Hong Kong market watchdog’s tightened oversight leads to fivefold jump in fines on errant capital market players

The Securities and Futures Commission imposed HK$369.75 million (US$47.10 million) in fines last year, versus HK$72.1 million in 2021
The watchdog completed 193 investigations last year, an increase of 47 per cent from 131 cases in 2021

Banking & finance

Enoch Yiu

Published: 6:10pm, 6 Jun 2023

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Fines imposed by Hong Kong’s securities watchdog rose five times last year, with one whopping penalty accounting for the lion’s share, according to data compiled by law firm Freshfields Bruckhaus Deringer.

The Securities and Futures Commission (SFC) imposed HK$369.75 million (US$47.1 million) in fines last year, compared with HK$72.17 million in 2021.

The agency also completed 193 investigations last year, an increase of 47 per cent from 131 cases in 2021, according to the study by Freshfields, which began its annual review of SFC regulatory actions and penalties in 2013. In 2020, the SFC handled 196 cases.

“In recent years, the SFC has used heavy fines to send a strong message to the industry and to deter market participants from engaging in similar malpractices,” said Gordon Tsui Luen-on, director of the Hong Kong Securities and Investment Institute. “The commission is likely to continue with such a regulatory approach to enhance the market quality and strengthen Hong Kong’s standing as an international financial centre.”

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The increase last year was mainly as a result of the HK$348.25 million fine on a unit of Citigroup for “pervasive dishonest behaviour” across its various trading desks over an 11-year period. It was imposed on Citigroup Global Markets Asia for making misrepresentations to institutional clients between 2008 and 2018.

The fine on the Citigroup unit, however, was dwarfed by the record HK$2.71 billion slapped on Goldman Sachs (Asia) in 2020 for “serious lapses and deficiencies” that contributed to the misappropriation of funds at the Malaysian sovereign investment fund 1Malaysia Development.

“The SFC’s enforcement in recent years has continued to focus on high-impact cases,” said Tim Mak, partner and head of Asia dispute resolution at Freshfields.

Mak expects the SFC in the coming years to spend more efforts on virtual-assets trading following the launch of a new licensing regime for these players on June 1. All virtual-asset-trading operators are required to apply for a licence from the SFC to operate in Hong Kong, or they will have to leave the market by May 2024, according to the newly enacted law.

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“Because of regulation, the SFC will have more visibility over how digital assets service providers operate and the transactions that go through them,” Mak said. “However, in the digital assets space there are currently no specific rules regulating market misconduct, like insider trading and market manipulation.”

Mak believes it will take some time before it is clear to the market how the SFC will look to address misconduct in the digital assets sector.

“Overall, the new SFC regulation will help Hong Kong’s digital assets sector to develop. Generally, more good quality regulation should result in greater market confidence and more people wanting to participate in the market,” he said.

Mak expects ESG (environmental, social, and corporate governance), particularly greenwashing, to be another key area of focus for the SFC in the coming years. Greenwashing refers to companies giving misleading information to customers or investors that their products or services have a positive impact on the environment but, in fact, they are not up to the mark.

“Climate change is a real concern for everyone. For regulators, one particular focus around the world has been the need to clamp down on greenwashing,” he said.

“In the coming years, we can expect to see more from the SFC and other regulators in that regard, including in the enforcement space.”

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