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The SFC has issued a circular requesting improved controls for both house bank accounts and client bank accounts. Although for some licensed corporations the impact will be minimal, for others it will be more significant, and corrective actions may be time consuming. If you are in scope you should make sure you have understood and enacted the contents of the circular as soon as possible.
The update was issued by the SFC at the end of June 2021 to all Licensed Corporations (LCs). The call for enhanced controls arises from its recent supervision work. The most notable issue the SFC is seeking to address is the unsatisfactory practice of shareholders of LCs withdrawing funds from LCs’ house accounts and creating a consequential regulatory liquid capital breach, without the knowledge of the senior management and responsible officers (ROs) of the LC.
This lack of proper control over bank accounts by ROs and senior management has prompted SFC to suggest enhancements for all sectors, including the funds and broking sectors, to:
- LC’s house bank accounts; and
- LC’s client accounts.
Notably, the new control enhancements are not applicable to LCs’ dealing / trading accounts held at execution brokers.
The requirements in summary are:
- To designate an RO or Manager in Charge (MIC) explicitly to be responsible for the obligations listed at 1 – 4 below
- The LC’s board should delegate powers to fulfil the obligations listed at 1 – 4 below, including the operation of the LC’s bank accounts
- Ensure authorised signatories over an LC’s bank accounts are given the ability to exercise their oversight appropriately, for example through access to regular account statements, and all other information about the operation and activities of the LC’s house and client bank accounts
- The authorised signers for effecting any form of payments out of an LC’s client bank accounts should only be ROs, MICs or their delegates.
The obligations to be explicitly met are as follows:
- To adequately safeguard client assets
- To promptly discharge settlement or margin obligations to clearing houses and trading counterparties
- To ensure the availability of the financial resources needed for the proper performance of the LC’s business activities
- To fully comply with the financial resources requirements under the FRR at all times.
Paragraph 16 of the circular obliquely requires LCs to put in place a formal governance manual or equivalent, which sets out the various responsibilities of senior management, including the ROs and MICs. This has been an enduring recommendation from the Bovill team for LCs of all shapes and sizes, and reinforces good corporate governance practice.
For LCs that already have only ROs or MICs established as signatories over the LC’s house accounts, then the circular will not be of great impact. However for other LCs, or those that control client money, or for larger groups with more complex banking arrangements, the call to action is to review the contents of the circular in detail and determine if enhanced controls are needed. Since the corrective actions may involve changing signatories of bank accounts, which can be operationally time-consuming, getting this kicked off promptly is essential.