Year of the Pig 2019-2020: Financial regulatory investigations and proceedings year in review

Year of the Pig 2019-2020: Financial regulatory investigations and proceedings year in review

It’s that time of the year again when the Kennedys Hong Kong financial regulatory team puts out our annual review of financial regulatory investigations and proceedings. 

To say that the Year of the Pig has been a tumultuous year for Hong Kong generally would be an understatement.  Before diving into the year that was in the financial regulatory enforcement world, we would like to take this opportunity to wish everyone a happy, safe and prosperous Year of the Pig.

A headline grabbing year for SFC enforcement…

On its face, this past year has been one of big headlines for the Securities and Futures Commission (SFC) in the enforcement space.  Some of these enforcement actions not only made the front pages of business news sections of publications, but also the main local Hong Kong news front pages:

• Anti-money laundering (AML) controls: An intermediary was fined HK$15.2 million for perceived AML systems and controls shortcomings in respect of the vetting and monitoring of payments to and from third parties through client accounts. The size of the fine appears significantly higher than those issued for similar infractions in the past.  This may be perceived by the market as a signal that the SFC is taking a tougher line on AML issues.
• Listing sponsors’ due diligence: Fines totalling over HK$810 million and, in one case, suspension of rights to act as sponsors (the SFC ultimately shortened the length of suspension after the sponsor firm cleared various compliance reviews [1]), have been issued against various big-name investment banking outfits. ^[2] In these cases, the SFC has concluded to be shortcomings in the listing due diligence process.  The issues cited the SFC in these cases largely correspond with the main shortcomings perceived by the SFC in a thematic review on sponsors in March 2018, [3] which were reiterated in a speech in October 2019 by Ms Julia Leung, the SFC’s Deputy Chief Executive Officer and Executive Director, Intermediaries. [4] These include (i) adopting a box-ticking approach, (ii) ignoring red flags, (iii) deficient interview practices, (iv) over-reliance on experts and third parties, and (v) improper supervision and inadequate resources to perform due diligence.
• Alleged “Enigma Network” prosecutions: After attracting significant headlines in December 2017 when a number of high profile arrests were made as part of a joint SFC-Independent Commission Against Corruption operation, a number of high profile individuals were ultimately charged with various counts of fraud in respect of the affairs of Convoy Global Holdings Limited. [5] The prosecutions remain pending and no one has to date been convicted.  The company became a focus of media attention after it was named by shareholder activist David Webb as part of his alleged “Enigma Network” of “50 stocks not to own” in May 2017. [6]
• Charging of client fees: A financial institution was fined HK$400 million over what the SFC considers as charging of client fees and related internal control issues. [7] The size of the fine attracted some public attention at the time when it was announced.

…But behind the headlines, a quieter enforcement scene emerges

However, if one looks more closely at the headline-grabbing cases, they tend to be ones where the underlying events that led to enforcement action took place quite some years ago.  This would tend to suggest that the SFC enforcement has, in the past year, been reaping headlines out of older investigations and proceedings. 

Look more deeply, and what one would find that the SFC is, in overall terms, continuing its trend away from post-infraction enforcement.  Instead, the SFC has moved towards “front loaded” prevention of possible regulatory infraction, through increased supervisory work by other divisions within the SFC.  This was confirmed in October last year by Ashley Alder, the SFC’s Chief Executive Officer, when he said that:

"Most recently, we have pursued a bold new strategy designed to tackle and deter novel forms of misconduct, especially in our listed markets. We have labelled this “front-loaded” regulation. It has already led to much better outcomes." [8]

This continues to be reflected in the latest enforcement-related statistics published by the SFC. [9] For investigations in respect of market misconduct and licensed entities/persons conduct issues, the number of new investigations in the 6 months to 30 September 2019 has remained static at 120 as compared with the same period last year.  And this is well down from the 246 new investigations in this regard over the 6 months to 30 September 2016.  The continuing trend towards less investigations has also led to a drop in investigations completed from 122 in the 6 months to 30 September 2018 to 90 in the same period last year.  And both these years are lower than the 294 investigations completed in the 6 months to 30 September 2016.

And interestingly, despite the SFC having in the recent past sought to project a more law enforcement agency-like image (see our regulatory year in review bulletin last year on this point), the number of search warrants executed by the SFC in the 6 months to 30 September 2019 is only 8.  This is down from 15 in the corresponding period in 2018, and is further below the 19 that was executed for the same period 3 years ago. 

Nonetheless, the 6 months to 30 September 2019, new investigations relating to listed companies conduct can be said to have increased significantly, up from 12 in the corresponding period last year to 21 this year.  This year’s figure is also higher than the 14 that were commenced in the corresponding period 3 years ago.  This is consistent with pronouncements from the SFC in recent years to the effect that they are more focused on listed companies conduct issues as part of its drive to protect investors.

Overall, away from the headlines, the regulatory enforcement scene is showing signs of continuing to trend towards being quieter than, say, 3-4 years ago.

Footnotes

[1] https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=20PR4

[2] See:

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR19

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR20

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR21

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR22

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR44

[3]https://www.sfc.hk/web/EN/files/ER/Reports/Report%20on%20the%20Thematic%20Review%20of%20L
icensed%20Corporations%20Engaged%20in%20Sponsor%20Business.PDF

[4] https://www.sfc.hk/web/EN/files/ER/PDF/Speeches/IPO%20Sponsors%20and%20Regulations%20-%20Keynote%20Speech_final_INT.pdf

[5] See:

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR39

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR72

[6] https://webb-site.com/articles/enigma.asp

[7] https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR111

[8] https://www.sfc.hk/web/EN/files/ER/PDF/Speeches/Speech%20-%20CEO%20at%20SFC%20Cocktail%202019_final.pdf

[9] The statistics cited in this part can be found in the following links:

https://www.sfc.hk/web/EN/files/ER/Reports/QR/201907-09/EN/2e.%20Enforcement.pdf

https://www.sfc.hk/web/EN/files/ER/Reports/QR/201607-09/Eng/00_full.pdf (scroll to section on “Enforcement”)