The Securities and Futures Commission’s “Statement of Disciplinary Action” (the “SFC’s Statement”), attached to its press release dated 10 July 2019 (and publicly available), makes for some compelling reading. It confirms that two licensed corporations have been handed (among other things) heavy fines for serious breaches of the Securities and Futures (Client Money) Rules*.
The SFC’s Statement identifies two principal breaches of the Client Money Rules:
- first, a licensed commodities dealer is stated to have paid monthly commission rebates to its account executives, on numerous occasions over the course of several years, using money from its client trust accounts held at two banks. Apparently, this “arrangement” was conducted for “operational convenience”. On each occasion and in a matter of days later, the commodities dealer arranged for equal sums of money to be transferred to its client account at another bank using the corporation’s “house” account;
- second, a related licensed securities dealer is stated to have made three payments totalling HK$ millions from its client trust accounts to the commodities dealer’s client trust accounts, in what is described as a “fund swaps arrangement” – the purpose of which was apparently to ensure that the commodities dealer’s accounts had sufficient funds to meet various “margin calls” (on a timely basis and as a matter of “operational convenience”).
According to the SFC’s Statement, the misuses of client money constituted breaches of ss. 5(1) or 5(3) of the Client Money Rules; they are also stated to have exposed the licensed entities’ client money to “unnecessary risks”, albeit there was no evidence of a client loss resulting from the breaches.
As one would expect, the Client Money Rules make it clear that client money should be (among other things):
- held in segregated accounts;
- paid out to a client (on whose behalf it is held) or in accordance with a client’s written instructions;
- used to pay money that the client lawfully owes to the licensed entity.
A common theme in these sorts of incidents is a lack of proper controls and supervision. This is not unique to the financial services industry. Anyone or any entity that holds client money must ensure that it is held in accordance with their professional and fiduciary obligations. For example, solicitors and foreign lawyers in Hong Kong are obliged to hold “client money” (as defined) for a legitimate client purpose in accordance with the Solicitors’ Accounts Rules (Cap. 159F). A client account must not be used as a banking facility.
It is important to note that there is no suggestion of any client loss in this particular case. However, any investor or client who deposits money with a financial intermediary (or, indeed, with any other person) would do well to ask beforehand – how safe is their money with that intermediary (or other person) and how can they identify it and get it back on demand?
The SFC’s Statement should give pause for thought generally.
*Editorial Note: Also see SFC’s Client Money Rules FAQs.