In its recent circular (with annexes 1 and 2 and a set of FAQs), the Securities and Futures Commission (SFC) introduced new measures to heighten the accountability of the senior management of all licensed corporations (LCs). The circular clarifies who should be regarded as the senior management of a LC and requires the LCs to designate fit and proper individuals to be “Managers In Charge” of certain Core Functions (MICs, MIC Regime).
The SFC's increased focus on senior management accountability is part of a global trend to make it easier for regulators to hold individuals to account, and comes following the recent introduction in the UK of the Senior Managers and Certification Regime. While the SFC emphasises that the MIC Regime does not impose any additional civil or criminal liability on the senior management of LCs, individuals must consider carefully whether they should be appointed as MICs and, if so, what their responsibilities for the designated Core Function are.
Breakfast Seminar – 10 January 2017
We will be holding a breakfast seminar on 10 January 2017 to discuss the regime in more detail and its implications for firms. If you would like to attend please click here to RSVP. In the meantime we consider the issues raised by the regime in more detail below.
A quick summary of the MIC Regime
- 18 April 2017 – The SFC intends to commence the collection of up-to-date management structure information from LCs and corporate licence applicants.
- 17 July 2017 – Existing LCs are expected to submit the required information via the SFC Online Portal on or before this date.
- 16 October 2017 – MICs who head certain Core Functions are also required to be approved as Responsible Officers (ROs) and the SFC generally expects that on or before this date (i.e. within six months from the commencement date), these MICs will have applied for approval to become ROs.
Given the tight timeline, LCs should begin reviewing their organisational structure and identifying potential MICs for each of the Core Functions, and making any necessary changes to comply with the new MIC Regime.
Meaning of "senior management"
The SFC is of the view that senior management of a LC includes, among others, directors, ROs and the new MICs. The SFC clarifies that the three categories are not mutually exclusive such that an individual can simultaneously be a director, a RO and a MIC.
Further, the SFC regards non-executive directors as senior management and expects all members of the board of directors (Board) to play an essential role in managing the LC's business.
The Core Functions
The SFC has clarified that the term MIC refers to an individual appointed by a LC to be principally responsible, either alone or with others, for managing any of the following functions of the LC:
- Overall Management Oversight
- Key Business Line
- Operational Control and Review
- Risk Management
- Finance and Accounting
- Information Technology
- Anti-Money Laundering and Counter-Terrorist Financing
Please refer to annex 1 of the circular for more details of each Core Function.
Appointment of MICs and reporting lines
LC should appoint at least one fit and proper person to be MIC of each Core Function. However, a LC may appoint one individual to act as the MIC for several Core Functions where appropriate considering its scale of operations and control measures. A LC may also appoint two or more individuals as MICs to jointly manage a particular Core Function.
In determining whether an individual is a MIC of a particular Core Function, a LC should consider the apparent or actual authority of the individual and the individual's seniority. In terms of reporting, the SFC expects that an MIC should report directly to and be accountable to the Board or the MIC for Overall Management Oversight; additionally, they may also report directly to the parent company and/or senior management personnel of the group in accordance with established internal policies and procedures.
MICs do not necessarily need to be employees of the LC, but they cannot be external parties merely providing outsourced services.
MICs may be located in Hong Kong or overseas. The SFC may impose appropriate conditions on the licence of offshore MICs of Overall Management Oversight or Key Business Line, for example, requiring him or her to act together with another RO who is fully competent and is based in Hong Kong.
MICs of Overall Management Oversight and Key Business Line are expected to seek the SFC's approval as ROs. Applications for approval should be made by 16 October 2017. In practice, some individuals who will be MICs of the Overall Management Oversight function may not have experience in conducting or directly supervising the relevant regulated activity. The SFC will take into account the applicant's overall career history within the industry, and may approve individuals subject to appropriate licensing conditions. The SFC does not expect MICs of other Core Functions, such as Information Technology, to be ROs; it also does not require every RO to be an MIC.
The Board of a LC should ensure that each MIC has acknowledged his or her appointment as MIC and the particular Core Function(s) for which he or she is principally responsible.
Standard of conduct expected of senior management
The SFC states that there are already various codes and guidelines which provide guidance on the responsibilities of senior management of LCs. In particular:
- General Principle 9 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) states that the senior management of a LC should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the LC.
- Paragraph 14.1 of the Code of Conduct further specifies that senior management of a LC should:
- Properly manage the risks associated with the business of the corporation, including performing periodic evaluation of its risk management processes;
- Understand the nature of the business of the corporation, its internal control procedures and its policies on the assumption of risk; and
- Understand the extent of their own authority and responsibilities.
- The Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC (Internal Control Guidelines) state that members of a LC's senior management are ultimately responsible for the adequacy and effectiveness of the corporation's internal control systems. The Internal Control Guidelines also contain specific control guidelines for certain important areas, including information management, compliance, audit or related reviews, operational controls and risk management.
