notification requirement, particularly for the common breaches identified by the SFC including: Suspected unlicensed dealing activities; Suspected unauthorised trading activities; Non-compliance with the suitability under paragraph 5.2 of the Code of Conduct as supplemented by the corresponding frequently asked questions; Breaches of the Securities and Futures (Keeping of Records) Rules; Breaches of the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules; and Non-compliance with the order recording under paragraph 3.9 of the Code of Conduct. Renminbi (RMB) Liquidity Facility Expansion of Collateral The HKMA announced that with effect from 21 September 2018, the list of eligible collateral for the RMB Liquidity Facility will be expanded to include the RMB denominated bills issued in Hong Kong by the People s Bank of China (PBoC). On 20 September 2018, the PBoC and the HKMA signed a "Memorandum of Co-operation on Using Central Moneymarkets Unit for Issuance of PBoC Bills", for the tendering and issuance of PBoC bills through CMU BID, the HKMA s Central Moneymarkets Unit s (CMU) bond tendering platform. PwC 9

10 regulatory AI Authorised Institutions ICO Initial Coin Offering AML Anti-Money Laundering IFRS International Financial Reporting Standard BC Basel Committee IOSCO International Organization of Securities Commission 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 Book FinTech Financial Technology LC Licensed Corporation FMCC Fund Manager Code of Conduct MAS Monetary Authority of Singapore FI Financial Institutions MoU Memorandum of Understanding FSB Financial Stability Board RO Responsible Officer HKMA The Hong Kong Monetary Authority RE-1 Recovery Planning IA The Insurance Authority SFC The Securities and Futures Commission IAF Internal Audit Function SFO Securities and Futures Ordinance IC-1 Risk Management Framework SPM Supervisory Policy Manual IC-2 Internal Audit Function 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 PwC 10