Hong Kong's Securities and Futures Authority has fined Deutsche Bank and Deutsche Securities HK$5.3 million (US$676,000) and HK$3 million (US$383,000) respectively under ss194 and 196 Securities and Futures Ordinance. Among their offences was a failure to segregate clients' monies.

The fine against Deutsche Securities centred around its failure to segregate client money pursuant to the SFC's Securities and Futures (Client Money) Rules. The other two fines were levied on the bank, which carried on a regulated activity without the regulator's permission and which failed to accurately report its reportable short positions pursuant to the Securities and Futures (Short Position Reporting) Rules.

The breach of the Client Money Rules

On 11 April 2014, Deutsche Securities told the SFC that it had failed to pay cash dividends of HK$11,818,900 (US$1½ million) of a client into a segregated account within one business day after receipt of the dividends. The dividend payment was incorrectly booked to a nominal income account rather than a segregated account of Deutsche Securities. In the autumn Deutsche Securities subsequently notified the SFC that it had identified other instances of failure to segregate client money.

This done, Deutsche Securities instructed its legal advisor to investigate the instances of failure and advise it about remedial action. It also hired an independent reviewer to review amounts received in its non-segregated house accounts between 1 January 2010 and 31 December 2014 relating to activities concerning equities, the idea being to determine whether the firm had handled clients' money properly.
 
Between these dates there were 117 incidents where client monies (for example, dividends payable to clients) were not segregated by Deutsche Securities within the timeline prescribed by the Client Money Rules. The failures were rectified at last.
 
It was found that there were control weaknesses which contributed to Deutsche Securities’s failure to segregate some of the clients’ dividends to segregated accounts. These included the lack of explicit guidelines in the firm’s operating procedures to do with the importance of paying client dividends to segregated accounts, an absence of appreciation among staff of the importance of client money segregation, and the absence of policies and procedures to govern the monitoring of client money segregation.

The regulator says that Deutsche Securities broke s4(4) of the Client Money Rules, which requires a licensed corporation to, within one business day after its receipt of client money, pay the client money into a segregated account, to the relevant client, or in accordance with a written direction or a standing authority given by the client. It has also invoked General Principle 8 (on clients' assets) and paragraph 11.1 (on the handling of clients' assets) of the Code of Conduct. These principles require licensed corporations and registered institutions to ensure that client assets are promptly and properly accounted for and adequately safeguarded. It also invokes General Principles 2 (diligence) and 7 (compliance) and paragraph 12.1 (compliance in general) of the Code of Conduct.

The other offences

The SFC came to know about the other two offences - the short position reporting failure and the unlicensed regulated activity - through Deutsche's own confessions, a factor that no doubt contributed to the insignificance of the amounts it fined the group. It learnt of the latter offence on 5 April 2017, when Deutsche Bank told it that it had published research reports which might constitute the type-5 regulated activity of “advising on futures contracts” without the required registration. The SFC claims that both failures breached principles 2 and 7.