EN
On 15 September 2021, the Securities and Futures Commission (SFC) released its consultation conclusions on the proposed amendments to (i) the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations) and (ii) the Prevention of Money Laundering and Terrorist Financing Guideline issued by the SFC for Associated Entities (collectively, the AML/CFT Guidelines) . The amendments were proposed to align the AML/CFT Guidelines with the Financial Action Task Force standards (in particular, the Guidance for a Risk-based Approach for the Securities Sector).
The revised AML/CFT Guidelines serve to outline the key principles and provide practical guidance to the securities industry on adopting a risk-based approach in combating money laundering and terrorist financing (ML/TF) . Under this risk-based approach, licensed corporations (LCs) are required to identity and assess the ML/TF risks to which they are exposed and implement AML/CFT policies that are appropriate and adequate for the nature, size and complexity of the business of the LCs in order to mitigate the ML/TF risks identified. To elaborate, the key amendments in the revised AML/CFT Guidelines address various aspects, including (i) steps to take and risk indicators to consider when conducting risk assessment; (ii) additional due diligence for cross-border correspondent relationships; (iii) simplified and enhanced measures LCs may apply to lower risk and higher risk customers or business relationships; (iv) red-flag indicators for suspicious transactions and activities; and (v) policies, procedures and measures for handling transactions involving third-party deposits and payments.
The revised AML/CFT Guidelines came into effect on 30 September 2021 (except for the cross-border correspondent relationship requirements, which will become effective on 30 March 2022 after an additional six-month transition period).
For further details, please refer to SFC’s consultation conclusions here.
The Minor Employment Claims Adjudication Board (the “MECAB”), which adjudicates minor employment claims, provides easy and cost-efficient recourse to certain claims arising from employment-related disputes, including the Employment Ordinance (Cap. 57 of the Laws of Hong Kong). Like Labour Tribunal claims, no legal representation is allowed before the MECAB, and the parties are required to conduct the case themselves, although legal assistance may be obtained “behind the scene”. Claims before the MECAB are heard by an Adjudication Officer in public, whose awards or orders are legally binding.
Effective from 17 September 2021, the jurisdictional limit of the MECAB for claims which arose on or after 17 September 2021 has been increased from HK$8,000 to HK$15,000 per claimant1. Up to a maximum of 10 claimants for a claim amount of not more than HK$15,000 per claimant arising out of the right of action may be filed in the same claim. Representative claims are also permitted, such that one person may represent not more than 5 persons for claims against the same defendant.
It is anticipated that the increase in MECAB’s jurisdictional limit will lead to a rise in the MECAB’s caseload, and help ease traffic at the Labour Tribunal. Simple claims which fall within the MECAB’s jurisdiction, for example, disputes on holiday, annual leave or sick leave entitlements and payment on termination of employment not exceeding HK$15,000, can be handled quickly and economically.
1 The MECAB’s jurisdictional limit for claims which arose before 17 September 2021 remains HK$8,000 per claimant.
The Court of First Instance (“CFI“) has recently decided in the case of Quaestus Capital Pte Ltd v Everton Associates Limited and another [2021] HKCFI 1367 on an interlocutory challenge to Hong Kong courts’ jurisdiction by a securities brokerage firm involved in a “non-recourse” loan scheme. The brokerage firm relied on an exclusive jurisdiction clause in favour of London courts in the relevant brokerage agreement to seek to set aside an order for serving the writ out of jurisdiction pursuant to Order 11 of the Rules of the High Court.
The CFI ruled that notwithstanding the existence of the exclusive jurisdictional clause, which was wide enough to cover the borrower’s claims, there was strong cause to allow the proceedings to continue against the brokerage firm in Hong Kong.
Background
The borrower of the “non-recourse” loan was a private equity firm incorporated in Singapore who wished to obtain funds to finance its business operations. By ‘non-recourse’, it meant that the lender shall only look to the collateral security for repayment of the loan, and may not make any further claim against the borrower in case of a default.
