Hong Kong brokers, fund managers struggle to get their heads round new SFC rule

New requirement that firms appoint individuals to control eight ‘core functions’ is proving harder than it sounds

PUBLISHED : Monday, 20 February, 2017, 1:55pm
UPDATED : Monday, 20 February, 2017, 10:45pm

A new regulation requiring Hong Kong’s stockbrokers and fund houses to appoint a specific individual to head up each of eight “core functions” is giving managers some sleepless nights.

The “manager-in-control” rule, announced by the Securities and Futures Commission in December and to be implemented in April, requires all licensed brokers and fund managers to submit a list of senior staff in charge of key functions, namely: overall management oversight; key business line; operational control and review; risk management; finance and accounting; information technology; compliance; and anti-money laundering.

The named individuals would need to be report to the board of directors.

The new rule is in line with international regulatory standards and has been largely met with approval within the industry.

However, as usual, the devil is in the detail.

At first glance, it seems simple enough; just take out your organisational chart and designate the relevant person - for example, your head of sales or chief investment officer - to the appropriate function and draw up your chain of command.

However, in reality, it is proving far from straightforward because different companies have different structures. For many it is not at all obvious which senior executive is the right fit for each of the eight roles highlighted by the SFC.

Not all companies have a board of directors, so for them it is technically impossible to meet the requirement.

For others the reporting line, or chain of command, is not clear cut. Some have matrix structures, some have a flat structure, and some are organised in ways that do not fit into the modes envisaged by the SFC.

Some companies do not have a chief investment officer. Others may have different heads for different asset classes which do not align with the eight categories named by the SFC.

Brokers and fund houses are also not clear on what level of reporting the SFC would consider satisfactory - should they report every quarter on the name of the individuals in charge? Do they need to provide evidence to show these executives have performed their duties?

Some international firms have their chief investment officers or other senior managers based outside Hong Kong. This raises the question of whether they would need to pass the Hong Kong licensing examinations and training requirements to meet with the SFC stipulations.

The list of questions goes on. The SFC may need to issue more detailed guidelines to allay the confusion.