Hong Kong’s Securities And Futures Commission Reprimands And Fines China Merchants Securities (HK) Co., Limited $5 Million For Mishandling Client Money

The Securities and Futures Commission (SFC) has reprimanded China Merchants Securities (HK) Co., Limited (China Merchants) and fined it $5 million for regulatory breaches and internal control failings related to mishandling of client money (Note 1).

The SFC found that there were around 800 incidents between 1 October 2011 to 30 September 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 (Client Money Rules) (Note 2).

China Merchants also failed to employ fit and proper staff to conduct its business and have proper internal controls and procedures in place to ensure compliance with the Client Money Rules and safeguard client assets.

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 clearly breached this fundamental obligation and failed to comply with the Client Money Rules and the Code of Conduct (Note 3).

In deciding the penalty, the SFC took into account all relevant circumstances including that China Merchants:

• self-reported the matter to the SFC;
• conducted a review to examine its operational processes and controls governing the segregation of client money during the relevant period;
• commissioned an independent compliance and control review on its client money handling process during the relevant period; and
• co-operated with the SFC in resolving its concerns and accepting the SFC’s findings and disciplinary action, and there is no evidence of client loss as a result of its non-compliance.

Notes:

1. China Merchants is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
2. The Securities and Futures (Client Money) Rules prescribes the manner in which licensed corporations shall treat and deal with client money received or held in Hong Kong.
3. Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.