Sun, Oct 7, 2018

No Simple Solution

The MIC regime in Hong Kong is going to require firms to look more closely at their governance structures.

In part, it was the constitution of governance structures globally that led to new powers to hold individuals in financial firms to account. The SMCR in the UK and MIC regime in Hong Kong have both sought to remove ambiguity around roles – and responsibilities – within organizations: to bring clarity where complexity prevented accountability.

Since the introduction of the new regime, during the brief months leading up to the deadline in July 2017, Hong Kong’s financial regulator, the SFC has processed a vast number of people as MICs: over 10,000 individuals – 40%of them never licensed before.1
That has a number of consequences. The first, and perhaps the most obvious, is that we should see increasing actions taken against individuals. While the MIC regime was an initiative of the SFC’s licensing division, rather than its enforcement or supervisory divisions, the latter divisions have been clear to staff when conducting inspections and investigations that they are to establish the responsible individuals at the outset when they discover any potential weaknesses in licensed firms.

Now that a reasonable period has elapsed since the implementation of the regime, cases against such individuals are likely to start coming through over the next year as these inspections bear fruit.

The new regime is also likely to lead to more formal governance structures, in particular within local and smaller firms in Hong Kong that may previously have been behind the curve. Indeed, the acknowledgement of firms’ efforts in strengthening their governance structures was the focus of comments by the SFC’s Chief Executive Officer when announcing full implementation of the new regime.2
For many firms, though, there is a lot more work to be done.

A new approach

Most European firms of any size usually have an array of committees ranging from Audit, Risk to Valuation, as well as an executive committee that typically meets monthly and a board meeting typically quarterly. Some of the SFC’s discussion around the MIC regime would give the impression that this is much the same in Hong Kong. While there are some exceptions, for many firms it is not.

Most companies in Hong Kong will have a board that only meets annually to sign off the accounts – this is in line with the Companies Ordinance under which a company can be formed with just one director. There is little formality otherwise. “Board” in Hong Kong is a slightly loose term that, most fund managers, for example, will assume is referring to the fund board, not the management board.

It looks doubtful that this can last in the new environment. The MIC regime is not simply about having someone to blame – and penalize – when things go wrong; it is designed to ensure that the right people, processes and management information are in place to protect investors and meet regulatory obligations. Changes will come piecemeal. In January, for example, a thematic review of best execution has led many to consider whether they need to introduce regular reviews and sampling of the quality of execution: This is no longer simply a trading issue; it is a compliance issue, too. 

2 ibid

Financial Services Compliance and Regulation

End-to-end governance, advisory and monitorship solutions to detect, mitigate, drive efficiencies and remediate operational, legal, compliance and regulatory risk.

Regulatory Advisory and Assurance Services

Within our Regulatory Advisory and Assurance Services, we assist financial services firms in a range of engagements across our suite of subject matter expertise.