Hong Kong is set to tighten its regulation of senior management at financial services firms, including asset managers, as its securities watchdog looks to implement new rules based on regulations being introduced in the UK.

They would impose stricter requirements for defining individuals' responsibilties and clarifying how and where decisions are made, and could mean extra compliance and administrative costs. 

The Securities and Futures Commission (SFC) wants to strengthen its oversight of the senior executives of companies licensed in Hong Kong but who are based elsewhere, noted industry observers.

The UK’s Financial Conduct Authority had introduced new ‘senior management regime’ (SMR) rules for banks and other lending institutions in March this year, aimed at giving the regulator more control over management outside their immediate jurisdiction. The regulation is now being extended to insurance companies and will be broadened further in 2017 to cover asset managers.

This means that a regulatory body in Hong Kong could hold accountable a London-based senior manager of a British firm for actions he had taken that affect that firm's local business in Hong Kong. 

A briefing note from law firm Herbert Smith Freehills (HSF) said: “It is considered no longer acceptable for senior managers within financial institutions to shirk responsibility when those institutions fail.”

Will Hallatt, financial services regulatory partner at HSF in Hong Kong, told AsianInvestor that his firm had seen a lot of local interest in this regulation: “The SFC is watching this closely and may look to implement changes to the regime.”

While the SFC would not confirm it is in the process of developing new regulations, chief executive Ashley Alder signalled its intentions. When it comes to regulated financial institutions, he told AsianInvestor: “We are placing special emphasis on senior managers. We think it is important for us to further clarify responsibility within firms.”

Hallatt said the new HK rules could bring into focus how and where decisions are made. “It would place a lot more focus on what senior management individuals actually do, defining their job functions and creating a responsibility map. 

“Senior manager regimes are particularly relevant and important to Asian regulators, as they are concerned to know how people from outside affect a locally registered entity, and how they can capture relevant individuals under local regulations,” added Hallatt.

For example, he noted, where an international firm introduces a policy approach that leads to a great risk exposure for its business in Hong Kong, the Hong Kong regulator will be concerned about how those decisions are taken and how it affects the local business.

“An aggressive business approach will introduce more risk to the business, in terms of operational security and the delivery to clients,” said Hallett. 

“Instead of the regulator having a local scapegoat, they want to have a handle on the relevant senior managers, wherever they may be,” he added. “Getting some nexus around senior management at a global level is likely to be attractive to the SFC.”

Moreover, the range of individuals who will be subject to specific requirements for their respective functions within a licensed entity would likely be expanded, making the regulatory burden for firms considerably greater, says HSF.

Practical implications

The compliance and administration implications for local businesses are significant. Under the UK system, an individual must obtain regulatory approval before he can perform a controlled function such as head of compliance or head of risk, and firms must produce a ‘management responsibility map’ that covers the nature of the company and its management and governance arrangements.

Anyone in a senior management role will be subject to a ‘duty of responsibility’ and could face disciplinary action for misconduct if something goes wrong in relation to one of their allocated responsibilities, said law firm King Wood Mallesons (KWM) in a briefing note.

Penalties for misconduct range from public censure to fines, the imposition of limitations or restrictions on an individual’s licence. Hence it is crucial that senior managers under the new regime fully understand their regulatory obligations, particularly if they are based outside their company’s home jurisdiction, said KWM.

Urszula McCormack, partner at KWM in Hong Kong, told AsianInvestor the licensing regime for front-line staff and senior management was in place, meaning there was already supervision in Hong Kong. "But we have heard the SFC discuss the senior managers regime in the UK and it seems reasonable to expect that something similar could well be implemented here."

The new regulations would go beyond frontline staff to include other strategically and systemically important functions, including heads of risk, compliance and others, said McCormack.

"It is the kind of regime we see already in the best run organisations around town and, frankly, a sign of good corporate governance for senior roles and organisational structures to be articulated," she noted. "It also reflects expectations that are absolutely evident during regulatory examinations and enforcement actions that the SFC and HKMA have undertaken."

Many firms ses fines as the cost of doing business, so enforcement actions against individuals would be a greater deterrent and more effective in driving cultural change, argued Meena Datwani, director-general of enforcement at the Hong Kong Monetary Authority (HKMA).

However, there is unlikely to be a combined regulatory effort involving, for example, the HKMA and the SFC, said McCormack. Joint regulatory action in Hong Kong is rare, with a few exceptions, such as for the city’s anti-money laundering rules. 

The HKMA already has a supervisory policy manual, with a broad range of corporate governance and organisational competence requirements, noted McCormack: “The SFC's interest in SMR also coincides with increasing pressure globally for individual accountability as part of the supervisory process."