Covid-19 HK: licensing, suitability, order recording and deadlines

As the financial services industry continues to cope with the challenges of the coronavirus pandemic, the SFC has delayed a number of regulatory deadlines for six months. The regulator also made several announcements that licensed firms should make sure they understand and act on where necessary. The first reminds firms of their obligations when it comes to suitability – in particular the impact of the pandemic on customers. The second, an FAQ on licencing, extends some deadlines while flagging additional requirements and notifications, for example where a business continuity plan is triggered. The SFC also reminded intermediaries of order recording requirements in light of the pandemic.

Obligations to ensure suitability and timely dissemination of information to clients

Mindful of the potential impact of the COVID-19 outbreak on market volatility and liquidity, the SFC has issued a circular related to suitability to remind all licensed corporations about two things:

Suitability obligations to clients

  • Conduct ongoing product due diligence to reflect any deterioration in credit quality or liquidity, market and industry risks related to the COVID-19 outbreak.
  • Consider all relevant client-specific circumstances in suitability assessment of an investment product for clients, including liquidity needs of the client, and the risk profile and concentration risk of the clients’ portfolio.
  • Explain risks and features of investment products. These could include credit quality, liquidity, termination conditions and transaction costs.
  • Mention disadvantages and downside risks, for example credit deterioration and illiquidity, when recommending investment products.

Timely dissemination of information to clients

  • Given the current market situation, fund managers might use liquidity risk management tools. These may include, for example increasing or applying any swing factor (or anti-dilution levy), defering redemption, and suspending creation and redemption in the primary market or secondary market trading.
  • If licensed corporations hold investment products directly or indirectly on behalf of their clients, notices and communications by product issuers – including those in relation to liquidity risk management – will need to be disseminated to their clients on a timely basis. 

Licensing matters under Covid-19 – FAQ

The SFC issued an FAQ on licensing related matters in light of the COVID-19 pandemic at the end of March.  The key takeaways are:

  • Licensing exams and additional CPT in relation to individual’s licensing condition with deadlines on or before 30 September 2020 will be extended for three more months
  • CPT hours in 2020 can be carried forward to 2021. This means you won’t breach the CPT requirement if you cannot meet 5-hours CPT requirement in 2020.
  • Licensed Corporations need to notify the SFC of the following situations:
    • Staff infection of COVID-19
    • Closing of office premises – including overseas premises if it affects the licensed corporation’s operation
    • Split team arrangements/staff relocation to overseas offices
    • The triggering of the Licensed Corporation business continuity plan
  • Licensed Corporations still need to ensure individuals are properly licensed and comply with the regulatory requirements regardless where they are conducting regulated activities. This applies to local staff working overseas or overseas staff servicing HK clients
  • The SFC allows staff to work from home or overseas offices that are not SFC-approved premises, but records and documents should be kept in/send back to SFC-approved premises.
  • Electronic copies of the signature pages of SFC application forms will be accepted.
  • Form B needs to be filed if extension of submission period for audited account is needed. 

Extended deadlines for implementation of regulatory expectations

The SFC’s circular on Covid-19 outlines extended deadlines for implementation of the following regulatory expectations by six months:

  • The circular on the use of external electronic data storage providers (EDSP) requires intermediaries who had obtained SFC approval for the use of an external data storage centre before the end of October 2019 to provide certain documents to the SFC by 30 June. This deadline has been extended to 31 December 2020. Intermediaries should note that this extension does not postpone the obligation to notify the SFC without delay if they keep records exclusively with an EDSP.
  • The circular on new measure to protect client assets from 8 July 2019 last year requires intermediaries to obtain confirmation from banks with whom they hold client assets that the relevant bank’s terms do not provide the bank with recourse to assets in the client’s account. The deadline for compliance has been extended from 31 July to 31 January 2021.
  • The deadline for compliance with the SFC’s circular on data standards for order life cycles which outlines the minimum content and presentation format of trading-related data to be submitted by licensed securities brokers to the SFC, has been extended from 31 October to 30 April 2021.

Order recording reminder

The SFC circular notes that many intermediaries have provided their staff with remote access to order management systems, which are capable of centralised order recording for orders placed from a remote location. The circular reminds intermediaries of their obligation to comply with the order recording requirements set out in the Code of Conduct. It also points to various order receiving and recording options available to comply with the regulatory requirements.

Bovill can help

If you need clarification of where you stand from a regulatory perspective in the current circumstances or help with any of your regulatory obligations, please get in touch.

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