Financial Services Risk and Regulation

Transcription

1 Financial Services Risk and Regulation Regulatory Updates Newsletter January

2 Contents Executive Summary 3 Stress testing principles 4 Cyber Resilience Bitcoin futures contracts 8 Other updates 9 10 Glossary 11 PwC 2

3 Executive Summary Emily Lam Partner PwC HK FS Risk and Regulation Welcome to our first financial services risk and regulation update of 2018, with this newsletter we will continue to keep you up to speed in the new year on significant regulatory developments from the financial services industry. As we leap into the new year, regulatory activity showed no sign of slowing down, with a number of recent updates relating to the impact of HKFRS 9 on regulatory reporting, BCBS stress testing principles consultation and amendments to the Code on Unit Trusts and Mutual Funds. We have summarised some of the key updates for you in this newsletter. For the implementation of HKFRS 9, the HKMA has finalised the reporting templates and the Completion Instructions ( CIs ) for relevant banking returns, of which will take effect from 1 January The BCBS also released a consultation on the proposed replacement of the existing set of stress testing principles with a streamlined approach, ensuring continued applicability to different banks and jurisdictions, and relevance as practices develop. In the asset management space, the SFC published a consultative document in relation to proposed amendments to the Code on Unit Trusts and Mutual Funds. The objectives of proposed amendments is to ensure that the regulatory regime for authorized funds is up-to-date and appropriately addresses the opportunities and risks. Finally, with the recent launch of Bitcoin futures contracts, the SFC issued a circular to remind intermediaries of the legal and regulatory requirements for providing local investors any related financial services. For details of the rules and regulations, please refer to the following sections in this publication. Emily Lam FS Risk and Regulation emily.lam@hk.pwc.com PwC 3

4 BCBS consultative document: Stress testing principles Brian Yiu Partner Stress testing principles and range of practices During the year 2017, the BCBS carried out a review of its existing set of stress testing principles. As a result of this review, the BCBS released a consultative document in which it proposes to substitute the existing stress testing principles. Below are the proposed revised stress testing principles: 1. Stress testing frameworks should have clearly articulated and formally adopted objectives 2. Stress testing frameworks should include an effective governance structure sufficiently severe 5. Resources and organisational structures should be adequate to meet the objectives of the stress testing framework 6. Stress tests should be supported by accurate and sufficiently granular data and by robust IT systems 7. Models and methodologies to assess the impacts of scenarios and sensitivities should be fit for purpose 8. Stress testing models, results and frameworks should be subject to challenge and regular review 9. Stress testing practices and findings should be communicated within and across jurisdictions by its members and the active banks that they supervise. Readers are informed that descriptions of stress testing practices will be set out in separate reports that the Committee may publish periodically in the future. The Committee welcomes comments on all aspects of the proposed new principles by 23 March In addition, the BCBS has released a report which sets out a range of observed supervisory and bank stress testing practices. The report describes and compares these practices and highlight areas of development. 3. Stress testing should be used as a risk management tool and to inform business decisions 4. Stress testing frameworks should capture material and relevant risks and apply stresses that are The document states that the principles are Guidelines that focus on the core elements of stress testing frameworks, and that the principles do not constitute Standards, for which the Basel Committee expects full implementation PwC 4

5 Cyber Resilience Kenneth Wong Partner Cyber Resilience The HKMA has taken into account of the industry s comments received during the consultation in the finalisation of Cyber Resilience ( C-RAF ) and also having regard to experience from other jurisdictions, the HKMA has announced that it will adopt a phased approach to implementation of the framework as follows: 1. The first phase will have coverage of approximately 30 AIs including all major retail banks, selected global banks and a few smaller AIs. The HKMA will inform these AIs individually. Inherent Risk Assessment and Maturity Assessment: End- September 2017 icast (if applicable): End-June Based on feedback and experience collected from the first phase, the second phase will cover all the remaining AIs. They will be expected to complete the Inherent Risk Assessment and the Maturity Assessment by the end of The HKMA will take into account the assessment results of the second phase in determining a timeframe for the remaining AIs to complete the icast.. 2. The expected timeline for completing the C-RAF assessment under the first phase is: PwC 5

