Hong Kong’s Securities And Futures Commission Reprimands And Fines Celestial Commodities Limited And Celestial Securities Limited $6.3 Million For Mishandling Client Money

The Securities and Futures Commission (SFC) has reprimanded Celestial Commodities Limited (CCL) and Celestial Securities Limited (CSL) and fined them $4.9 million and $1.4 million, respectively for regulatory breaches and internal control failures relating to mishandling of client money (Notes 1 & 2).

The SFC found that for the purpose of operational convenience, CCL transferred approximately $44 million on about 180 occasions between January 2009 and December 2016 from its client accounts to pay monthly commission rebates to its account executives.  The amounts involved in each transfer ranged from $249,000 to over $1 million.      

CCL often replenished the shortfalls in the client funds days after the initial withdrawals from the relevant client trust accounts, and on one occasion it only replenished the shortfall 41 days after the withdrawal.  CCL is unable to trace the exact time when such practice commenced, but the evidence suggests that the arrangement had likely prevailed for more than 20 years.

The SFC also found that CSL effected payments totalling $40 million on 8 July 2015 from its client trust accounts into CCL’s client trust accounts in an intra-day fund swap arrangement so that CCL could meet various margin calls from the Hong Kong Exchanges and Clearing Limited on time.

The evidence further revealed that CCL and CSL had failed to implement proper controls to safeguard client money and supervise its staff in handling it in that their accounting and treasury staff were effectively given a free reign in handling client money with little supervision, instructions or guidance.

Since safe custody of client assets is a fundamental obligation of licensed corporations, any transgression of this obligation cannot be tolerated, even if the client assets are made whole again.  As such, the SFC is of the view that CCL and CSL have breached this fundamental obligation by virtue of their failures to comply with the Securities and Futures (Client Money) Rules (Client Money Rules) and the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) (Notes 3 & 4).

In deciding the disciplinary sanctions, the SFC took into account all relevant circumstances, including that:

• CCL’s breach of the Client Money Rules in using client money to pay monthly commission rebates to its account executives lasted at least seven years based on the SFC’s investigation findings (with some evidence suggesting that such practice had prevailed at CCL for over 20 years);
• CCL’s breach of the Client Money Rules was only discovered when the SFC conducted an inspection on its practices and controls;
• CCL’s substantial delays in making up the relevant shortfalls in the client funds;
• CCL and CSL’s misconduct exposed client money to unnecessary risks;
• CCL and CSL cooperated with the SFC in accepting the SFC’s findings and disciplinary actions;
• there is no evidence of client loss resulting from CCL and CSL’s respective non-compliance; and
• CCL and CSL have agreed to commission an independent reviewer to review their internal controls and senior management supervision over the handling of client assets.

Notes:

1. CCL is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 2 (dealing in futures contracts) regulated activity.
2. CSL is licensed under the SFO to carry on business in Type 1 (dealing in securities) regulated activity.
3. The Client Money Rules prescribe the manner in which licensed corporations shall treat and deal with client money received or held in Hong Kong.
4. General Principle 8 and paragraph 11.1 of the Code of Conduct provide that a licensed or registered person should ensure that client positions or assets are promptly and properly accounted for and adequately safeguarded.