Through an intermediary, the borrower was introduced to the lender, and entered into an “equity collateralised non-recourse non-title transfer term loan” by using the shares (“Shares“) in China Metal Resources Utilization Limited (a company listed on the Stock Exchange of Hong Kong) held by the borrower as collateral.
On 21 April 2020, the borrower and the lender entered into a loan agreement and a pledge agreement. The borrower was required by the agreements to transfer the Shares as collaterals into a brokerage account, which was specified in the loan agreement as Look’s Securities Limited (“Look’s“), a brokerage firm in Hong Kong nominated by the lender. The borrower, lender and Look’s entered into a collateral management agreement which governed the custodian arrangement of the collaterals. All agreements entered into were governed by Hong Kong law and provided for the non-exclusive jurisdiction for the Hong Kong courts. The agreements also made clear that there would be no change in beneficial ownership of the collateral except upon occurrence of an event of default.
On 1 June 2020, pursuant to the loan agreement, the borrower deposited 94 million Shares with Look’s. A few days later, the lender stated that there would be delay in the funding due to bank compliance issues, and requested the borrower to open an account with another brokerage, Axis Capital Markets Limited (“Axis“), where the lender had the funds immediately available. The borrower agreed and opened an account with Axis. In doing so, the borrower entered into a brokerage account control agreement (“Axis Agreement“) with the lender and Axis. The Axis Agreement contained an English choice of law clause and an exclusive jurisdiction clause in favour of courts in London.
However, even though no money was ultimately advanced by the lender to the borrower pursuant to the loan agreement, it transpired that the Shares were disposed of, without the borrower’s knowledge, through a hypothecation agreement entered into between the lender and a third party.
The borrower’s case was that the lender, Axis and the third parties involved in the disposing of the Shares were all part of a fraudulent scheme.
The exclusive jurisdiction clause
The Axis Agreement provided that:-
“Consent to Jurisdiction; Venue; Jury Trial Waiver. Each of the parties hereto hereby consents to the exclusive jurisdiction of the courts sitting in London, England, as well as to the jurisdiction of all courts from which an appeal may be taken from the aforesaid courts, for the purpose of any suit, action or other proceedings by any party to this [Axis Agreement], arising out of or related in any way to this [Axis Agreement], or any related document. Each of the parties hereto hereby irrevocably and unconditionally waives any defense of any inconvenient forum to the maintenance of any action or proceedings in any such court, any objection to venue with respect to any such action or proceeding and any right of jurisdiction on account of the place of residence or domicile of any party hereto.“
The borrower’s argument that Hong Kong courts ought to have jurisdiction to adjudicate the disputes involving Axis was threefold:-
CFI’s ruling
The CFI held that the wording of the exclusive jurisdiction clause was drafted widely, and there was a presumption that the parties likely intended that any dispute arising out of the relationship they have entered into, whether arising in contract or in tort or as some other causes of action, to be decided by the courts in London. The borrower’s claim against Axis, whether for fraud or knowing receipt, arose out of Axis’ custody of the Shares which came about as a direct result of the Axis Agreement and their subsequent disposition. As such, the borrower’s claims were subject to the exclusive jurisdiction clause.
The CFI rejected the contention that since “fraud unravels everything”, the exclusive jurisdiction clause contained in the Axis Agreement would therefore be null and void. The CFI applied the doctrine of separability with respect to jurisdiction clauses, which would be viewed as a distinct agreement and can thus only be avoided on grounds which relate directly to the jurisdiction clause. In the absence of any suggestion that the borrower was not aware of the jurisdiction clause or was specifically misled into agreeing to give the English courts exclusive jurisdiction, the exclusive jurisdiction clause was not excluded from application to a dispute involving claims that the agreement as a whole is vitiated (e.g. by fraud).
Having decided that the exclusive jurisdiction clause was applicable, the CFI was nonetheless satisfied that there was strong cause for not giving effect to the clause and exercised its discretion to refuse an order to set aside the service of the writ out of jurisdiction.
