Fund houses that help unlicensed firms to offer margin financing face action, Hong Kong regulator warns

PUBLISHED : Friday, 03 August, 2018, 8:50pm
UPDATED : Friday, 03 August, 2018, 10:58pm

Hong Kong’s financial regulator has vowed to take action against asset managers and brokers that help firms without a licence to offer stock margin-financing disguised as investments.

“Deliberate use of an investment arrangement to conceal unlicensed margin financing activities is illegal,” said Julia Leung, the SFC’s deputy chief executive who is also the executive director of intermediaries, in a circular sent to all brokers and fund houses on Friday evening.

“Anyone involved in these illicit arrangements may be liable to prosecution and should cease them immediately.”

A spokesman for the SFC declined to say how frequent such cases are.

In the world’s priciest city, even the securities regulator finds itself priced out of prime office space

The SFC said in the circular that “parties involved in [such] illicit activities may have avoided certain capital, conduct or disclosure requirements aimed at protecting investors and market integrity.”

Illegal margin financing arrangements can take different forms. They may operate through discretionary accounts or private funds of an asset management company.

This will enhance investor confidence in the whole market
Robert Lee Wai-wang, executive director, Grand Finance Group

Under such an arrangement, an asset manager licensed by the SFC teams up with a firm that is not. The two then join hands to finance acquisition deals while they take some stock as collateral.

The SFC said some such tie-ups would allow the unlicensed firm to collect money from the client that received the asset – similar to interest payments to brokers or fund houses for margin financing.

In some cases, the licensed fund management company or broker does not have an agreement with the customer, who instead has a discretionary agreement with the unlicensed firm.

Hong Kong’s SFC makes fighting corporate fraud a top priority in 2018

“The SFC warns licensed companies that they should not facilitate the setting up or operation of de facto margin financing arrangements to circumvent financial resource rules and risk management requirements. The fitness and properness of licensed corporates may be called into question when they aid and abet the conduct of illegal activities. Anyone involved in these arrangements may be liable to prosecution and should cease such arrangements immediately,” the SFC said.

The warning marks the latest effort by the SFC to clean up the local market as the city aims to establish itself as an international hub for technology companies to list their shares.

Robert Lee Wai-wang, executive director of Hong Kong-based broker Grand Finance Group, said the crackdown would help protest the interests of investors.

“This will enhance investor confidence in the whole market. However, we would also like to urge the SFC not to adopt an approach of over-regulation as that would make the life of brokers too difficult,” Lee said.