Compliance Matters asked Hannah Cassidy, a partner at the international law firm Herbert Smith Freehills, to talk about the hottest subjects that concern compliance officers at wealth management financial institutions in Hong Kong. Her observations are recorded here in the form of a question-and-answer session.

Q: All banks and asset managers licensed by the Securities and Futures Commission (SFC) now have to comply with Hong Kong's new individual accountability regime. Is it based on the British model?

A: Hong Kong's new regime is based on the same sort of principles as the regime in the UK (the Senior Managers and Certification Regime), but it is not as prescriptive. This, in a way, makes it harder to implement because there is less regulatory guidance to show firms how to obey the rules. The new regime was also implemented very quickly and did not involve any legislative changes, whereas in the UK the new regime went through lengthy consultative processes. Even now, asset managers in the UK do not yet have to obey the Senior Managers’ Regime – it is expected to bite from 2018 onwards.

Q: How does the Hong Kong regime work?

A: Firms are required to appoint at least one "manager in charge", or MIC, for eight core functions. Firms had to tell the SFC about their MICs, as well as provide detailed charts showing their business and operational units, by 17 July. This deadline was just seven months after the regime was announced. Some MICs also now need to be licensed by the SFC as "responsible officers", but they have until 16 October to apply. As many firms operate across borders, some MICs sit in other jurisdictions but have now fallen under the regulatory scrutiny of the SFC. In theory, the fact that they are outside Hong Kong will not save them from SFC action if something goes wrong because of the help it can receive from foreign regulators. In addition, unlicensed individuals, such as those who head up IT or operations departments, are also subject to the regime. This has made individuals really think about how they discharge their day-to-day responsibilities.

Q: What do firms need to do differently?

A: Under the new system, it's really important for firms to have robust reporting lines in place. Firms should also be asking themselves whether their MICs are getting the right management information. Clearly, being given a 1,500 page document the day before a board meeting or a committee meeting won't arm MICs with the information they need to make informed decisions. A one-page memo may also not be sufficient. Different MICs will also have different preferences and firms should be playing their part to help create robust MI and board/committee reporting structures.

Q: Why has the SFC done this?

A: This regime enables the SFC to find out more about how the firms that it supervises work, although no doubt it also plans to use the information it receives to quickly identify the individuals to call first if things go wrong. As well as providing organisation charts, firms have been required to prepare internal "management structure" documents which go into detail about the MICs they have appointed, what their responsibilities are and the reasons for appointing them, especially in cases where two or more MICs have been appointed for the same core function.

However, firms should know that the SFC is looking at firms' organograms now. It is not going to wait for something to happen before looking at the charts.

Q: The new client agreement requirements also came into effect on 9 June. Can you tell us what these mean for wealth managers?

A: In Hong Kong, as in the UK and elsewhere, there was a huge uptick in the number of mis-selling cases post-financial crisis. Where those cases went to court, the outcome was often in favour of the banks because the documentation contained various derogations of liability. In Hong Kong, the regulator now requires private banks to include in client agreements what they call a "suitability clause". This effectively says that if there is a solicitation or recommendation, the financial product must be reasonably suitable. So if a wealth manager is recommending a financial product to someone, he/she must ensure that the product is reasonably suitable by taking into account the customer's financial situation and investment experience/objectives.

Q: Can wealth managers still escape liability by drafting contracts which exclude liability for suitability?

A: No. Private banks must include the new suitability clause verbatim in every client agreement. Also, they cannot put anything in the client agreement (or any other document) that is inconsistent with this clause.

Q: So existing contracts – sometimes very long-standing ones – have to be changed?

A: Yes, although the new phrase cannot be used retrospectively to invalidate old recommendations and old products. We'll definitely see more litigation as a result of the changes. We've been working with clients to get ready for the 9 June deadline and it's been a huge amount of work.

Q: What can you tell us about recent changes to the regulatory landscape in Hong Kong?

A: Tom Atkinson (who replaced Mark Steward, now at the Financial Conduct Authority in the UK) is making his mark as the new head of enforcement at the SFC. Having conducted a strategic review of enforcement priorities, the SFC's new approach is to focus on quality and "high impact" cases, rather than opening an enforcement case for every technical breach of the rules. He has re-organised his enforcement team to focus on permanent issues such as corporate malfeasance, as well as 'of the moment' issues such as AML. Firms should ensure that they continue to comply with their "notification requirements", telling the SFC of any material breaches even where there is only suspicion of such a breach.

Q: What things remain the same for compliance officers?

A: The regulator is still focusing on the job of identifying the mass mis-selling of a product before the problem becomes overwhelming. This ties into the new developments around client agreements and the suitability clause.

Q: Is the regulator concentrating on initial coin offerings and cryptocurrencies, the way the Monetary Authority of Singapore is?

A: Not yet, although no doubt the regulator is carefully considering the MAS's recent clarification that an offer or issue of digital tokens would be regulated if these tokens constitute products regulated by securities law in Singapore. Watch this space!