In allowing proceedings to be continued against Axis in Hong Kong, the CFI’s main consideration appeared to be to avoid multiplicity of proceedings. Given the fact that jurisdiction clauses in the loan agreement and pledge agreement between the borrower and the lender provided for the Hong Kong courts to have jurisdiction, and the jurisdiction clause in the Axis Agreement provided for the London courts to have jurisdiction, there would necessarily be two sets of proceedings, one in London and another in Hong Kong, if the borrower could not proceed with its claim against Axis in Hong Kong. The learned judge found it necessary to avoid a ‘disastrous’ situation where there are separate actions in different jurisdictions culminating in two separate trials and two judgments by two different tribunals, each based on incomplete materials, with a real risk of inconsistent findings.
Nevertheless, the learned judge left it open for Axis to claim damages for any loss it suffers as a result of the borrower’s breach of the exclusive jurisdiction clause (e.g. any additional expense incurred in having to litigate in Hong Kong as compared to London).
Takeaway
If contracting parties have agreed that a foreign court should have exclusive jurisdiction over disputes arising out of the contract, the court will ordinarily enforce the agreement by staying proceedings in Hong Kong. Nevertheless, the court has a discretion to refuse to stay proceedings brought in breach of such agreement if there is “strong cause” for doing so.
In the present case, the CFI was satisfied that the claimant has demonstrated that there was a “strong cause” for allowing proceedings to continue in Hong Kong in spite of an exclusive jurisdiction clause in favour of London courts, by reason of multiple parties being involved in a dispute arising out of the same facts, the fact that part of the dispute would be litigated in the Hong Kong courts, and there being a real risk that multiplicity of proceedings would give rise to inconsistent findings of facts by different tribunals.
One further point to note – in the present case, even though the borrower successfully resisted the jurisdictional challenge, the CFI refused to make any order as to costs due to material non-disclosure on the part of the borrower in its ex parte application to serve its writ of summons out of jurisdiction. The learned judge criticised the borrower for not making any reference in its affidavit in support to the need to show strong cause or strong reasons why the Hong Kong court should assume jurisdiction despite the exclusive jurisdiction clause in favour of London, and that no attempt was made to demonstrate such strong cause. This omission was exacerbated by the fact that Axis had already referred to principles surrounding exclusive foreign jurisdiction clauses in earlier interlocutory applications. It is therefore important to bear in mind the duty of full and frank disclosure in making ex parte application for service out of jurisdiction.
On 20 August 2021, the 13th Standing Committee of the National People’s Congress of the People’s Republic of China passed the Personal Information Protection Law (the PIPL). The PIPL is the first comprehensive legislation on the protection of personal information in the PRC and it will take effect on 1 November 2021.
The PIPL has extraterritorial effect and applies to the personal information processing activities carried out both inside and outside mainland China.
Foreign individuals or organisations which process, outside mainland China, personal information of natural persons in the mainland China for the purposes of (i) offering products or services to natural persons in the mainland China, or (ii) analysing and assessing the behaviours of the natural persons in the mainland China will be subject to the PIPL. Those individuals or organisations shall establish designated entities or appoint representatives in the mainland China to be responsible for matters relating to the protection of personal information.
On 16 July 2021, the Financial Reporting Council (Amendment) Bill 2021 (the “Bill“) was gazetted. The Bill aims to further develop the Financial Reporting Council (“FRC“) into a full-fledged independent regulatory and oversight body for the accounting profession. It seeks to amend the Financial Reporting Council Ordinance (Cap. 588) (“FRCO“) to, inter alia, enhance the independence of the regulatory regime for accounting professionals; to regulate accounting professionals through registration, issuing practising certificates, inspection, investigation and disciplinary sanction; to rename the FRC; and to provide for the new functions of the FRC[1].
