Hong Kong’s Securities and Futures Commission (SFC) has detailed its strategic priorities to address changing market conditions. The SFC communication provides a comprehensive outline of how it plans to bolster Hong Kong’s securities markets while addressing evolving risks and protecting investors.
Although the SFC generally comments on key priorities within its annual and quarterly reports, its new three-year strategic plan takes a notably different approach, which the regulator says will “steer market development to guard the city’s reputation as a world-class financial centre”.
The SFC states shifts in global markets, geopolitical tensions and technological advances amongst the challenges and opportunities currently impacting Hong Kong’s financial markets. In response, the regulator aims to manage and mitigate risk, enhance resilience, and lead transformation through operational, technological, and ESG initiatives.
Notably, Hong Kong has long held a unique position as a financial gateway between China and the Western world. The SFC highlights this aspect of its strategic approach over the next three years, citing its commitment to “further strengthening Hong Kong’s unique role as a gateway to the Mainland”.
The four pillar strategies defined by the SFC aim to:
- Maintain market resilience and reducing the risk of serious harm to Hong Kong’s markets;
- Enhance the global competitiveness and appeal of the Hong Kong capital markets;
- Lead financial market transformation through technology and ESG; and
- Improve institutional resilience and operational efficiency.
This article explores these strategic priorities in further detail and key takeaways your financial firm may wish to consider.
Priority 01 - Maintaining Market Resilience and Reducing the Risk of Serious Harm to Hong Kong’s Markets
The SFC seeks to bolster the resilience of Hong Kong’s financial markets and establish an even stronger foundation for sustainable growth.
Key areas the SFC is focused on to achieve these outcomes include:
- Identifying and addressing emerging risks.
- Enhancing surveillance capabilities to spot market misconduct amongst listed companies and intermediaries.
- Taking a collaborative approach with regulatory counterparts in Hong Kong, Mainland China and overseas to combat cross-border market misconduct.
- Public education and collaboration with the Hong Kong Police Force and Investor and Financial Education Council to further combat investment scams that affect the general public.
Takeaway 01 - How Firms Can Help Strengthen Market Resilience and Reduce Risk
The SFC’s 2023 Annual Report revealed enforcement actions including 135 investigations, 115 criminal charges against 25 persons, 14 individuals charged for suspected market misconduct and money laundering offences for indictment prosecution, and 5 convictions.
Additionally, the SFC made 5,851 requests for trading and account records from intermediaries due to surveillance of untoward price and turnover movements.
Firms can help strengthen market resilience and reduce the risk of harm to Hong Kong’s financial markets by enabling employees to understand their obligations and trade ethically. Ways firms can support the right trading behaviours include:
- Ensuring your firm has robust personal trading compliance programs and policies that define acceptable and unacceptable behaviour when employees engage in personal trades.
- Effectively managing insider lists, material non-public information (MNPI), and conflicts of interest registers.
- Communicating your trading policies and procedures to employees and allowing them to create dialogues about ethical and compliant trading behaviours and financial conduct.
- Ensuring everyone understands blackout periods and trading windows to prevent anyone in possession of material non-public information (MNPI) from making personal trades during times when that information is likely to create unfair gains from transactions.
- Leveraging technology to monitor trading activity and identify red flags.
For further insights about managing and mitigating the risk of personal trading misconduct, see our article, How to Reduce Insider Trading Risk and Stay Out of the Headlines.
Priority 02 - Enhancing the Global Competitiveness and Appeal of Hong Kong Capital Markets
The SFC says it is exploring new regulatory tools to monitor and investigate companies with multi-jurisdictional operations. It aims to work with overseas regulators, financial networks, and the International Organization of Securities Commissions (IOSCO) to continue to bolster Hong Kong’s international standing.
Additionally, the SFC seeks to create deeper connections with Mainland capital markets and Increase Hong Kong’s risk management competitiveness with more Mainland-related derivative products.
SFC Chairman Lui Tim Leung comments, “The Commission is now better placed than ever to respond robustly and creatively to new regulatory challenges at home and abroad and to shape market developments. In particular, we are committed to playing an even more active part in further strengthening Hong Kong’s unique role as a gateway to the Mainland and positioning the city as an offshore hub for RMB businesses and risk management, as well as supporting national development and safeguarding financial security.”
Takeaway 02 - How Firms Can More Effectively Uphold Cross-Border Obligations
The SFC recently released its consultation conclusions to bolster its enforcement of cross-border insider trading. Firms should pay close attention to cross-border transactions with new scrutiny expected.
Additionally, just as the SFC is exploring regulatory monitoring tools, firms should consider taking a proactive approach to monitoring evolving regulatory changes and obligations.
Compliance teams’ ability to stay current with regulations and be aware of upcoming changes is a growing challenge in Hong Kong and across the globe. Firms attempting to navigate the complexities of operating within multiple jurisdictions and effectively manage cross-border compliance have an even greater task in front of them.
