Hong Kong SFC Process Review Panel Report 2022/2023: Reviewed 60 Cases, Increasing Application of AI & Technology in Enforcement Cases, General Features of Real Estate Projects Might be Classified as Collective Investment Schemes & Be Listed on Suspected Unauthorised CIS Alert List, Strengthening Investor Education on Collective Investment Schemes, Enhancing Industry Education on the Virtual Asset Trading Platform Licensing Regime, Early Disciplinary Action against Non-Contested Breaches by Responsible Officers
20th December 2023 | Hong Kong
The Hong Kong Securities & Futures Commission (SFC) has released the Process Review Panel Report 2022/2023, reviewing 60 cases and highlighting key points including 1) Increasing application of artificial intelligence (AI) & technology in enforcement cases, 2) General features of real estate projects might be classified as Collective Investment Schemes (CIS) and be listed on Suspected Unauthorised CIS Alert List, 3) Strengthening investor education on Collective Investment Schemes, 4) Enhancing industry education on the Virtual Asset Trading Platform (VATP) licensing regime, and 5) Early disciplinary action against non-contested breaches by Responsible Officers (ROs). More info below | View: 2022-23 annual report
“ Reviewed 60 Cases, Increasing Application of AI & Technology in Enforcement Cases, General Features of Real Estate Projects Might be Classified as Collective Investment Schemes & Be Listed on Suspected Unauthorised CIS Alert List, Strengthening Investor Education on Collective Investment Schemes, Enhancing Industry Education on the Virtual Asset Trading Platform Licensing Regime, Early Disciplinary Action against Non-Contested Breaches by Responsible Officers “
Hong Kong SFC Julia Leung: “The SFC would like to thank PRP members for their recommendations to optimise the SFC’s work processes. We will be happy to take these into account to strive for higher levels of operational efficiency.”
Hong Kong SFC Process Review Panel Report 2022/2023
19th December 2023 – The Securities and Futures Commission (SFC) welcomes the 2022-23 annual report published today by the Process Review Panel (PRP) for the SFC. After comprehensively reviewing 60 cases in the year 2022-23, the PRP made observations and recommendations in the annual report to help ensure that the SFC’s actions are consistent and impartial. Established by Hong Kong’s Chief Executive in November 2000, the PRP is an independent panel to review the SFC’s case handling (Note 1), advise the SFC on the adequacy of its internal procedures and operational guidelines, and determine whether the SFC has followed its internal procedures to ensure fairness and consistency.
Executive Summary
In 2022-23, PRP reviewed 60 cases selected from the monthly closed cases lists submitted by SFC. Based on discussions with case officers and deliberation on observations made in the case reviews, PRP made recommendations to SFC mainly on its policies, processes and procedures. PRP’s recommendations and SFC’s responses are summarised below –
Increasing Application of AI and Technology in Enforcement Cases
2. PRP recommended SFC to enhance the adoption of technology to speed up various processes in enforcement cases, such as the preparation of referral and handling of exhibits at the case closure stage which were labour-intensive in nature, and tracking of the operation of suspected fraudulent or deceptive activities which had become increasingly complex. PRP reminded SFC to ensure timely completion of the administrative case closure process and that investigatory work would not be compromised by manpower issues.
3. SFC responded that ENF had already commenced digitalisation of its processes for handling exhibits and overall, applied various technologies to enhance the efficiency in its work, such as adopting case management systems to monitor and track case progress and key milestones. SFC would continue to review its processes and make ongoing efforts to seek to introduce appropriate new technologies in enhancing efficiency.
Early Disciplinary Action against Non-contested Breaches by ROs
4. Noting a relatively long lead time between ISD’s referral of a case to ENF for investigation and the disciplinary actions against the two ROs concerned, and having considered that the suspected misconduct of the ROs and their fitness and properness as a licensed person which had been called in question appeared to be obvious and non-contested, PRP suggested SFC to consider taking early actions such as suspension of licence against non-contested breaches by ROs before the conclusion of the whole case.
5. SFC responded that for this particular case, disciplinary actions had not been taken against the ROs earlier pending the completion of the investigation, as more serious breaches might be revealed during the investigation, which would warrant more severe disciplinary actions. Nonetheless, following the prevailing procedure, ISD would pass its preliminary findings on internal control deficiencies to the concerned licensed corporation and request for remedial actions in parallel to referring a case to ENF.
Strengthening Investor Education on CIS
6. PRP considered the FAQs on the general features of real estate projects that might give rise to a CIS and the “Suspected Unauthorised CIS Alert List” published on the SFC website useful for the industry. In view of complaints concerning CIS received by SFC from time to time, PRP recommended SFC to engage its subsidiary, IFEC to strengthen investor education on CIS, and making them more digestible for the elderly group.
7. SFC responded that it had been working closely with IFEC to promote public awareness of topical issues concerning CIS through, for example, the IFEC website and social media channels, which covered a broad range of investor education materials and provided a hyperlink to SFC’s “Suspected Unauthorised CIS Alert List”. Taking note of the comments from PRP, SFC had collaborated with IFEC to further promote investor education on CIS to the public. SFC and IFEC would continue to work together to alert the public on the latest development on prevalent unauthorised CIS to help the public stay vigilant.
Enhancing Industry Education on the VATP Licensing Regime
8. PRP noted the processing time of a VATP licence application1 was approximately 2.5 years and at the time of the application, the relevant VATP licensing process was novel and the regulatory framework was new. During the process, the applicant took time to, among others, show that it could meet the expected regulatory standards and made substantial changes to the application. For the benefit of the fintech development in Hong Kong while upholding investor protection, PRP recommended SFC to streamline the licensing process and enhance the market’s understanding of the new licensing regime.
9. SFC attributed the longer processing time of the application concerned partly to the complex business models of VATPs. In this regard, SFC had published a set of VATP Guidelines, a Licensing Handbook, FAQs, circulars and set up a dedicated webpage to provide one-stop-shop access to information and guidance materials to assist VATP licence applicants. Under the VATP Guidelines which took effect on 1 June 2023, VATP licence applicants are required to engage external assessors to ensure their applications are up-to-standard. This upholds investor protection while streamlining the licensing process.
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