Serious Breaches of Client Money Rules

SFC reprimanded China Merchants Securities (HK) Co., Limited (CMSHK) and fined it $5 million for regulatory breaches and internal control failings related to mishandling of client money.

In Sep 2014, CMSHK self-reported to SFC regarding its failure to segregate client money in accordance with Client Money Rules.  Subsequently, CMSHK performed a look-back review to examine its operational processes and controls governing the segregation of client monies during the 3-year period from 1 Oct 2011 to 30 Sep 2014.

The review identified around 800 incidents of non-compliance with the Client Money Rules with individual transaction amounts ranging from HK$68,000 to HK$308 million.

These incidents were classified into 6 categories:

1. Transfer of funds from client trust accounts to house accounts during client money segregation process.
2. Transfer of funds from client trust accounts for repayment of CMSHK’s bank loans.
3. Transfer of funds from client trust accounts for granting term loans to CMSHK’s clients.
4. Transfer of funds from client trust accounts for purposes of funding proprietary investments of CMSHK’s fellow subsidiary company.
5. Transfer of funds from client trust accounts for purposes of paying CMSHK’s expenses.
6. Transfer of a rounded amount from a client trust account for purposes of facilitating potential client withdrawal requests, settlement of securities dealing in overseas markets and fee payments for stock lending/borrowing.

Even if clients’ funds improperly transferred out were subsequently returned to the client trust account on the same day, the above misconducts (obviously arising out of deliberate or reckless decisions) can't be tolerated.

SFC also said CMSHK failed to employ fit and proper staff to conduct its business and have proper internal controls and procedures in place to ensure compliance with the Client Money Rules and safeguard client assets.  Which senior management member(s) of CMSHK would be held liable?

I don't think $5 million fine is commensurate with the seriousness of this case.