HKMA issues guidance on Management Accountability at Registered Institutions

Transcription

1 November 2017 HKMA issues guidance on Management Accountability at Registered Institutions On 16 October 2017, the Hong Kong Monetary Authority ( HKMA ) issued a Circular, a set of Frequently Asked Questions ( FAQs ) and an Appendix (together the Guidance ) setting out its expectations in relation to management accountability at Registered Institutions ( RIs ) for conducting or supervising the conduct of businesses that constitute regulated activities ( RAs ). The measures proposed by the HKMA are similar to those put in place by the Securities and Futures Commission ( SFC ) through its Managers in Charge regime, which came into effect in April 2017 and has now been fully implemented, also with effect from 16 October Contents The deliverables... 1 The Guidance... 2 Timing of implementation. 5 Implications... 5 How we can help... 6 The HKMA see the Guidance as clarifying their expectations and enhancing the arrangements for gathering information on RAs and individual businesses for which management of RIs are responsible; the Guidance is not intended to duplicate the existing governance requirements applicable to Authorized Institutions ( AI ) or add additional regulatory obligations or legal liabilities on the management of RIs under the Banking Ordinance ( BO ), but it does underline the importance of personal accountability of management within RIs. Consistently with the SFC s focus on legal entity governance, the HKMA has also taken this opportunity to emphasise that ultimate responsibility for the operations and the financial soundness of the AI, including businesses that constitute RA, sits with the board of directors. The deliverables RIs are required to provide to the HKMA and the SFC the following: > relevant information for individual Chief Executives ( CEs ), Alternate Chief Executives ( ACEs ), or directors ( Directors ), each approved under section 71 of the BO, or managers appointed under section 72B of the BO ( Managers ) principally responsible for its RA; and > an organisation charting depicting the RI s management and governance structure relevant to its RA. 1 See here for our briefing on the SFC Managers in Charge regime FRG Newsletter: November 2017 HKMA Guidance on Management Accountability 1

2 RIs are expected to submit the required information (the Required Information ) starting from 16 March 2018 and no later than 16 April As such, RIs should start work on this as soon as possible. The Guidance Who should be identified? > To better identify lines of responsibility and accountability, RIs must identify: (i) at least one fit and proper individual ( Identified Individual ) to be responsible for the overall management of the whole business of the RI as well as; (ii) an Identified Individual to manage each of the businesses or functions listed in paragraphs 2 to 8 of the Fourteenth Schedule to the BO, to the extent that these individuals are involved in the management of the business constituting any RA for which the RI is registered. These are: a) retail banking, private banking, corporate banking, international banking, institutional banking, treasury or any other business which is material to the RI (key business lines); b) maintenance of accounts or accounting systems of the RI (accounting); c) maintenance of systems of control, including risk management systems, of the RI (operational control and risk management); d) maintenance of systems of control to protect the RI against involvement in money laundering (AML); e) the development, operation and maintenance of computer systems for an RI (IT); f) conduct of internal audits or inspections of the RI s affairs or business (internal audit); and g) the function of ensuring the RI complies with applicable laws, regulations or guidelines (compliance). > If a RA conducted by a RI does not fall under the business areas managed by a Manager appointed for the key business lines set out in paragraph a) above, the business of such RA should be regarded as material and an Identified Individual appointed. > However, if any of the business areas identified do not constitute RA, an Identified Individual does not need to be appointed. For example, a Manager for institutional banking need not be identified as principally responsible under the Guidance if institutional banking does not constitute any RA. > The HKMA has also emphasised that the functions listed in paragraphs 3 to 8 of the Fourteenth Schedule to the BO (as set out at paragraphs FRG Newsletter November

3 b) to g) above) are of no less importance than the front office roles with respect to RA business. What level of authority? > Generally, the CE of a RI is expected to be principally responsible for the overall management of the whole business of the RI. > In respect of the remaining business or functions, the Identified Individuals are expected to be CEs, ACEs, Directors or Managers. For example, if an ACE is principally responsible for private banking, he/she should be so identified even though he/she may not be required to be appointed as a Manager under CG-2 of the Supervisory Policy Manual. > NEDs and INEDs are not expected to be responsible for day-to-day management of RAs or other businesses and so are not regarded as management for these purposes. What is the fitness and properness requirement? > The fitness and properness requirements in respect of CEs, ACEs and Directors are set out in the SPM module CG-1 Corporate governance of locally-incorporated authorized institutions. > Similarly, an RI is required to put in place adequate systems of control to ensure that each Manager is a fit and proper person and the relevant requirements are set out in the SPM module CG-2 Systems of control for the appointment of managers. > As such, the fitness and properness requirements are already established, and will need to be applied to new appointees. Do the Identified Individuals needs to be Executive Officers? > The Identified Individuals are not required to be approved as Executive Officers ( EOs ). However, CEs, ACEs and Directors who are directly responsible for supervising the conduct of RAs should be appointed as EOs in respect of the RAs they oversee and the HKMA may require them to become EOs if appropriate. > At least one of the EOs for a given RA should be a CE, ACE, Director or Manager. All EOs should not be more than one rank below CE, ACE, Director or Manger (if they do not themselves fall in to this category) so that they have sufficient authority to conduct or oversee the relevant RA. How many Identified Individuals? > More than one individual may be identified if they are jointly responsible for a business/function. However, where individuals are jointly responsible and one principally covers RA business while the other covers non-ra business, the former should be identified for the purpose of the Guidance (but not the latter). For example, if an FRG Newsletter November