- The Guideline on Anti-Money Laundering and Counter-Terrorist Financing sets out detailed expectations regarding compliance and control functions that will be particularly relevant to MICs responsible for managing the Anti-Money Laundering and Counter-Terrorist Financing function.
The SFC states that where policies, practices and actions are determined or formulated by or together with other companies in the group, a LC's senior management should examine their appropriateness and make any necessary amendments or changes so that they are appropriate for the operations of the corporation's regulated business activities in Hong Kong.
Legal liabilities of senior management
The MIC Regime does not impose any new civil or criminal liability on MICs. Instead, the circular sets out the SFC's current powers to take action for individual misconduct:
- Under Part IX of the Securities and Futures Ordinance (SFO), the SFC may exercise its disciplinary powers to sanction a "regulated person" if the person is, or was at any time, guilty of misconduct or is considered not fit and proper to be or to remain the same type of regulated person. The SFC clarifies that all members of senior management are "regulated persons" because of their involvement in the management of the LC's business. Therefore, the SFC's disciplinary powers apply to MICs (whether they are located in or outside of Hong Kong).
- Where a LC is (or was) guilty of misconduct as a result of the commission of any conduct occurring with the consent or connivance of, or attributable to any neglect on the part of a person involved in the management of the business of the LC, then that person is also guilty of misconduct (section 193(2) of the SFO).
- Further, in determining whether a regulated person is a fit and proper person for the purpose of considering taking disciplinary action, the SFC may consider the past or present conduct of the person (see section 194(3) and section 129 of the SFO). For example, if a MIC fails to ensure a LC's compliance with the codes or guidelines published by the SFC, such failure may call into question the MIC's fitness and properness, having regard to his or her level of responsibility within the LC.
- Where a corporation has been found guilty of an offence under the SFO, the SFC may extend criminal liability to any of the corporation's officers where the offence is committed with their consent, connivance or otherwise attributable to their recklessness (see section 390 of the SFO).
Management structure information: The organisational chart
The SFC expects that a LC should adopt a formal document, approved by the Board, clearly setting out the management structure of the corporation including the roles, responsibilities, accountability and reporting lines of its senior management personnel. Where a LC designates more than one individual to be the MIC of a particular Core Function, the board should ensure that the document contains sufficient details regarding the specific responsibilities of each MIC concerned. The SFC may request a LC to provide such document for review.
Additionally, when applying for a licence under section 116(1) of the SFO, a corporation is required to provide information about its human resources and organisational structure showing that it is capable of carrying on regulated activities competently. To this end, the SFC expects the LC to provide information regarding its MICs and its organisational chart in its application.
In respect of each MIC, a LC should submit the following particulars:
- Full name;
- Identification information;
- Job title;
- Place of residence;
- The Core Function(s) which he or she is in charge of; and
- The job title(s) of the person(s) to whom he or she reports within the LC or its corporate group.
A LC should also submit an organisational chart depicting its corporate hierarchy and business and operational units. The chart should capture all MICs, their respective reporting lines and the job titles of the persons reporting directly to these MICs in relation to the operations of the LC.
A LC should also notify the SFC of any changes in its appointment of MICs (including new appointment and cessation) or any changes in the particulars of its MICs within seven business days of the changes. Where a change involves a new appointment or cessation, or a change in the particulars regarding the Core Function(s) which he or she is in charge of or the job title(s) of the person(s) to whom he or she reports within the LC or its corporate group, the LC should also submit an updated organisational chart in its notification of that change.
Upon implementation of the MIC regime (i.e. from 18 April 2017), the SFC expects existing LCs to submit the required information, and any subsequent changes, via the SFC Online Portal; the deadline for providing the MIC information and organisational charts is 17 July 2017.
The SFC will revise the existing form of Supplement 8 – Business Plan and Proposed Business Activities, and make a new form, Supplement 8A – Manager-In-Charge of Core Function(s). A draft of the new Supplement 8A is provided at annex 2 of the circular.
In practice the introduction of the MIC Regime represents a significant regulatory shift, in which the SFC aims to enhance accountability of senior management of LCs in Hong Kong. Given the complexity of the issues involved and the tight implementation timeframe, financial services firms are set to face challenges in meeting the new regulatory requirements under the MIC Regime.
For instance, although the MIC regime allows flexibility in management structure, the flexibility also means uncertainty in applying the regime in practice. Global organisations will have to think carefully when identifying individuals to ensure that they possess the relevant authority and decision-making powers, whilst at the same time seeking to minimize the number of offshore MICs. Smaller LCs that engage in only limited regulated activities will also face challenges, as they may have no choice but to appoint offshore MICs for a number of Core Functions.
Finally, whilst the SFC has clarified that the standards expected of MICs are already contained in the relevant codes and guidelines, it remains to be seen whether they are appropriate in the context of these new roles. Individuals who are to be appointed as MICs will want to ensure that their regulatory responsibilities are clearly understood, both by them and their firms. This is particularly relevant in the context of an enforcement agenda in Hong Kong that is focused on senior management responsibility and accountability.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2019