Banking Supervision
HKMA Investigations of SFC Regulated Activities

The Hong Kong Monetary Authority (“HKMA”) regulates banks, known as authorized institutions, including in respect of their regulated activities under the Securities and Futures Ordinance (“SFO”). Under the regulatory regime, banks are registered with the Securities and Futures Commission (“SFC”) and are thus called registered institutions. However, day-to-day regulatory oversight for the banks, their executive officers and their staff, known as relevant individuals, generally lies with the HKMA. Thus, for example, the HKMA normally handles complaints in respect of SFC regulated activities and complaints made to the SFC are normally referred by the SFC to the HKMA.

In the enforcement context, where there is a concern as to wrongdoing, though the SFC has statutory jurisdiction and can, where appropriate takes primary responsibility for investigation (see our guide to SFC enforcement action), the HKMA generally conducts investigations of banks in respect of their SFC regulated activities. Where an HKMA investigation suggests a possible finding of wrongdoing, the HKMA then refers the matter to the SFC for follow-up, providing a copy of its investigation report and the conclusions of its investigation.

RECENT HKMA ACTIVITY FOCUSED ON SECURITIES & FUTURES

In 2023, the HKMA investigations of banks in respect of their SFC regulated activities resulted in 18 referrals to the SFC for possible disciplinary action. Nearly 100 cases were referred between 2020 and 2023.

HKMA referrals typically concern banks rather than bank staff. However, bank staff may be the subject of a referral, particularly where the individual staff member has engaged in conduct which impugns the individual’s integrity.

HKMA referrals have resulted in a range of disciplinary measures being taken including public reprimands, monetary fines and, in the case of individual staff, bans on the individual from re-entering the securities and futures industry for a period of time up to and including for life.

HKMA'S STATUTORY POWERS

The HKMA has wide-ranging powers to investigate possible breaches by banks and their staff of laws and regulations governing securities and futures activities. These powers broadly mirror those of the SFC with some important differences described below.

On-Site Inspection

Under the SFO, the HKMA may conduct an on-site inspection at any premises of a bank, to ascertain if the bank is complying with the requirements of the SFO or any of the codes and guidelines issued under the SFO.

Document Production

The HKMA has powers under both the SFO and the Banking Ordinance (“BO”) to examine books and records. Under the former, it can inspect, make copies or record details of any record or document relating to a bank’s business or transactions.

Under the latter, it may examine the books, accounts and transactions of any bank and, in the case of a bank incorporated in Hong Kong, those of its representative offices, branches or subsidiaries overseas. A bank has the duty to cooperate and provide the documents as required by the HKMA.

Information Request & Interviews

Where information cannot be obtained through an on-site inspection or by document production, the HKMA may make enquiries of a bank in respect of any record, document or activity of the bank. If information cannot be obtained directly from the bank, the HKMA may make enquiries of persons unconnected to the bank who may have information relating to the business of the bank or transactions carried out by the bank.

In any such enquiry, the HKMA may require the bank to provide access to any record or document which may relate to the business, transaction or activities of the bank and to answer any question. For this purpose, the HKMA may require a person to attend an interview to answer such questions.

Customer Information

Given a banker’s implied duty of confidentiality to customers, where the HKMA exercises its investigative powers under the SFO, before requiring disclosure of any information or the production of any record or document relating to the affairs of a customer, the HKMA must certify that it is satisfied that the disclosure or production is necessary for the purposes of ascertaining compliance with the SFO and codes and guidelines issued thereunder.

Co-operation & Assistance

In general, in an HKMA investigation of a bank’s SFC regulated activities, the HKMA does not have a statutory power equivalent to that of the SFC to require a person to give all assistance which the person is reasonably able to give in an investigation (except for an investigation related to OTC derivatives trading).

Self-Incrimination

Unlike an investigation conducted by the SFC, there are no provisions in the SFO that override the privilege against self-discrimination in an HKMA investigation relating to SFC regulated activities (except for an investigation related to OTC derivatives trading). Thus, a person who is questioned by the HKMA may refuse to answer a question on the basis that the answer to the question may self-incriminate. In contrast, in an investigation conducted by the SFC, the person has a right to make a claim that the answer to a question may self-incriminate but is nevertheless obliged to answer the question (see our article on handling SFC interviews).

