On 16 December 2016, the SFC issued a "Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management" ("Circular") to introduce the "Managers-In-Charge of Core Functions" ("MICs") regime, accompanied by 41 frequently asked questions ("FAQs").
The new MIC regime seeks to regulate the senior management of a licensed corporation, including directors of the corporation (including shadow directors), responsible officers ("ROs") and individuals appointed as an MIC of one of the eight new "Core Functions".
Licensed corporations must appoint a MIC to be responsible for managing the "Core Functions" of the corporation, namely:
(i) the overall management oversight;
(ii) key business line;
(iii) operational control and review;
(iv) risk management;
(v) finance and accounting;
(vi) information technology;
(vii) compliance; and
(viii) anti-money laundering and counter-terrorist financing.
Although there is no requirement that MICs must be employees of the licensed corporation, they must hold positions of authority within the licensed corporation. They cannot be external parties merely providing outsourced services.
Licensed corporations will have a continuing obligation to notify the SFC of up-to-date information with respect to the MICs within seven business days of change, and to ensure that the information submitted is complete and accurate.
Background to the MIC regime
Against the backdrop of the global financial crisis, there has been a general trend to increase scrutiny of senior management personnel in the financial sector with a view to improving the compliance culture within financial institutions. The SFC is the first regulator in Asia to adopt a regime which raises the standards of accountability and conduct of executives in the financial industry following the introduction of similar rules by the UK Financial Conduct Authority.
Timeline of implementation of the MIC regime
On 18 April 2017, the SFC will commence the collection of up-to-date management structure information (including MIC information and organisation charts) from licensed corporations. Licensed corporations are expected to submit the information on or before 17 July 2017. MICs, who are not already ROs, must apply for approval to become ROs on or before 16 October 2017.
Given the number of licensed corporations in Hong Kong being part of a group headquartered overseas, there will be a substantial number of MICs based outside Hong Kong who are required to be registered as ROs by 16 October 2017. While some of these overseas MICs may not be comfortable with being regulated under the Hong Kong regime, it is expected that some firms may switch responsibilities to Hong Kong-based MICs or fill the roles locally.
It could be challenging for the industry to implement the new regime in a short timeframe. It remains to be seen whether the guidance in the Circular and the FAQs are comprehensive enough to cover the numerous situations in the affected firms captured by the regime. Licensed corporations should consider allocating sufficient time to identify the appropriate MICs for each of its eight Core Functions and set them out in an organisational chart in accordance with the Circular. It is advisable for corporations to start planning as soon as possible in light of the regulatory changes.
In assessing misconduct under the SFO, the SFC will have regard to the compliance status of various codes and guidelines. Senior management (especially overseas MICs) should familiarise themselves with their obligations under the new regime, so that they have in place a robust framework and an adequate record-keeping system to help demonstrate their compliance with the various codes and guidelines.
This article is part of the Asia-Pacific Dispute Resolution update for April 2017. View the next article here.