SFC imposes HK$5m fine on China Merchants Securities for mishandling of client money
There were around 800 incidents from October 2011 to September 2014, where China Merchants transferred funds from client trust accounts for purposes other than those allowed by the Client Money Rules.
Hong Kong’s Securities and Futures Commission (SFC) has reprimanded China Merchants Securities (HK) Co., Limited (China Merchants) and fined it HK$5 million due to regulatory breaches and internal control failings related to mishandling of client money.
The Hong Kong regulator estimates that there were around 800 incidents between October 1, 2011 and September 30, 2014, where China Merchants transferred funds ranging from $68,000 to $308 million from client trust accounts for purposes other than those specifically allowed by the Securities and Futures (Client Money) Rules. Further, China Merchants did not employ fit and proper staff to conduct its business and did not have proper internal controls and procedures in place to ensure compliance with the Client Money Rules and safeguard client assets.
The regulator notes that, since safe custody of client assets is a fundamental obligation of licensed corporations, any transgression of this obligation, even if clients’ funds were subsequently returned to the client trust account on the same day, cannot be tolerated. By doing so over a three-year period, China Merchants breached this obligation and failed to comply with the Client Money Rules and the Code of Conduct.
In determining the penalty, the SFC took into account a range factors, including that China Merchants self-reported the matter to the SFC and conducted a review to examine its operational processes and controls governing the segregation of client money during the relevant period. The company co-operated with the SFC in resolving its concerns and accepted the SFC’s findings and disciplinary action. Finally, there is no evidence of client loss as a result of China Merchants’ non-compliance.
Earlier this week, the SFC announced the imposition of $27 million fine on China Merchants over sponsor failures. CMS has been reprimanded and fined over its failure to discharge its obligations as a joint sponsor in relation to China Metal. The SFC has found that CMS and UBS had respectively failed in their due diligence as joint sponsors to address a number of unusual facts and findings on China Metal and its customers during the listing process.