Firms sometimes attempt to track compliance obligations and processes using Excel spreadsheets and emailing documentation to the right resources. This Excel and Outlook approach has several drawbacks. There is no single, high-level view of a firm’s compliance status for all of its obligations, which increases the risk of non-compliance. Add to this the complexities of operating within multiple jurisdictions, and compliance teams have a significant task in front of them.
Regulatory Technology (RegTech) solutions like MCO’s Regulatory Change Manager (RCM) and Horizon Scanning tool read legislation and regulator’s rules to rapidly understand changes to regulatory obligations. These tools are a game-changer for organisations, especially with compliance resources based in local head offices and across multiple jurisdictions, empowering them to stay informed of changes without enduring intensive manual workloads.
MCO’s RCM solution automates the extraction & classification of information from regulatory texts & other data sources. RCM uses AI to review and categorise sources, including regulatory updates, legal documents and enforcement actions and provide automatic regulatory insight.
The RCM module is part of MCO’s complete compliance solution, built for the long-term, that fulfils the needs of every sized organisation, including:
- An integrated solution that checks for conflicts across multiple systems
- Centralised data for ease of access, consistency and unparalleled risk control
- An easy-to-use interface for greater efficiency and adherence
- A scalable modular approach to meet every firm’s unique needs
Priority 03 - Leading Financial Market Transformation Through Technology and ESG
The SFC aims to:
- Bolster its virtual asset trading platform (VATP) regulatory regime.
- Build a responsible and secure FinTech ecosystem, leveraging blockchain, Web 3 technologies, and tokenisation of traditional assets to protect investors’ interests.
- Actively working against greenwashing and steering the development of corporate sustainability standards.
Takeaway 03 - Firms Should Assess the Impact of Digital Asset on Existing Strategies and Products
The SFC is taking a proactive approach to regulating the crypto industry in Hong Kong. The adoption of tokenised assets within the banking sector presents regulatory challenges. As the SFC states, “While tokenised investment products may provide certain potential benefits, they may also give rise to investor protection and other risks.”
The SFC has been clear in its guidance that “the use of technology should not make investors of tokenised products worse off than investing in the underlying traditional products”, and in this respect, product providers will remain and be ultimately responsible for the management and operational soundness of the tokenisation arrangement adopted and record keeping of ownership, regardless of any outsourcing arrangement.
Boards should assess how crypto and digital assets impact existing strategies and products and understand the regulatory or strategic risk factors in dealing with tokenised products.
For further details about the SFC’s current guidance on virtual assets, see its Circular on tokenisation of SFC-authorised investment products.
Priority 04 - Enhancing Institutional Resilience and Operational Efficiency
The SFC is undertaking initiatives to enhance its operational efficiency and resilience, including:
- Upholding effective governance.
- Increasing its cybersecurity resilience.
- Using AI to streamline and automate workflows.
While these are internally focused actions, firms may well note the regulator’s lead in leveraging technology to improve efficiency and resilience.
Financial institutions can enhance resilience and operational efficiency by leveraging financial technology (FinTech), including AI-driven solutions such as eCommunications surveillance.
Takeaway 04 - Consider AI-Driven eCommunications Surveillance Technology for Your Firm
Is it time to investigate AI-driven eCommunication surveillance technology to identify high-risk communications and actively prevent unethical communications from occurring?
Employees within financial firms are now communicating across multiple electronic devices using numerous applications, such as WhatsApp, WeChat, Facebook Messenger, and many others. Bring Your Own Device (BYOD) policies add even more complexity, making eCommunications surveillance an increasingly difficult task.
When implementing or reviewing eComms surveillance processes, firms should pay particular attention to the following areas:
Reporting
- Have adequate record-keeping processes in place to provide maintenance of surveillance records and documentation.
- Ensure proper storage of all voice and eCommunications data to enable fast reporting if further investigation is needed or if requests from regulators are received.
- Make periodic reports with surveillance metrics available for senior management to review.
Analysis
- Analyse key data sets (such as trade data) in conjunction with voice and eCommunications data to help detect suspicious patterns and behaviours.
- Define your internal processes around when the analysis of suspicious activities should be escalated and the actions that should be taken.
- Review and analyse the quality and accuracy of alerts, closures, and escalations.
Automation
- Your surveillance process should be automated to help compliance teams analyse and identify potential issues data most effectively. Don’t leave breaches falling through the cracks due to manual processes.
- Make sure automated alert processes match your criteria and assessment for flagging potential issues, your escalation policies, and the closure of alerts and escalations.
Communications compliance software can help your firm prevent, detect, and measure potentially harmful, unethical, or unlawful messages from being sent.
MCO’s AI-driven eComms Review Module detects and measures potentially harmful, unethical, or unlawful messages and even helps prevent the sending of those messages. The solution automatically identifies unapproved communication channels and regulatory risk and prompts employees to change their language as they type words and phrases that trigger compliance policy exceptions.
