Hong Kong’s SFC fines Celestial Commodities and Celestial Securities for mishandling client money
Between January 2009 and December 2016, Celestial Commodities transferred $44 million from its client accounts to pay monthly commission rebates to its account executives.
Hong Kong’s Securities and Futures Commission (SFC) today announces that it has reprimanded Celestial Commodities Limited (CCL) and Celestial Securities Limited (CSL) and fined them HK$4.9 million and HK$1.4 million, respectively for regulatory breaches and internal control failures relating to mishandling of client money.
The SFC has found that, from January 2009 and December 2016, CCL transferred approximately $44 million from its client accounts to pay monthly commission rebates to its account executives. The amounts involved in each transfer ranged from $249,000 to over $1 million.
CCL often replenished the shortfalls in the client funds days after the initial withdrawals from the relevant client trust accounts, and on one occasion it only replenished the shortfall 41 days after the withdrawal.
The regulator has also found that CSL effected payments totalling $40 million on July 8, 2015 from its client trust accounts into CCL’s client trust accounts in an intra-day fund swap arrangement so that CCL could meet various margin calls from the Hong Kong Exchanges and Clearing Limited on time.
The evidence further shows that CCL and CSL had failed to implement proper controls to safeguard client money and supervise its staff in handling it in that their accounting and treasury staff were effectively given a free reign in handling client money with little supervision, instructions or guidance.
The SFC stresses that safe custody of client assets is a fundamental obligation of licensed corporations and that, hence, any transgression of this obligation cannot be tolerated, even if the client assets are made whole again.
Given this, the SFC considers that CCL and CSL have breached this fundamental obligation by virtue of their failures to comply with the Securities and Futures (Client Money) Rules (Client Money Rules) and the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).
In deciding the disciplinary sanctions, the SFC took into account a range of factors, including:
- CCL’s breach of the Client Money Rules in using client money to pay monthly commission rebates to its account executives lasted at least seven years based on the SFC’s investigation findings (with some evidence suggesting that such practice had prevailed at CCL for over 20 years);
- CCL’s breach of the Client Money Rules was only discovered when the SFC conducted an inspection on its practices and controls;
- CCL’s substantial delays in making up the relevant shortfalls in the client funds;
- CCL and CSL’s misconduct exposed client money to unnecessary risks;
- CCL and CSL cooperated with the SFC in accepting the SFC’s findings and disciplinary actions;
- there is no evidence of client loss resulting from CCL and CSL’s respective non-compliance; and
- CCL and CSL have agreed to commission an independent reviewer to review their internal controls and senior management supervision over the handling of client assets.