SFC Strengthens Financial Resilience: New Circular Enhances FRR Compliance for Licensed Corporations

On July 3, 2024, the Securities and Futures Commission (SFC) published a circular outlining its expectations for licensed corporations (LCs) concerning financial resources management and compliance with the Securities and Futures (Financial Resources) Rules (FRR). This circular aims to address observed deficiencies in governance and internal controls that have led to issues with liquid capital adequacy.

Key Points from the Circular

1. Governance and Internal Control Standards:The SFC emphasizes the need for robust governance structures and internal controls to ensure adequate monitoring of financial resources. LCs must maintain sufficient liquid capital at all times, as mandated by the FRR.

2. Identified Deficiencies:The SFC has identified several common deficiencies in LCs, including:

   • Inadequate controls over liquid capital monitoring.

   • Failure to make proper accounting provisions and accruals.

   • Incorrect treatment of assets and liabilities for liquid capital calculations.

3. Management Oversight:Responsible officers and managers-in-charge are tasked with overseeing financial resources and compliance with the FRR. Each LC must designate individuals responsible for ensuring adequate financial resources and adherence to FRR requirements.

4. Reporting Requirements:LCs are required to notify the SFC immediately if they are unable to maintain the required liquid capital. Delays in reporting such deficits can lead to regulatory consequences.

5. Internal Control Measures:The circular outlines minimum internal control standards, including:

   • Establishing sound accounting policies.

   • Implementing a maker-checker mechanism for liquid capital calculations.

   • Regular monitoring and projections of liquid capital to maintain adequate buffers.

6. Incident Reporting:If an LC fails to maintain the minimum required liquid capital, it must notify the SFC with full details and submit an incident report within three weeks of identifying the deficit.

7. Expectation of Compliance:The SFC expects all LCs to review their governance practices and internal controls thoroughly. Non-compliance may result in regulatory actions, including potential suspension of licenses.

Conclusion

The SFC's circular serves as a critical reminder of the importance of maintaining robust financial resources and compliance frameworks within licensed corporations. By reinforcing governance standards and internal controls, the SFC aims to enhance the overall stability and integrity of the financial sector in Hong Kong. Licensed corporations should take immediate steps to align their practices with these expectations and ensure ongoing compliance with the FRR requirements.