22 December 2016 - Post by:
This blog post was co-authored by Charlotte Robins, a financial services and regulatory partner based in Hong Kong.
On 16 December 2016, the Securities and Futures Commission (SFC) published a ‘Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management’ (Circular) together with associated Frequently Asked Questions. The SFC did so to articulate its view as to who should be regarded as a member of senior management and also promote awareness of the regulatory obligations of senior managers. Does the Circular indicate a change in approach?
Who are Managers In Charge?
The SFC set out in the Circular who it considers to be senior management within a licensed corporation, specifically naming directors, Responsible Officers (ROs) and individuals who are ‘Managers in Charge’ of specific core functions (MICs). These categories are not mutually exclusive, so a person who is a director may also be a RO and a MIC. The ‘core functions’ for which the SFC expects MICs to have responsibility are:
- Overall management oversight
- Key business line
- Operational control and review
- Risk management
- Finance and accounting
- Information technology
- Compliance; and
- Anti-money laundering and counter-terrorist financing.
The SFC set out criteria as to how a licensed corporation should identify its MICs of a particular core function, stating that an MIC should:
- have sufficient authority to enable the individual to exert significant influence on the conduct of the core function, has authority to make decisions for the core function, and has authority to allocate resources; and
- report directly to the Board of the corporation or to the MIC who assumes the Overall management oversight function of the corporation, and be accountable for the performance or achievement of business objectives set by the same.
The SFC requires all licensed corporations to identify their MICs and to inform the SFC of the particulars of those individuals including the Core Functions for which they are responsible on or before 17 July 2017. Licensed corporations will be required to inform the SFC of any change in its appointment of MICs within seven business days of that change. In addition, the SFC has made clear that it expects MICs of the Overall Management Oversight and Key Business Line functions are ROs and a deadline for applying to be an RO is received by 16 October 2017.
A simple clarification of existing obligations?
The SFC also took the opportunity to remind licenced corporations of the responsibilities of ROs and senior managers, including that the Internal Control Guidelines state that members of a licensed corporation’s senior management, such as its senior operating management personnel, are ultimately responsible for the adequacy and effectiveness of the corporation’s internal control systems, and of the statutory bases upon which they could be found liable for misconduct or for failure to be fit and proper including under s.194 of the Securities and Futures Ordinance (SFO).
The SFC has stated that the MIC regime is consistent with the existing provisions of the SFO, subsidiary legislation made by the SFC and codes and guidelines published by it under the SFO, and that it does not impose any additional liability on the senior management of licensed corporations.
That may be true. The Circular does not purport to expand the responsibilities of senior managers, and the RO regime remains same, although the SFC did stress the need to ensure that ROs who will also be MICs of the Overall Management Oversight function are suitable and have the necessary industry expertise.
Nevertheless, the introduction of the MIC regime and the requirement to disclose details of MICs and their individual lines of responsibility to the SFC is new. In addition, while ‘regulated persons’ are exposed to potential disciplinary consequences under s.194 of the SFO, and that term is expressly stated to extend to ‘a person involved in the management of the business of a licensed corporation’, that term is one for the courts to define, having regard to the role of the individual and the particular circumstances of the case. It is possible that a senior manager who is designated as an MIC would (at least from the SFC’s perspective) by that designation alone become exposed to disciplinary consequences under section 194 of the SFO. Any challenge to that designation would be left to the MIC to pursue through the appropriate channels.
Leading up to publication of the Circular, the SFC has been clear for some time about its intent to focus on individuals. For example, at the Thomson Reuters Pan Asian Regulatory Summit in November, Executive Director of Enforcement Tom Atkinson noted that the SFC recently engaged in an exercise to comb through the SFO and identify all provisions that could be used to target individuals; in Mr Atkinson’s words, individual accountability should be a ‘first thought’ rather than ‘an afterthought’. The SFC’s focus on management accountability is also consistent with similar developments in other jurisdictions, in particular in the U.K. where the FCA and the PRA have recently adopted the Senior Managers and Certification Regime. Against this background, it is important for senior managers to be aware of their regulatory obligations and the Circular is a helpful reminder of those. Whether the MIC regime represents a substantive development in the responsibilities of, and the possible liabilities for, senior managers of licensed corporations remains to be seen.