Accountability: Tighter compliance for banks, financial institutions

By Ben Yip, Hong Kong Corporate Counsel Association

In a global effort to increase transparency of financial institutions, FATCA (Foreign Account Tax Compliance Act), CRS (common reporting standard) and country by country reporting have been enacted, among others. While transparency is important in helping identify the responsible person, most new legislation is tax and reporting-focused. Transparency does not entirely remove risk, and it follows that new legislation would not necessarily have the effect of making responsible individuals understand and appreciate risk. To this end, a number of other pieces of legislation have been put in place, which will have a significant impact on how financial institutions and licensed corporations operate. It is expected that these new legislations will go some way towards addressing the issue of accountability.

Ben YipExecutive Committee MemberHong Kong Corporate Counsel Association
Ben Yip
Executive Committee Member
Hong Kong Corporate Counsel Association

Beneficial ownership registers. From 30 June 2016, every company (with limited exceptions) and limited liability partnership (LLP) in the UK is required to establish a register for people with significant control. A person with significant control is a person that holds more than 25% of shares or voting rights in a company or an LLP, has the right to appoint or remove the majority of directors, or otherwise exercises significant influence or control.

The information required to be recorded on the register includes name, month and year of birth, nationality, and details of interests held. Following the UK regime, the Cayman Islands beneficial ownership regime came into force on 1 July 2017. The Cayman Islands regime creates a platform on which beneficial ownership information of “registrable persons” is required to be kept. In addition, an in-scope Cayman Islands entity – and that means most Cayman Islands entities that are not listed, registered or managed – is required to engage a licensed Cayman Islands corporate services provider to maintain a beneficial ownership register. The threshold requirements under the Cayman Islands regime are largely similar to the requirements under the UK regime.

The effect of the new regimes is the same: the board of in-scope entities will be required to take reasonable steps to identify relevant individuals, give notice and request that relevant individuals confirm their status, maintain applicable registers and ensure that relevant information is kept up to date. This also means that a relevant individual will no longer be able to hide behind the corporate entity or special purpose vehicle in which he or she holds an interest. The new regimes aim to address concerns about the misuse of companies as a way to disguise and hide the proceeds of crime, facilitate money laundering or serve illegal purposes such as tax evasion, corruption or terrorist financing. There will be sanctions for breaches but the practical effect of the new regimes remain to be seen.

In this space, there are likely to be more developments along the way. The UK government is introducing a new trust register, requiring trustees to comply with reporting obligations, and there will be an online trusts register for registration of trustees. Hong Kong is considering a similar regime. In line with anti-money laundering (AML) and counter-terrorist financing (CTF) standards set by the Financial Action Task Force (FATF), it has been proposed that Hong Kong incorporated companies be required to keep a register of people having significant control.
Senior managers and certification regime. The new senior managers and certification regime (SMCR) was introduced in the UK as part of the rules on individual accountability. The SMCR applies to banks, insurers and financial investment firms in the UK to ensure that senior individuals are held accountable for misconduct that falls within the area for which they are responsible.

Essentially, there are three parts to the SMCR: (1) senior manager regime; (2) certification regime; and (3) conduct regime. The first regime focuses on senior individuals holding key roles, requiring firms to ensure each senior manager has in place a statement of responsibilities describing details of areas for which they are responsible. A responsibilities map is also required to map out the firm’s governance and management arrangements. Each senior manager is then required to be pre-approved by the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA). The second regime focuses on the remaining holders of significant influence functions. These are described as individuals who could pose a significant risk or harm to the firm and customers. Each individual is then required to be assessed for fitness and propriety, and certified annually by the firm. The firm is required to put in place procedures for carrying out the assessment, and it is the firm’s responsibility to ensure that these requirements are complied with. The third regime, the conduct regime, encompasses a set of high-level rules, including requirements on staff notice, staff training and culture implementation, and are applicable to almost all staff within the firm.

As a result, the SMCR requires changes to a firm’s policies and procedures for training, compliance and employment. Senior managers and relevant individuals will need to understand the potential impact that may ensue by considering the following issues: selection of relevant individuals; allocation of key responsibilities; governance procedures; segregation of duties; training; terms of employment; personal data; and practical implementation. There may be serious consequences for non-compliance as a senior individual will be held accountable to the regulator and subject to potential enforcement action for breaches in their areas of responsibility.

Manager-in-charge regime. In 2016, the Hong Kong Securities and Futures Commission (SFC) introduced a manager-In-charge (MIC) regime, broadening regulatory oversight of licensed corporations. Similar to the SMCR, the MIC regime requires licensed corporations to identify and report individuals responsible for core functions to the SFC, regardless of whether they are licensed. The SFC has defined eight core functions, namely: (1) overall management oversight; (2) key business line; (3) operational control and review; (4) risk management; (5) finance and accounting; (6) information technology; (7) compliance; and (8) AML and CTF.

Each licensed corporation is required to report information about an MIC and update the SFC of any changes regarding information submitted. Many consider the MIC regime to be less stringent compared with the SMCR, given the lack of requirement to have senior individuals pre-approved.

The key drive for these new pieces of legislation point to one area that governments and regulators wish to strengthen – accountability. In the foreseeable future, it is likely that governments and regulators from other jurisdictions will follow suit, putting in place new rules and requirements to ensure financial institutions enhance corporate culture and hold senior individuals accountable. The scope of regulators’ surveillance will be enhanced, as higher standards will be expected from relevant individuals and corporations.

Ben Yip is a member of Hong Kong Corporate Counsel Association’s (HKCCA) executive committee, and head of legal and compliance at NF Trinity Capital. HKCCA has entered into an alliance agreement with the Association of Corporate Counsel (ACC) and will be rebranded as ACC Hong Kong from 1 September 2017