Proceed with caution: limited enforcement reform in Hong Kong (so far)

Published Date
Aug 31, 2023
On 8 August 2023, almost a year after the public consultation ended, the Securities and Futures Commission (SFC) published its long-awaited consultation conclusions on Proposed Amendments to Enforcement-related Provisions of the Securities and Futures Ordinance (SFO).  The conclusions reflect a pragmatic and measured approach that will be welcomed by industry participants.

Insider dealing – get prepared for expansion in scope

First, the SFC proposed that the scope of the insider dealing provisions be broadened to cover: (i) insider dealing perpetrated in Hong Kong with respect to overseas-listed securities or their derivatives; and (ii) insider dealing perpetrated outside of Hong Kong, if it involves any Hong Kong-listed securities or their derivatives.

The SFC will go ahead with the insider dealing provisions as proposed.  The relevant misconduct will need to be unlawful in the relevant overseas jurisdiction.  The SFC has also confirmed that its proposal only seeks to change the territorial scope but not the applicability of the insider dealing regime.

The SFC has not indicated any timetable but has assured the industry that there will be an opportunity to review the draft amendments during the legislative process.  We expect a draft bill amending the SFO to be published and tabled to the Legislative Council in short order, possibly by the end of this year.  Industry participants should closely monitor relevant developments.  In the meantime, any practical and implementation issues that need to be addressed or raised during the legislative process should be considered.  In particular, given its extra-territorial application, the amended insider dealing regime may have implications for overseas group companies and affiliates who trade Hong Kong-listed securities or derivatives.

Importantly, the SFC has made it clear that there will be no transition period once the amendments come into effect.  This is because in the SFC’s view firms will have sufficient time to prepare once the legislative amendments have been published.  Consequently, firms should keep themselves abreast of the legislative process so that they can be appropriately prepared for when the new provisions become effective.  For example, firms will need to consider (and appropriately instigate) employee training and provide updates to compliance policies and manuals sooner rather than later.  Going forward, firms should also bear in mind that any notification requirements required by the Code of Conduct for Persons Licensed by or Registered with the SFC will equally apply to any suspected breaches of the amended provisions.

Advertisements – make it clear who they are for

Secondly, the SFC proposed that the private placement exemption, set out in section 103(3)(k) of the SFO to the prohibition on the issuance of advertisements, invitations or other documents relating to investments unless authorised by the SFC, be amended, so that it can only be relied on when advertisements of investment products intended only for disposal to professional investors (PIs) are issued only to PIs, but not where issued to the general public.

After considering views and concerns raised during the public consultation, the SFC will not proceed with the proposal. In particular, the SFC noted two practical difficulties: (i) in reality, PIs are generally unwilling to provide their know-your-client information at the preliminary marketing stage; and (ii) the challenge in developing multi-media, multi-jurisdictional online distribution of investment products while controlling how (and which) investors access these distribution platforms.  The SFC will continue to monitor the need to introduce new policies over the longer term and consult the industry again if necessary.

The SFC has however taken the opportunity to remind the industry that an issuer of an advertisement should, at a minimum, ensure it is apparent from the face of the advertisement that the underlying investment product is intended only for PIs, even though the advertisement may be issued to the general public.  The SFC has said it will issue guidance if it deems necessary as a result of market activity to ensure that investor protection is properly maintained.

Remedial Court orders – business as usual

Finally, the SFC proposed that section 213 of the SFO be amended to enable the SFC to apply to the Court of First Instance for injunctions and other remedial orders including compensation and rescission orders after having exercised any of its disciplinary powers against a regulated person.

The SFC has decided it will put this proposal on hold given various concerns raised during public consultation  as well as the far-reaching impact on the industry and the Hong Kong financial markets.  However, the SFC will further assess the adequacy of the current avenues for seeking financial redress and consider a full range of options to meet its policy objectives.

Limited reform but not the last word

This measured approach taken by the SFC in response to market feedback and further consideration by the regulator will be welcomed by industry participants.  Its conclusions seek to strike a delicate balance between enhancing investor protection, which is essential for ensuring Hong Kong’s continued success as an international finance centre, and recognising practical implementation issues that may create uncertainties and unnecessary hindrance to market operations.  The SFC is also demonstrating its willingness to take feedback from relevant stakeholders into account and adopt a flexible approach to achieve its policy objectives.

However, this is unlikely to be the last word on the SFC’s perceived need to strengthen the enforcement framework in Hong Kong.  In the SFC’s view, the existing legal framework is not sufficient to ensure aggrieved investors (especially retail investors) are compensated for financial losses in all appropriate cases, given that retail investors often do not have resources to directly litigate and there is currently no class action mechanism in Hong Kong.  The proposal to amend section 213 would have helped fill that perceived gap.  For now, the policy objective remains, and as indicated, the SFC will look for other ways to address it.

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