6 Impact of HKFRS 9 on regulatory reporting enhance clarity of the reporting requirements. Edith Wong Director edith.ht.wong@cn.pwc.com Following consultation with industry associations, the HKMA has made amendments to the reporting templates and the Completion Instructions ( CIs ) for relevant banking returns, of which will take effect from 1 January The amendments include: 1. Revisions in financial asset categories to align with HKFRS 9 new classification of financial assets; 2. References to the Banking (Capital) Rules and Capital Adequacy Ratio Return regarding the definitions of general provisions and specific provisions; 3. Revised guidance for the reporting of movements in provisions in the Return of Current Year s Profit & Loss Account; and 4. Other non-hkfrs 9 related miscellaneous amendments to The revised electronic form of the Monthly Return of Renminbi (RMB) Business Activities is available for authorized institutions to download from the HKMA s supervisory communication website. The HKMA will inform institutions by when the STET software for the other revised returns is available for downloading from the HKMA s supervisory communication website during early March PwC 6

7 Carlyon Knight-Evans Partner Helen Li Partner and FAQ on the Code The SFC issued its Consultation on the Proposed Amendments to the Code on Unit Trusts and Mutual Funds ( UT Code ) on 18 December 2017 following a review of to ensure that regulations in Hong Kong are aligned with international requirements and those of major overseas markets. The proposals in the consultation also seek to ensure that the regulatory regime for SFC-authorized funds is upto-date and appropriately addresses the opportunities and risks presented by financial innovation and market development. The main areas for consultation include: Key operators Proposals to provide flexibility and strengthen requirements for management companies, trustees and custodians, with an increase of the minimum capital requirement for management companies to HK$10 million and greater flexibility to allow management companies with multinational presence to leverage group resources in meeting the fiveyear public fund investment management experience requirement for key personnel Investments Modernisation to provide greater investment flexibility with enhanced safeguards, such as the introduction of an overall limit of 50% on the use of derivatives for investment purposes by plain vanilla public funds Specialised schemes Proposals to introduce new types of funds consisting of new chapters in the UT Code for listed open-ended funds (also known as active ETFs) and closed-ended funds to facilitate the development of new products as well as enhance requirements on money market funds to ensure robust requirements aligned with the relevant IOSCO standards The SFC invites comments on proposed amendments to by 19 March Additionally, the SFC has released a FAQ, which gives basic information to market practitioners concerning the UT Code. The FAQ s coverage includes Basic Requirements for Fund Authorization, Fund s Structure and Domicile, Fund Manager s Eligibility, Obligations of Trustee/Custodian. The FAQ encourages applicants to contact the relevant case team in the Investment Products Division of the SFC if in doubt on any issues arising from the application and interpretation of. PwC 7

8 Circular on Bitcoin futures contracts and cryptocurrency-related investment Henri Arslanian Consulting Director Circular to Licensed Corporations and Registered Institutions on Bitcoin futures contracts and cryptocurrency-related investment products The SFC issued a circular to remind intermediaries of the legal and regulatory requirements for providing to Hong Kong investors any financial services in relation to Bitcoin futures contracts ( Bitcoin Futures ) and other cryptocurrency-related investment products. The circular also remind investors of the risks associated with these products. rules of those exchanges are regarded as futures contracts for the purposes of the SFO. Consequently, parties carrying on a business in dealing in Bitcoin Futures, including those who relay or route Bitcoin Futures orders, are required to be licensed for Type 2 regulated activity (dealing in futures contracts) under the SFO unless an exemption applies. The SFC expects that intermediaries should strictly observe the suitability requirement (paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC) and the conduct requirements in relation to providing services in derivative products to clients under paragraphs 5.1A and 5.3. The circular states that as Bitcoin Futures have the conventional features of a futures contract which is defined in the SFO to include a contract or an option on a contract made under the rules or conventions of a futures market, therefore, even though the underlying assets of Bitcoin Futures are not regulated under the SFO, Bitcoin Futures traded on and subject to the The industry is reminded that a party is required to have an appropriate license with the SFC if it provides any other business services relating to Bitcoin Futures which constitute a regulated activity. This is irrespective of whether the party is located in Hong Kong, so long as its business activities target the Hong Kong public. PwC 8

