SFC reinforces Financial Resource Return expectations in HK

7 August 2024 | Asia | Articles

The SFC has issued a new circular emphasising the importance of robust financial resources management and adherence to the Securities and Futures Rules. This directive underscores the regulator’s expectations around the rules’ governance and internal control standards, acting as a useful guide for strengthening financial adequacy and compliance.

The circular addresses several critical areas of focus to ensure adequate financial resources are maintained:

• Effective controls: You must have effective controls over liquid capital monitoring to prevent abrupt declines in excess liquid capital or breaches of liquid capital requirements.
• Accurate accounting: Proper accruals and accounting provisions are crucial to avoid misrepresentations of your financial health.
• Correct asset and liability treatment: You should ensure accurate treatment of assets and liabilities for liquid capital computation to prevent regulatory breaches.

Common deficiencies in financial resource management

The circular has pinpointed several common deficiencies regarding effective financial resource management:

• Inadequate monitoring control: Many lack robust controls to monitor and report on their liquid capital positions on a timely basis, leading to delayed responses to capital adequacy issues.
• Misclassification of assets and liabilities: Assets and liabilities are sometimes incorrectly classified, resulting in inaccurate liquid capital calculations.
• Poor governance: Some demonstrate weak governance structures, lacking clear lines of responsibility and accountability for financial compliance.
• Inaccurate financial reporting: Errors in Financial Resource Returns (FRRs) , such as incorrect accruals and provisions, can misrepresent financial health and lead to regulatory breaches.

The regulator’s expectations on FRRs

To address these deficiencies, the SFC expects firms to adhere to the following standards:

• Sound accounting policies and procedures: Establishing month-end and year-end closing accounting and financial procedures, for timely and proper recognition of revenues, accruals and provisions.
• Effective liquid capital monitoring processes: Implementing effective monitoring processes with a similar nature, scope, size, and complexity of business activities and operations.
• Frequent liquid capital projections: Making regular projections to prepare and maintain a sufficient liquid capital buffer.
• Robust liquidity management framework: Setting up a vigorous liquidity framework for handling excess liquid capital situations. This should include effective alerts, relevant mitigation measures, and escalation procedures with clear steps and timelines.
• Qualified personnel: Employing personnel with the necessary qualifications and expertise to manage financial resources and ensuring compliance with the FRR rule.

How can Bovill Newgate help you comply with FRR expectations?

The SFC’s circular serves as a reminder of the critical nature of financial resources management in the securities and futures industry.

Our team of experts are well-equipped to help you navigate these regulatory expectations by providing ongoing support to prepare and / or review your FRR as needed. We also tailor solutions to strengthen your internal controls, ensuring they remain compliance.

For more information on how we can assist you in aligning with the latest SFC guidelines, please reach out to our team.