Background
At present, the Hong Kong Institute of Certified Public Accountants (the “HKICPA“) is vested with certain regulatory powers in respect of certified public accountants (“CPAs“) and practice units[2] which include among other things, issuance of practising certificates, registration, investigation and discipline over the same under the Professional Accountants Ordinance (Cap. 50) (“PAO“); whereas the FRC is responsible for regulating auditors of Public Interest Entities (“PIE“)[3] and exercises powers of inspection, investigation and discipline over PIE auditors and their responsible persons in relation to their engagements for listed entitles under the FRCO.
The regulation of PIE auditors by the FRC was pursuant to a reform proposal introduced in 2018 to transfer such powers from the HKICPA to the FRC. The Government has been taking a step-by-step approach to achieve regulatory reform and indicated that further reform would be on the way. Against such background, the Bill has been introduced to transfer further powers currently exercised by the HKICPA to the FRC.
The Legislative Proposal
The key aspects of the proposal are summarised as follows:
In view of the expansion of the scope of regulation beyond PIE auditors to cover all CPAs, the FRC will be renamed as the “Accounting and Financial Reporting Council” (“AFRC“) to more fully reflect its roles and functions after the reform[4]. Similarly, the current FRCO will be renamed as “Accounting and Financial Reporting Council Ordinance” (“AFRCO“)[5].
The Bill seeks to add a new Part 2A[6] to the FRCO which provides for the AFRC to exercise its new functions in relation to the issue of practising certificates to CPAs[7] and registration of CPA firms[8] and corporate practices[9]. It also provides for the AFRC to establish and maintain a register of CPAs (practising), CPA firms and corporate practices (i.e. practice units)[10].
In connection with the above functions, the proposed new Part 2A provides for the related offences which include pretending to be or practising as CPAs (practising)[11]; signing audit reports without practising certificates[12]; and advertising or representing as being qualified to practise[13] etc.
It should be noted that the HKICPA will continue to be responsible for registration of CPAs and to administer professional examinations, qualification and continuing professional development programmes, and the mutual or recognition agreements with accountancy bodies of other jurisdictions in relation to registration of CPAs in Hong Kong, subject to the oversight of the AFRC.
Pursuant to a proposed new Part 3AA[14] of the FRCO, the AFRC may appoint CPA inspectors to carry out inspections in relation to practice units for the purpose of determining whether a unit has observed, maintained or applied a professional standard. It also provides for the powers of the AFRC to conduct investigation in relation to professional persons[15]. In addition, the AFRC will be vested with disciplinary powers under the Bill in respect of professional persons. If a professional person commits any misconduct under the proposed new section 37AA of the AFRCO, the AFRC could then impose sanctions under the proposed new section 37CA of the AFRCO[16]. Sanctions include the following:
It is worth noting that the scope of disciplinary powers on professional persons and the type and level of sanctions over them in case of non-compliance under the proposed regime will follow closely and remain comparable to those currently provided in the PAO[17].
The AFRC would oversee the HKICPA’s performance of the following functions[18]:
At present, an independent review tribunal, the Public Interest Entities Auditors Review Tribunal (the “Tribunal“), has been established under section 37N of the FRCO with jurisdiction to review the HKICPA’s decisions in relation to the registration of local PIE auditors and the FRC’s decisions regarding the recognition of overseas PIE auditors and discipline of all PIE auditors. The Bill seeks to expand the Tribunal’s jurisdiction to review all decisions in relation to the issue of practising certificates, registration of CPA firms and corporate practices and disciplinary actions against CPAs and practice units made by the AFRC. In light of the expanding functions of the Tribunal, it is proposed to be named as “Accounting and Financial Reporting Review Tribunal”[19].
Under the current FRCO, if a party to a review is dissatisfied with a determination of the review made by the Tribunal, the party may appeal to the Court of Appeal and leave is required for such an appeal[20]. The Bill does not seek to amend such an appeal mechanism and thus the position remains the same under the proposed AFRCO.
The Bill seeks to provide for the establishment of a new advisory committee to advise the AFRC on matters of policy regarding any of its regulatory objectives and functions.