9 Other updates Enhanced Competency Framework on Retail Wealth Management On 2 January 2018, the HKMA launched the Enhanced Competency Framework on Retail Wealth Management (ECF-RWM), which focuses on talent development and enables the building of professional competencies and capabilities of those involved in retail wealth management duties. The framework includes the scope of application, competency standards, qualification structure, certification and grandfathering arrangements, and continuing education requirements. Consultation on rules for lossabsorbing capacity requirements for authorized institutions under Financial Institutions (Resolution) Ordinance The HKMA launched a two-month public consultation on a set of proposed rules relating to loss-absorbing capacity ( LAC ) requirements for authorized institutions under the Financial Institutions (Resolution) Ordinance (Cap. 628) (the Ordinance). The consultation sets out detailed proposals on minimum LAC requirements for authorized institutions. The proposals are designed to be aligned with the international standards set by the Financial Stability Board in its Total Loss-absorbing Capacity Term Sheet. Circular to licensed corporations on liquidity risk management The SFC conducted an exercise on LCs with groupaffiliated entities, and concluded with two major risk areas being: (i) protection of client money kept with affiliated banks, and (ii) reliance on funding from affiliated group entities. The circular mentions that LCs should safeguard client money by: Setting out effective policies and procedures to manage concentration exposure to an affiliated banking group or connected FIs Regularly reviewing concentration exposure to an affiliated banking group and connected FIs Determining appropriate arrangements and procedures As for funding sources, in order to appropriately manage the risks associated with the LCs businesses and to ensure the contingent funds available to LCs are adequate to address liquidity shortfalls in a volatile market situation, LCs should not rely on a single source of funding from within their group. PwC 9

10 Other updates Consultation paper on the OTC derivatives regime for Hong Kong The Securities and Futures (Amendment) Ordinance 2014 ( SFAO ) was enacted in 2014 and introduced two new regulated activities ( RA ): (a) a Type 11 RA of dealing in OTC derivative products or advising on OTC derivative products; and (b) a Type 12 RA of providing client clearing services for OTC derivative transactions. Moreover, the existing Type 9 RA (asset management) will be expanded to cover the management of portfolios of OTC derivative transactions. The definition of Automated Trading Services ( ATS ) under the existing Type 7 RA (providing ATS) will also be expanded to cover OTC derivative transactions. The purpose of this consultation paper is to seek views on several issues, some of which being: Refinements to the scope of RAs; Proposed requirements in relation to OTC derivatives in the areas of risk mitigation, client clearing, client money, client securities and record keeping; and Proposed conduct requirements to address risks posed by group affiliates and other connected persons. SFC compliance bulletin highlights conflicts of interest The SFC released its first issue of SFC Compliance Bulletin: Intermediaries to provide guidance to intermediaries and market practitioners on the SFC's regulatory and supervisory priorities. The cases cited in the bulletin illustrate that conflicts of interest can arise when intermediaries stand to benefit at the expense of clients. The bulletin reiterates that firms should have clear, detailed policies and procedures to manage conflicts of interest and reviews should be carried out regularly to ensure they are relevant and effective. Circular on compliance failures in the distribution of fixed-income and structured products The Securities and Futures Commission (SFC) has identified a number of compliance failures during its on-site inspections and investigations of the distribution of complex bonds and structured products by licensed corporations (LCs). The SFC reminds LCs to comply with the following expected standards: Maintain adequate management oversight and effective compliance monitoring. Provide staff with adequate training on the investment products they distribute and how to appropriately disclose the products features and risks to clients, particularly for complex and risky products. Implement proper policies and procedures, ensure sufficient guidance is provided to staff and put in place appropriate monitoring. Regularly perform a holistic assessment of the suitability framework to ensure compliance with suitability obligations. Maintain adequate records to ensure compliance with suitability obligations and to enable reviews or investigations to be carried out by the LCs, their auditors and the SFC. PwC 10

11 Glossary AI Authorised Institutions IC-2 Internal Audit Function AML Anti-Money Laundering IFRS International Financial Standard BCBS Basel Committee on Banking Supervision IOSCO International Organization of Securities Commission CFT Counter-Financing of Terrorism IR-1 Interest Rate Risk Management CG-1 Corporate Governance of Locally Incorporated Authorized Institutions IRR Interest Rate Risk FI Financial Institutions IRRBB Interest Rate Risk in the Banking Book FinTech Financial Technology LC Licensed Corporation FMCC Fund Manager Code of Conduct MAS Monetary Authority of Singapore FSB Financial Stability Board MoU Memorandum of Understanding HKFRS 9 Hong Kong Financial Standard 9 RO Responsible Officer HKMA The Hong Kong Monetary Authority SFC The Securities and Futures Commission IA The Insurance Authority SFO Securities and Futures Ordinance IAF Internal Audit Function SPM Supervisory Policy Manual IC-1 Risk Management Framework 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. PwC 11