Less is more: SFC fulfils pledge to narrow enforcement focus to most serious casesHong Kong’s Securities and Futures Commission (SFC) enjoyed a strong 2018 on the enforcement penalties front, living up to its promise to focus its resources on fewer, but bigger, “high impact” cases, according to new analysis by international law firm Freshfields Bruckhaus Deringer (Freshfields). Over the course of last year, the regulator continued to strengthen ties with its mainland China counterparts, particularly the China Securities Regulatory Commission (CSRC), and secured a number of victories in its focus areas of insider dealing, market manipulation and sponsor misconduct.
Both the SFC and the Hong Kong Monetary Authority (HKMA) also continued their efforts to clamp down on money laundering and encourage the implementation of effective anti-money laundering controls.
Described by the SFC as a “blunt regulatory tool”, enforcement action is usually a last resort, because it is resource-intensive and takes time. In recent years, the regulator has publicly committed to prioritise its enforcement activities by focusing on the most serious categories of case, rather than covering a broader range of matters through investigations and enforcement actions. The SFC’s Enforcement Division is now working more closely and collaboratively with its Intermediaries and Corporate Finance teams to try to prevent problems before they occur. In a number of cases, this preventative approach appears to have avoided the need for urgent enforcement action.
The SFC’s focus on bigger cases and its “less is more” approach is borne out by an analysis of its enforcement statistics in the past few years. Since 2015/16, the number of investigations started by the SFC has fallen year-on-year. This trend was particularly pronounced in 2017/18, when just 280 investigations were commenced – down from 414 in 2016/17. The number of disciplinary actions taken has also fallen. Despite this, aggregate fines have increased in the past five years, from around HK$60-70m in 2014, 2015 and 2016 to almost HK$195m in 2018 and a similar upward trend can be observed in the average amount of each fine.
“Over 2018, we essentially saw a continuation of the enforcement trends that we identified this time last year,” said Georgia Dawson, Freshfields’ Asia managing partner. “The SFC has continued to opt for prevention over cure as far as possible, concentrating its enforcement resources on the categories of case it deems most serious.”
Looking ahead to 2019, Freshfields’ analysis predicts a continued focus on corporate fraud. A number of current actions before the Market Misconduct Tribunal against directors and corporates, regarding alleged late disclosure of inside information, will likely conclude, as will several significant actions against IPO sponsors. We may see the first batch of cases focused on “managers-in-charge”. The effectiveness of internal controls in managing risk will remain a focus, alongside the effectiveness of mechanisms designed to detect and prevent money laundering. Finally, Freshfields’ analysis predicts further developments in the regulation of financial technology and increased use of regulatory technology, as well as a heightened focus on cybercrime and cyberfraud.
For more details, download a copy of Freshfields’ briefing, Regulatory Enforcement Trends in Hong Kong.
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