The making of such a claim precludes the answer from being used against the person in criminal proceedings (otherwise than for offences relating to the falsity of the answer) but otherwise, the answer may be used against the person in civil proceedings (such as disciplinary proceedings).

Search and Seizure

Similar to the SFC (see our article on SFC warrants), the HKMA can obtain a search warrant from court if there are reasonable grounds to suspect that there are, or likely to be, any record or document related to the investigation in a specific premise. A search warrant authorizes the HKMA to enter those premises to search for, seize and remove any record or document related to the investigation.

HKMA'S POWERS SPECIFIC TO OTC DERIVATIVES TRADING

The HKMA has extended investigation powers over banks in respect of their compliance with mandatory reporting, trading, clearing and record-keeping obligations in respect of over-the-counter (OTC) derivatives trading.

HKMA ENFORCEMENT PROCEDURES

Upon the receipt of a complaint or referral from the SFC in respect of the securities and futures related activities of a bank, the HKMA may conduct an initial assessment by collecting more background information from the complainant and the bank. If the HKMA considers it appropriate, it will open a case for investigation and will notify the SFC as soon as reasonably practicable and keep the SFC informed of the investigation progress.

In opening an investigation, the HKMA may authorize specific individual employees in writing to conduct the investigation. These authorized persons may exercise the statutory powers described above to obtain specific documents or records and to receive answers to any relevant question. In so doing, the authorized persons must produce a copy of the document authorizing them to conduct the investigation.

At the time of producing a copy of the authorization document, the authorized person will typically describe at a high level the allegation being investigated, setting out brief details such as the nature of the alleged wrongdoing and the time period of any such alleged wrongdoing.

Statutory Secrecy

HKMA investigations of banks in respect of their SFC regulated activities are subject to statutory secrecy, meaning for example, that any person receiving an HKMA investigation notice (e.g. a request for documents or an interview) is generally prohibited from disclosing to any other person the fact of the investigation notice, the contents of the investigation notice and the manner in which they have responded to the investigation notice.

Interviews

Interviews in HKMA investigations are generally conducted by 2 authorized persons. The person being interviewed will normally need to produce identification documentation to confirm his or her identity. This interviewee may be accompanied by a lawyer. It is generally advisable for a lawyer to be present as, at any time during the interview, the interviewee may request a private conference with the lawyer and, conversely, the lawyer may request a private conference with the interviewee. Such a private conference may be desirable whenever the line of questioning evolves in an unexpected fashion or in a manner that may be prejudicial to the interviewee or the bank. In this case, legal advice as to the concerns being raised by the interviewer and the presentation of facts optimal to address these concerns may be valuable.

Preparation

Similar to receiving an investigation notice from the SFC (see our article on handling a SFC investigation notice), a bank receiving an HKMA investigation notice should consider a proactive rather than a reactive approach to addressing the notice. That is to say, the bank should consider not simply responding to the notice in a mechanical fashion but should consider the underlying concerns being raised and the legislative or regulatory basis for these concerns with a view to addressing these concerns in the response. A lawyer well versed with the applicable legal and regulatory framework in securities and futures activities can provide an independent and objective assessment to identify these concerns and to determine how best to present information to pre-empt or mitigate these concerns.

HKMA'S DISCIPLINARY POWERS

At the conclusion of an HKMA investigation of a bank in respect of its SFC regulated activities, the HKMA will typically forward a copy of its investigation report to SFC for their follow-up. This is so even though, in the case of bank staff, the HKMA has its own disciplinary powers under the BO in respect of relevant individuals.

The SFC will then determine the appropriate disciplinary action. In so doing, the SFC will consult the HKMA before exercising its disciplinary powers. Disciplinary sanctions similar to those available to the SFC can be imposed on banks and individuals, such as public or private reprimands, fines, prohibition from certain regulated activities, suspension or revocation of licence or registration.

The parties subject to disciplinary sanctions will be given a reasonable opportunity to be heard. If the decision is upheld, the disciplined parties can still appeal against the decision in the Securities and Futures Appeals Tribunal.