The Bill introduces a new provision to provide for the power of the Secretary for Financial Services and the Treasury to make transitional and saving provisions consequent on the enactment of the AFRCO by way of regulation for matters including pending applications for registration of practice units and the issue of practising certificates before the HKICPA under the PAO. Such regulation would be subsidiary legislation subject to scrutiny by way of negative vetting of the Legislative Council.
It is proposed that all registration applications approved by the HKICPA before the commencement of the new regime will remain valid, whereas outstanding applications will be transferred to the AFRC for processing upon commencement of the new regime. For ongoing practice reviews, investigations and disciplinary cases of the HKICPA which have not been completed on the commencement date of the new regime will continue to be conducted under the PAO mechanism. The result of such practice reviews or investigation under the transitional arrangement will then be referred to the AFRC for follow-up action[21].
Legislative Timetable
The Bill received its First Reading at the Legislative Council meeting on 21 July 2021 and a Bills Committee was formed on 23 July 2021. At the time of writing, the Second Reading debate of the Bill has not resumed and will take place on a date to be notified.
Potential reduction in compliance costs and independent regulation of accountants
According to the Government, one of the justifications for the Bill is to ensure more efficient use of resources and reduce compliance burden as presently, individual practice units and CPAs with both PIE engagements and all other engagements would be subject to separate inspections by the FRC and the HKICPA, which may lead to extra compliance burden for the entities concerned. However, on the other hand, there are also concerns about the potential increase in compliance costs and burden for non-PIE auditors and CPAs under the proposed regime.
The Government also suggests that the reform would make our regulatory regime of the accounting profession more in line with the international standard and practice by vesting the regulatory powers with a regulatory body independent from the trade to ensure impartiality, and to reinforce our status as an international financial centre and business hub. In this regard, the HKICPA accepts that a common feature found in other jurisdictions is independent regulation of PIE auditors, though there is no one approach as such. According to the HKICPA, regulatory models for the whole of the accounting profession differs between jurisdictions and such differences reflect the different natures and structures of the profession across different jurisdictions.
Conclusion
As mentioned above, the Bill is a more extensive reform of the regulation of the accounting profession as a whole than the previous one which was concerned with PIE auditors only and would involve a wider range of stakeholders. As with any other reforms, in light of the various concerns of the stakeholders, it is believed that more extensive consultations would likely enhance the effectiveness of the reform.
[1] p. C4019 of the Bill.
[2] A practice unit means (a) a firm of CPA (practicing); (b) a CPA (practising); or (c) a corporate practice under section 2 of the Professional Accountants Ordinance (Cap. 50).
[3] Public Interest Entity means (a) a listed corporation (equity); or (b) a listed collective investment scheme (Section 3(1) of the Financial Reporting Council Ordinance (Cap. 588)).
[4] Clause 10 of the Bill.
[5] Clause 4 of the Bill.
[6] Clause 19 of the Bill.
[7] Division 1 of the new Part 2A (Clause 19 of the Bill).
[8] Division 2 of the new Part 2A (Clause 19 of the Bill).
[9] Division 3 of the new Part 2A (Clause 19 of the Bill); the AFRC will also be responsible for the registration of PIE auditors (Clause 20 of the Bill), whereas CPAs will continue to be dealt with by the HKICPA.
[10] Division 4 of the new Part 2A (Clause 19 of the Bill).
[11] Division 5 of the new Part 2A.
[12] Ibid.
[13] Ibid.
[14] Clause 42 of the Bill.
[15] “Professional person” is proposed to mean (a) a CPA; or (a) practice unit under Clause 5(21) of the Bill.
[16] Clause 64 of the Bill.
[17] Section 35 of the Professional Accountants Ordinance (Cap. 50).
[18] Clause 12(4) of the Bill.
[19] Clause 75(2) of the Bill.
[20] Sections 37ZF and 37ZG of the FRCO.
[21] Legislative Council Brief dated 14 July 2021, paragraphs 17-19
See news from our global offices