How long does it take? Hong Kong regulator gets slammed over clumsy procedures

Maria Nikolova

Poor fintech training of staff, enforcement actions that take forever and rude replies to complaints are among the issues highlighted in the latest Annual Report of the Process Review Panel for the Securities and Futures Commission.

Hong Kong’s Securities and Futures Commission (SFC) has come under fire in the latest Annual Report of the Process Review Panel into the regulator’s activities in 2016/17. Clumsy procedures for reviewing license applications and complaints, lack of appropriate fintech training of staff and poor communication with complainants are among the issues highlighted in the report.

In 2016/17, the Process Review Panel (PRP) reviewed 62 cases handled by the SFC. As per the established practice in the past years, PRP has chosen to review cases that the SFC had taken a relatively longer time to complete. By “long”, the PRP means “up to seven years”.

  • Enforcement

PRP has reviewed enforcement cases that took a relatively longer processing time. In reviewing these cases, PRP noticed that different teams seemed to have undertaken an unduly long process in examining, preparing and reviewing the evidence collected.

For instance, in one case being reviewed, the SFC investigators took one year to collect and examine the evidence, another year to review and prepare an evidence matrix for referral to the SFC disciplinary officers; and in turn the SFC disciplinary officers took another year to review the evidence matrix and prepare a Notice of Proposed Disciplinary Action to the intermediary under investigation. The disciplinary case took a total of three and a half years to complete.

PRP recommended that such procedures be streamlined so as to expedite the investigation and improve the overall efficiency.

  • Market Surveillance

PRP studied a case about manipulation of the futures market. Upon discussion with the SFC officers, PRP learnt that the SFC’s surveillance system had not been able to detect such suspicious trading at the material time and, therefore, it was not possible to start its formal investigation earlier.

In another case being reviewed, the SFC received a public complaint and commenced its investigation. It was revealed that a person had been conducting voluminous matched trades to create an active trading environment with a view to inducing more trading from market participants. The person traded through two to three securities firms only and the trading volume of the stock was inflated more than 400% within a month. PRP commented that the extreme change in trading volume should have been an obvious signal of possible market manipulation. Upon discussion with the SFC officers, PRP learnt that the SFC’s surveillance system had not been able to detect these matched trades at the material time.

PRP suggested that the SFC should look into how it could enhance its surveillance system.

  • Fintech Training

PRP reviewed two different cases, and arrived at the same conclusion for both. The conclusion was that the SFC should provide adequate training to its case officers on the development of innovative products and financial technology in the market.

One of the cases reviewed related to the investigation into an intermediary’s compliance of rules in running its dark pool business in the past two years. The investigation started in 2012 and took four years and five months to complete. The long processing time was attributed not only to the complexity of the case, but also to the need for the SFC’s staff to understand the operation of the dark pool business so as to carry out the investigation and decide on the disciplinary action.

  • Licensing Applications

PRP reviewed nine licensing applications for different types of regulated activities in the year. The processing time of the cases ranged from seven months to seven years and one month. For all these cases being reviewed, PRP raised concerns about how the case officers, their supervisors and the senior management had monitored the case progress.

PRP recommended that the SFC enhances its monitoring of the processing of licensing applications. Specifically, the senior management should be informed of the status of the outstanding applications so that they could provide timely guidance to the case officers if necessary, and ensure that appropriate resources were allocated for effective processing of the applications.

  • Complaint Handling

The overall processing time of one complaint case could take several years. In one case being reviewed in the year, the handling of the complaint was also complicated by civil litigation commenced during the investigation period, and the processing of the complaint case had lasted seven years.

PRP noted a common problem in these cases was a lack of effective communication between the SFC and complainants during the process. As a result, the complainants felt being ignored, unfairly treated, and very aggrieved by the SFC’s response.

In one case, PRP noted that the complainant was not satisfied with the SFC’s reply. The complainant said that he had made a complaint to the SFC against an intermediary in January 2012 and received a reply from the SFC in June 2012, stating that

“…we have taken appropriate action on the matter. We are restrained by secrecy provision… accordingly we are not in a position to disclose further information”.

PRP made further comment that the SFC should provide as much information to the complainant as possible.

  • Closure

PRP said that for several cases being reviewed, the operational divisions had overlooked the procedures to close the complaint cases. One case was closed in the SFC complaint system one and and a half years after the investigation had been completed. Sometimes this period may last six years.

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