SFC and FRC enter into a new Memorandum of Understanding

The Securities and Futures Commission (SFC) and the Financial Reporting Council (FRC) of Hong Kong have entered into a new Memorandum of Understanding (MOU).  This MOU came into effect on 24 February 2021 and supersedes the MOU entered into between the agencies in 2007.  The signing of a new MOU had been anticipated since the FRC commenced its role as the independent oversight body regulating auditors of listed entities in October 2019.

The MOU sets out arrangements to facilitate cooperation/coordination and the sharing of information between the regulators as well as provides guidance on enforcement in cases where their remits overlap.

In areas where the remits of the SFC and the FRC overlap, they will coordinate and let the more appropriate agency take (or lead, in cases of mutual interest) the enforcement action.

There are arrangements specific to the regulation of listed entities that are also licensed persons within the meaning of section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO) or collective investment schemes authorised under section 104 of the SFO.  Under the new MOU, as before, the FRC shall:

• inform the SFC that an investigation or an enquiry is to be carried out in respect of a listed entity that is also a licensed person or a collective investment scheme; and
• not exercise its investigation and enquiry powers over any licensed person or any responsible person of the collective investment scheme without first consulting the SFC. 

This embodies the requirements in Parts 3A and 4 of the Financial Reporting Council Ordinance.

There are also provisions covering joint investigations, case referrals, mutual assistance, capacity building and the exchange and use of information.  Some of these provisions are new, such as:

• the possibility of conducting joint investigations into significant and urgent cases that fall within the functions of both;
• the giving of technical or other assistance upon the other's request, including the provision of advice or expertise of a market, industry or accounting expert on a case-by-case basis; and
• capacity building by joint training of staff at both agencies.

Whilst both agencies have agreed to coordinate their enforcement activities, we expect, in practice, parallel investigations in cases of mutual interest by both agencies remain possible, with the SFC likely to focus on the market misconduct aspect and the FRC likely to focus on the suspected audit failings.

The signing of this new MOU follows the Memorandum of Understanding entered into between the FRC and the Supervision and Evaluation Bureau (SEB) of the PRC Ministry of Finance in May 2019, under which the FRC can make requests to the SEB for assistance in, inter alia, gaining access to audit working papers located in the Mainland. According to the FRC, it has raised such requests in relation to 11 investigation cases as of December 2020 and obtained the first batch of Mainland audit working papers in relation to some of the cases.

It is clear the FRC is keen to make full use of its new investigatory and disciplinary powers in order to establish itself as a respected and independent regulator, to be counted among its more established brethren.