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Comment on the SFC Roboadvisory guidelines

July 30, 2017

https://www.bryancave.com/en/thought-leadership/rolling-in-the-regulations-for-robo-advisers.html

This reveals the best and the worst of Hong Kong bureaucracy. It turns out that the SFC is issuing guidance over things that people don’t much care about any more, and that basically anyone that is operating a roboadvisory platform with a global market won’t honestly think much about SFC guidelines.

It’s also the situation that these are merely guidelines since the legal authority for the SFC to regulate roboadvisory platforms is extremely limited. In fact if you just totally violate and ignore all of these guidelines then the SFO explicitly says under Section 399(6) that there is no legal sanction that the SFC can take against you. It can be used as evidence of other things. For example, if it’s clear that I’m following the guidelines, then this can be evidence that I’m not a thief and that I’m not incompetent.

(6) A failure on the part of any person to comply with the provisions set
out in any code or guideline published under this section that apply to him
shall not by itself render him liable to any judicial or other proceedings, but in
any proceedings under this Ordinance before any court the code or guideline
shall be admissable in evidence, and if any provision set out in the code or
guideline appears to the court to be relevant to any question arising in the
proceedings it shall be taken into account in determining that question.

But the fact that the SFC is coming up with some “guidelines” and that the only authority that they have for enforcing them is to “ask nicely” shows how different Hong Kong works from Singapore. If you look at Section 27 of the Monetary Authority of Singapore Act, you see

(1)  The Authority may, if it thinks it necessary in the public interest, request information from and make recommendations to such financial institutions as the Authority may, from time to time, determine and may issue directions for the purpose of securing that effect is given to any such request or recommendation.

(4) Any financial institution that fails or refuses to comply with a direction given under this section shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $20,000.

If Singapore does something like this, they wouldn’t be just “asking nicely.”  So with respect to the SFC, if the guidelines make sense, people will follow them.  If they don’t make sense, people will ignore them.

But there are two places where this matters…..

The first is the  HK retail market.  Suppose you have an SFC license, and you just say that you think that SFC guidelines are terrible and you will ignore them.  Suppose then something bad happens.  At that point, the SFC can look at you and say, “well it’s obvious that you had terrible risk management, so we are going to kill your license.”

No one that does global business will care much about the SFC guidelines, but HK has a huge local retail market, and traditional brokers and retail asset managers really need this sort of information from the SFC so that they can see what they can do and what they can’t.

The second is big companies.  The way that big companies work is that they need guidelines and standards.  Once the SFC issues guidelines, there are going to be entire teams of compliance people and lawyers looking over each word.  Big companies are funny.  You just can’t go to a big company and say “just use your judgment and don’t do anything bad” because big corporate bureaucracies just can’t deal with that.  You need to give them a 50 page code of conduct that describes in total mind-numbing detail what exactly “bad” means so that their compliance department can issue the right memos and pages of interpretations and standards.  Big companies have entire divisions of dozens of people that work full time in order to deal with this sort of thing.  If you generate tons of paper, then it will cost them tons of money and time to get anything done.  If you don’t generate tons of paper, then nothing will happen.

The substance of the guidelines aren’t going to matter if you are running a global company, you are probably going to ignore what the SFC says.  If you are dealing with 20 different regulators, then you are going to care much more about the SEC, EU, FCA, and MAS than the SFC because the SEC, EU, FCA, and MAS aren’t going to be “asking nicely” for you to do something.  And if it turns out that you are compliant with EU regulations, it’s pretty likely that it will be compliant with what the SFC wants you to do.  If you are a big company, the *content* of the SFC guidelines won’t matter, but the fact that you have a big long legalistic document that you can process does.

If you aren’t already an SFC regulated business, then these guidelines don’t matter much. On the other hand, if you *are* already an SFC regulated business (i.e. a traditional broker or asset manager), guidance like this is critical to let you know what you can and can’t do, and if it turns out that they issue a 100 page document that says “don’t do anything stupid or dishonest” so much the better.

Finally, having a weak government and focusing on the private sector has its advantages.  InvestHK can’t promote Hong Kong by saying “come to Hong Kong because the financial regulators really don’t have much power, and as long as you are basically honest and want to do the right things, there is a way of doing what you want to do” but I can.

The beauty of the Hong Kong government is that they spend a lot of their time doing nothing, but sometimes in order to get something done, you have to do the right sort of nothing.  For the roboadvisory guidelines, I’ll look through them and if they make sense, I’ll follow them, and if they don’t, I’ll just ignore them.

 

 

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