Legislative Council Panel of Financial Affairs
for the meeting to be held on 3 March 1997
This note is to inform Members of the Panel of the manner in which intermediaries in the securities, futures and leveraged forex markets are supervised by the SFC.
In most securities and futures markets throughout the world, intermediaries and advisers are required to be authorised by a regulatory authority. This requirement arises from the need for market participants generally, and investors in particular to have confidence that the people and organisations with whom they deal with are efficient, honest and financially sound and will treat them fairly.
In Hong Kong, this objective is achieved through the licensing requirements in the Securities, Commodities Trading and Leveraged Foreign Exchange Trading Ordinances. The licensing regime set up by the SFC pursuant to these Ordinances, having regard to section 23 of the SFC Ordinance seeks to ensure that only fit and proper persons can obtain registrations to carry on securities, futures and leveraged forex businesses in Hong Kong.
Fit and proper criteria
The law lists a number of matters that the SFC must take into account in considering whether a person is fit and proper, namely, his financial status; educational or other qualifications or experience having regard to the nature of the functions to be performed; ability to perform such functions efficiently, honestly and fairly; and reputation, character, financial integrity and reliability. As these requirements are not capable of being measured objectively, each case has to be considered on its own merit.
In order to assist the public to understand how the SFC applies the fit and proper test, SFC published, in 1990, guidelines pursuant to section 4(2) of the SFC Ordinance detailing the essential elements it will consider in determining the fitness of a person.
In addition, SFC published, in 1994 (amended in 1996) a Code of Conduct for registered persons containing the basic standards of behavior which the SFC expects a registered person to act.
Furthermore, whenever the SFC makes a decision in relation to a disciplinary case, it publishes in detail the reasons for the particular action against the registered person concerned. This will enable the market in general, and registered persons in particular, to be cognizant of the fit and proper standards that the SFC expects from registered persons.
Continuous requirement and sanctions
The fit and proper requirement is, of course, not purely an entry requirement. Registrants must continue to be fit and proper to remain registered.
Continuing fitness is monitored by the SFC in a number of ways by, for instance,
conducting regular audit inspections of the registrants businesses
reviewing registrantsannual returns and annual accounts
reviewing registrants quarterly financial returns
reviewing notifications of changes submitted by registrants.
During the current financial year, i.e. from 1 April 1996 to 31 January 1997, the SFC conducted 314 audit inspections of registrants.
In cases where registrants are found to have breached the fit and proper requirements, the SFC may conduct an inquiry concerning such breaches. If the inquiry finds that the fitness of a registrant is wanting, the SFC may take disciplinary action, including reprimanding the registrant or suspending or revoking his registration.
During the period, from 1 April 1996 to 31 January 1997, the SFC initiated 120 inquiries and took 114 disciplinary actions against registrants.
Checks and balances
It should be noted that whilst the fit and proper requirements are essentially subjective in nature, there are adequate checks and balances build into the regulatory system to ensure that the SFC act properly in applying these standards. For instance, following the conclusion of an inquiry into the behavior of a registrant, the law provides that before SFC can make a decision, it must detail its findings and the reasons for taking action and afford the registrant an opportunity to make representations. In addition, decisions made by the SFC are subject to appeal to the Securities and Futures Appeals Panel (the Appeals Panel), an independent body appointed by the Governor under section 18 of the SFC Ordinance to deal with appeals against the decisions made by the SFC. Furthermore, a registrant can seek leave for the Court to review SFCs decision on a point of law even after he has appealed to the Appeals Panel.
Since the formation of the Appeals Panel in 1989, it has handled 11 appeals. In all instances, the Appeals Panel has affirmed the SFCs decision, although in 5 cases, it has reduced the level of penalties imposed.
Apart from the appeals process, the normal common law administrative remedy of seeking judicial review of the manner in which the SFC carries out its functions is also available. Finally, the SFC is a public body subject to review by the Office of the Ombudsman.
Last Updated on 18 August 1998