HK SFC fines HSBC Securities $5 million for Providing Inaccurate Information in Licence Application
HSBC Securities submitted a licence application to carry on business in Type 7 (providing automated trading services) regulated activity for its provision of matching and crossing services in Hong Kong (Crossing Service) in May 2010. During the licence application process, HSBC Securities represented to the SFC that existing clients would be given the option of “opting in”, by signing “opt in letters”, if they wished to participate in the Crossing Service (the “opt in” approach). The SFC granted HSBC Securities a Type 7 licence in March 2011.
In July 2011, the media reported that HSBC proposed to launch the Crossing Service to its retail clients, and that an “opt out” approach would be adopted, whereby clients would effectively be assumed to consent to their trades being matched and crossed on the Crossing Service unless they took the initiative to notify HSBC otherwise. This is contrary to the representations that HSBC Securities had made to the SFC during the licence application process (Notes 2 & 3).
An SFC investigation found that:
• A preliminary decision by HSBC to change the enrolment approach for retail clients from “opt in” to “opt out” was made in mid-October 2010 but as a result of internal miscommunication, when the SFC specifically queried HSBC Securities in November 2010 whether the “opt in” approach would apply to retail clients, HSBC Securities misrepresented to the SFC that this would be the case.
• When the decision to change from “opt in” to “opt out” approach for retail clients was confirmed in around December 2010, HSBC Securities failed to notify the SFC about the change as required by the Securities and Futures (Licensing and Registration) (Information) Rules (Note 4).
The SFC considers that HSBC Securities’ failure to ensure the accuracy of information submitted to the SFC in support of its licence application and its failure to notify the SFC about the change from “opt in” to “opt out” approach for retail clients called into question its fitness and properness as a licensed person.
In deciding the sanction, the SFC took into account that HSBC Securities has cooperated with the SFC in resolving the disciplinary action and agreed to engage an independent reviewer to review its access controls concerning trading information in the Crossing Service (Note 5).
1. HSBC Securities is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities.
2. According to HSBC Securities, in connection with the provision of the Crossing Service, HSBC would be the client facing entity and HSBC Securities’ only client.
3. On 8 August 2011, the SFC imposed a condition on HSBC Securities’ licence to the effect that HSBC Securities shall only provide the Crossing Service to “professional investors”, as defined in the SFO and its subsidiary legislation.
4. The Securities and Futures (Licensing and Registration) (Information) Rules require that certain changes in information that has previously been provided to the SFC in support of a licence application must be communicated to the SFC within seven days after the change takes place. The change from “opt in” approach to “opt out” approach for retail clients was a notifiable change.
5. In August 2012, HSBC Securities informed the SFC that it had discovered that certain functions in its trading system might indirectly have provided unintended internal visibility to orders in the Crossing Service. HSBC Securities suspended the Crossing Service immediately pending resolution of the matter, and has since taken steps to remedy this visibility issue and restarted the Crossing Service in September 2013.
6. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.