UK: The Securities and Futures Ordinance

Last Updated: 28 April 2003


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In this first issue, we take a brief look at some of the changes that have been made by the new Securities and Futures Ordinance ("the Ordinance"). We also examine the SFC’s fining guidelines for intermediaries, including identifying whom the SFC can fine and the considerations that will be taken into account by the SFC in fixing the amount of any fine. Finally, we touch briefly on the new civil rights of action created by the Ordinance and question whether they effect any significant change to the scope of potential civil liability to which market participants were exposed under the previous legislation.

The Securities and Futures Ordinance

The Ordinance was enacted on 13 March 2002 and came into force on 1 April 2003, together with some forty pieces of related subsidiary legislation and a number of revised codes and guidelines.  For those who operate in the financial services market, the new legislation brings some significant changes.

The background

The history of the Ordinance, which has been in the making for almost a decade, is well-known. It consolidates ten separate pieces of legislation into one and, in the process, revises the regulatory framework under which Hong Kong’s securities and futures and leveraged foreign exchange markets operate.

The Ordinance brings some important changes, including the following (not exhaustive):

  • financial intermediaries are subject to new licensing requirements, including a requirement to be insured in accordance with rules made by the SFC
  • only corporations may be licensed to carry on a regulated activity. Individuals may be licensed as representatives of licensed corporations
  • each licensed corporation is required to have at least two "responsible officers" who are responsible directly for supervising the regulated activities for which the corporation is licensed
  • "authorised institutions" under the Banking Ordinance (Cap. 155) who wish to engage in one or more regulated activities are required to be registered with the SFC.  Previously, they were "exempted" from registration
  • the SFC has broader powers to investigate wrongdoing and to discipline registrants (including a new power to fine)
  • there is a dual alternative civil and criminal regime to deal with market misconduct, including insider dealing, false trading, price rigging and stock market manipulation.  Insider dealing is criminalized
  • there are stricter and wider disclosure of interests requirements for listed securities
  • there are new, statutory civil rights of action for those who suffer loss because of market misconduct.

A number of new bodies have been created to implement some of these changes. For example, there is a new, full-time Market Misconduct Tribunal to deal with civil market misconduct cases. Similarly, the Securities and Futures Appeals Panel has been replaced with a new, full-time, Securities and Futures Appeals Tribunal, which can hear appeals from a broader range of SFC decisions.

Making the transition

Existing financial intermediaries who wish to carry on business in one or more "regulated activities" will need to be licensed afresh under the Ordinance.  The Ordinance allows two years for existing intermediaries to apply for a new licence, but intermediaries will be required to comply with relevant new regulatory requirements immediately.

The SFC's disciplinary fining guidelines

Under the Ordinance, the SFC may impose disciplinary fines on registered intermediaries it finds guilty of misconduct, or it otherwise believes are not "fit and proper". In exercising this power, the SFC must have regard to published guidelines. On 11 April 2002, the SFC published these guidelines.

Who can the SFC fine and in what circumstances can it do so?
If the SFC finds that a registered intermediary is guilty of misconduct, or is not "fit and proper", it will be able to fine them up to HK$10 million or three times the profit made or loss avoided, whichever is the higher. Decisions to fine will be publicised.

Those who may be fined include:

  • a licensed corporation or its licensed representative, or a registered institution
  • a responsible officer of a licensed corporation, or an executive officer of a registered institution
  • a person involved in the management of the business of a licensed corporation, or of the regulated activity for which a registered institution is or was registered
  • a person registered with the HKMA as a person engaged by a registered institution in respect of a regulated activity.

Amongst the disciplinary sanctions available to the SFC, a fine is regarded as more severe than a reprimand (a public reprimand is regarded as more severe than a private reprimand), but less severe than suspension or revocation of a licence, or part of a licence. A fine may be imposed on its own or with other disciplinary sanctions.

What factors will the SFC consider in deciding how much to fine?

Fines will not be based on a "tariff" system.  Generally, the more serious the  misconduct, the greater the likelihood that the SFC will impose a fine and the larger the size of the fine. In reaching its decision, the SFC will have regard to "general considerations" as well as the specific circumstances of each case. The SFC will generally regard the following conduct as serious:

  • intentional or reckless conduct
  • conduct that damages the integrity of the securities and futures market
  • conduct that causes loss to, or imposes costs on, others
  • conduct which provides a benefit to the corporation or individual engaged in that conduct, or to someone else.

Generally, the SFC will consider the circumstances of each case in light of the following:

  • whether advice was sought on the lawfulness or acceptability of the conduct, whether from professional advisers, supervisors or compliance staff
  • how long the conduct took place and how frequent it was
  • whether the conduct is/was widespread in the relevant industry, or there were reasonable grounds for believing it to be widespread
  • in relation to a corporation, whether there were weaknesses in its internal controls
  • whether the SFC has issued guidance concerning the conduct in question
  • the registrant’s financial resources
  • whether the registrant brought the conduct to the SFC’s attention and, if so, how, why and how quickly it did so
  • the degree to which the registrant co-operated with the SFC and other relevant authorities
  • what (if any) remedial steps were taken
  • the registrant’s previous disciplinary record and its experience in the industry
  • what action the SFC took in previous, similar cases.

New civil rights of action

Under the Ordinance, those who have perpetrated, or engaged in, market misconduct will be liable to pay compensation to anyone who has suffered pecuniary loss as a result of that market misconduct. Compensation will be payable whether or not the loss arises from dealing in securities at a price affected by the misconduct. However, the courts will only award compensation if it is "fair, just and reasonable" to do so in the circumstances.

"Market misconduct" is defined in the Ordinance as:

  • insider dealing
  • false trading
  • price rigging
  • stock market manipulation
  • disclosure of information about market misconduct
  • disclosure of false or misleading information inducing transactions
  • attempting to engage in, or assisting, counselling or procuring another person to engage in any of the above conduct.

An action may be pursued even if the market misconduct has not been prosecuted in the courts or brought before the Market Misconduct Tribunal. However, where the market misconduct has been successfully prosecuted in the courts or brought before the Tribunal, the courts’ or Tribunal’s findings may be used as evidence in a private action for compensation. This should provide significant evidential assistance to private citizens who wish to seek to recover losses suffered as a result of market misconduct.

This new right of action means that an intermediary, who has helped a client to engage in market misconduct, may face a claim for compensation arising from that misconduct, in addition to any disciplinary action the SFC may take.  However, the extent to which the new provisions will, in practice, expose market participants to additional liability is uncertain. The SFC has stated that the new provisions are only intended to create liability in circumstances where common law liability would otherwise exist. If this is right, the new provisions will have little effect, in terms of imposing additional liability on market participants. However, whether the courts will take the same view remains to be seen.

For further information on the Ordinance, please contact our financial services team: Mark Johnson (head of litigation and arbitration department, Hong Kong) or Gavin Lewis (partner, litigation and arbitration department, Hong Kong)

Article by Mark Johnson and Gavin Lewis

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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