Oversight July 2019 - New account opening under the code of conduct

New account opening under the code of conduct

On 12 July 2018, the Securities and Futures Commission (SFC) announced a review of the account opening and know your client (KYC) procedures prescribed under paragraph 5.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), the primary non-statutory code which governs all SFC licensed or registered persons. The SFC issued a number of circulars on 28 June 2019 announcing an amendment to paragraph 5.1, which took effect on 05 July 2019.

Prior to the amendment, paragraph 5.1 imposed a high standard of KYC requirements for non-face-to-face account openings. Where the account opening documents were not executed face-to-face, the signing of the relevant agreement with the client (Client Agreement) and the sighting of identity documents had to be certified by a SFC licensed or registered person or other permitted individuals such as “professional persons” (which included a branch manager of a bank, certified public accountant, lawyer or notary public). As an alternative measure, individual clients could be verified if, amongst other procedural requirements, he or she sent a physical copy of the Client Agreement and copies of identify documents to the intermediary, along with a cheque of not less than HK$10,000 issued by the client which had the same signature as that of the signed Client Agreement and was drawn on the client’s account with a licensed bank in Hong Kong (Designated Bank Account). On 12 July 2018, the SFC published a circular confirming that intermediaries could also onboard overseas clients online through a copy of the Client Agreement signed by way of an electronic signature, together with (amongst other requirements) a successful transfer of at least HK$10,000 from a Designated Bank Account to the intermediary’s bank account. The requirement for a Designated Bank Account meant that clients had to open a bank account in Hong Kong. This was particularly burdensome for overseas clients with no base operations in the jurisdiction.

Following the SFC’s review, the prescribed procedural steps have now been edited out from paragraph 5.1. Acceptable procedures are now published and periodically updated on the SFC website (www.sfc.hk) and are supplemented by a set of frequently asked questions (FAQs). Currently acceptable procedures will remain applicable, but the threshold for verification has been lowered somewhat by the SFC. An additional means of onboarding overseas individual clients is now permissible, whereby clients may be onboarded by way of an electronically signed Client Agreement and a cheque of HK$10,000 opened with a regulated bank in an eligible jurisdiction (Designated Overseas Bank Account), subject to the implementation of certain client verification processes and technologies and other training and record keeping requirements. As of the date of this Oversight, there are 16 eligible jurisdictions, namely Australia, Austria, Belgium, Canada, Ireland, Israel, Italy, Malaysia, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.

While intermediaries are likely to welcome this new development, it is arguable that the newly prescribed methods do not adequately address the practical difficulties intermediaries face when onboarding overseas clients. This edition of Oversight focuses on the procedural updates under the Code of Conduct and the practical implications on intermediaries.

Read this edition of Oversight in full.