SFC increases FRR monitoring focus

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The SFC has recently issued another fine in relation to breaches of its Financial Resources Rules. The enforcement is a reminder of the importance of complying with the rules and is in line with the SFC’s move to improve Financial Resources Rule monitoring. The pressure is on for firms to improve their liquid capital positions if they want to meet expectations.

The SFC reprimanded and fined Central Wealth Securities Investment Limited HK$1 million for breaching the Financial Resources Rules (FRR). The regulator identified various accounting and calculation errors in the firm’s financial returns which resulted in an overstatement of liquid capital. After eliminating the errors, the firm’s liquid capital was in deficit ranging from HK$1.6 million to HK$49 million, breaching the FRR.

Appointing reviewers and implementing controls

The SFC expects firms to appoint qualified persons to prepare and review financial returns, ensuring that they, and the Responsible Officer who reviews and signs off the returns, are familiar with the FRR requirements. You should also implement suitable controls to identify errors and mistakes of the returns before submitting them to the SFC.

FRR monitoring

We’ve also seen the SFC taking a more stringent approach on FRR monitoring, with some of our clients receiving enquiries from the regulator on their funding plans due to not generating sufficient income to cover their operational expenses. Another instance that may prompt enquiries includes having arrangements with other parties, such as substantial shareholders or group companies, to pay for key operating expenses (e.g., staff costs and rental expenses).

The SFC expects you to take appropriate measures to improve your liquid capital positions. In these cases, it expected their excess liquid capital can cover at least 12-month operational expenses. In some instances, they were also requested to provide their exit plans.

How we can help

We review FRR returns and funding plans, help businesses prepare exit plans and develop suitable internal controls for monitoring liquid capital positions for our clients. We can set up notification requirement reminders and take remedial measures on any FRR non-compliance.

Get in touch with our experts to discuss any of the points above in more detail or if you have any questions about FRR compliance.