4 individual covers compliance for both RA and non-ra, he/she should be identified. > An individual may be identified as principally responsible for more than one business/function. There is no requirement that the Identified Individuals be employees of the RI so long as they have sufficient authority. Accordingly, the HKMA has stated that the Identified Individual may be employed by the parent or group company. However, for outsourced functions, the HKMA expects the management of the RI to retain ultimate accountability and a member of the RI s management should be the Identified Individual. Liabilities of Identified Individuals The HKMA has expressly noted in the Guidance that a person involved in the management of the business constituting any RA in a RI is a regulated person as defined in section 196(8)(c) under the Securities and Futures Ordinance ( SFO ), regardless of whether he or she is registered, and is subject to the disciplinary powers under the SFO. How should the Required Information be submitted? > RIs are responsible for submitting the Required Information on Identified Individuals to the HKMA and the SFC using the forms in the Appendix. The particulars to be provided include: a) full name; b) identification information; c) job title and capacity (such as CE, ACE, Director or Manager); d) place of residence; and e) the business/function of which they are in responsible. > RIs are also responsible for submitting an organisation chart depicting the RI s management and governance structure relevant to its RA and showing the Identified Individuals, the RAs and individual businesses or functions for which they are responsible, as well as their respective reporting lines and the job titles of the persons reporting directly to them. Keeping the Required Information up-to-date Updates to the Required Information should be submitted to the HKMA and SFC using the forms at the Appendix within 14 days of the change taking effect. An updated organisation chart should also be submitted (unless the change only relates to the particulars of the Identified Individual). An appointment that is expect to last no more than a few months and is not expected to be permanent does not need not be notified. FRG Newsletter November

5 Timing of implementation RIs are expected to report the Required Information (including organisation charts), starting from 16 March All information should be submitted no later than 16 April Implications While many RIs will have undertaken significant work to prepare for the implementation of the SFC s Managers in Charge regime, RIs should not underestimate what additional work might now need to be carried out to ensure compliance with the Guidance and to be in a position to submit the Required Information by April In particular, the key business lines identified for the purposes of the SFC s Managers in Charge regime may not necessarily be equivalent to the key business lines for the RIs. Similarly, it will not automatically be the case that the existing Managers will be the most appropriate individuals to be identified to comply with the Guidance. Consideration will also have to be given to the extent to which any newly appointed CEs, ACEs, Directors or Managers meet the relevant fitness and properness requirements. In addition, although the Guidance does not refer to the approval of a formal document setting out the management structure of the corporation in the way that is required under the SFC s Managers in Charge regime, it is likely that the corporate governance document which is already required under paragraph of SPM module CG-1 will need to be refreshed to ensure that it reflects the existing governance arrangements and any updates put in place to comply with the Guidance. Note that SPM module CG-1 has been updated in light of the Bank Culture Reform Circular dated 2 March 2017 and boards are now required to establish a standalone culture committee, which should be chaired by an INED, to regularly review the effectiveness of the AI s measures to promote a sound corporate culture and to support the board on culture-related matters. Such committees should be consulted as part of the implementation of the Guidance. We expect that time and resource will have to be expended behind the scenes to ensure that the most appropriate Identified Individuals are appointed, the information given to the HKMA and the SFC under the Guidelines is accurate and the Identified Individuals are comfortable with their name being notified to the regulators as being principally responsible for relevant businesses and functions. FRG Newsletter November

6 How we can help There is limited time until full implementation of the Guidance. As a marketleading team with regulatory, enforcement and employment expertise, we have the necessary breadth of expertise across multi-disciplinary teams in advising on governance and risk management issues. We have worked on a significant number of projects on the implementation the SFC s Managers in Charge regime as well as over 15 projects on the implementation of the Senior Managers and Certification Regime in the UK. We have strong working relationships with the HKMA and the SFC and we would be pleased to assist you with implementation of the Guidance. FRG Newsletter November

7 Contacts For further information please contact: Annabella Fu van Bijnen Partner (+852) Sumit Indwar Partner (+852) Gavin Lewis Partner (+852) Sarah Martin Managing Associate (+852) Author: Sumit Indwar This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters. All Rights reserved 2017 Linklaters Hong Kong is a law firm affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on Please refer to for important information on Linklaters LLP s regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Linklaters 10th Floor, Alexandra House Chater Road Hong Kong Telephone (+852) Facsimile (+852) / Linklaters.com FRG Newsletter November 2017 HKMA Guidance on Management Accountability 7 A /0.5/14 Nov 2017