The SFC is taking its lead from the United Kingdom’s Financial Conduct Authority (FCA), which introduced a controversial “senior managers regime” in March under which key executives can be held criminally liable for bank failures, although the SFC regime will not be as tough, the sources said.
The Hong Kong rules, which have been devised by the SFC’s supervisory department, will effectively extend the regulator’s oversight far beyond the front-line staff directly licensed by the watchdog, to hundreds of executives in support functions including IT, operations, compliance, legal and risk management, the sources said.
The sources did not wish to be identified because the new rules are not yet public.
The SFC confirmed it was working on a new regime to clarify managerial responsibilities at licensed firms, but did not provide specific details.
“The initiative is aimed at helping the SFC obtain up-to-date management structure information from licensed corporations and prompt the awareness of senior management to their obligations under the existing regulatory framework,” a spokesman for the SFC said in a statement.
“We also believe that these measures will provide more clarity to the industry and further strengthen the corporate governance of licensed firms,” he said.
The rules are also expected to encompass senior executives involved in the day-to-day running of SFC-regulated activities who are based overseas — a common set-up at global banks and hedge funds where decisions on the Hong Kong business are often made by executives in London, New York or Singapore.
The SFC is concerned that it does not know the identities of many of the people with crucial responsibilities at the Hong Kong operations it regulates, the sources said.
The SFC spokesman said the new regime does not signal the SFC’s intent to sanction managers, but two sources said it would inevitably make “managers in charge” more accountable for rule-breaches.
Under Hong Kong’s securities law the SFC has the power to discipline licensed individuals with civil sanctions including public censure, license restrictions or outright bans, and fines of up to HK$10 million ($1.3 million) for each transgression. Legal experts said the regulator can also use these powers to sanction unlicensed managers involved in the day-to-day running of regulated activities, but has rarely done so in the past.
“Going forward, the SFC is expected to use these powers more often,” said one of the sources.
The SFC has told industry participants they will have several months to move to the new regime, which sources said will require firms to review and possibly overhaul and re-document all their reporting lines, governance structures, and job descriptions.
Like its peers in the United States and Europe, the SFC is looking for ways to improve personal conduct at financial firms by moving away from purely corporate entity-level penalties, which management at many firms seem to have come to treat as another cost of doing business, say regulatory experts.