Hong Kong’s MIC Update
Assessing the Impact of the SFCs MIC regime in Hong Kong
As financial regulators around the world began to focus on the importance of proper culture and senior management accountability for financial institutions, the first two regulators to go live were the UK’s Senior Managers and Certification Regime (SM&CR) and Hong Kong’s Manager in Charge Regime (MIC). The two regulations were very different in nature, with SM&CR being at the more prescriptive end of the spectrum, requiring several regulatory documents and many defined activities, and MIC taking a more directional approach that left specific implementation at the firm’s discretion. With over four years under their belts, there has been enough time to compare the results of the two approaches.
In Hong Kong, the SFC publishes in its Annual Report the number of on-site inspections which revealed deficiencies or weaknesses in internal controls. The numbers since 2017 are interesting, with 535 breaches in 2017-18, 443 in 2018-19, and 451 in 2019-20. Whilst there has been a drop since 2017 it is fair to say that this is not showing the downward trend that the implementation of MIC would have hoped to achieve. As an aside, the FCA’s annual report makes sixteen specific references to SM&CR, whereas the SFC doesn’t make a single direct reference to MIC. This possibly displays the FCA’s clear intent to use SM&CR as an enhancement to other supervisory requirements, whereas the SFC continue to rely on the enforcement tools that were already in place.
In conclusion, the FCAs prescriptive approach has led to a visibly increased focus on culture and conduct. The SFCs approach, has produced less visible change, but there are clear expectations from the regulator that standards should have improved, and that if they have not, when enforcement occurs it will use any lack of evidence as proof of weakness in controls. In the UK evidence is much easier to provide as the prescriptive approach has led many firms to use software solutions, like Trailight’s IAR solution, to both provide critical MI and the evidence required by the regulator. It seems that the future for HK will be to increasingly implement SM&CR style solutions. Already, international firms are starting to implement a standardised approach for all countries safe in the assurance that they will be able to show that conduct and culture has improved should the regulator come knocking.