Yesterday SFC publicly reprimanded The Bank of East Asia, Limited (BEA) and fined it HK$4.2 million due to BEA’s failure to segregate its client securities from proprietary securities into separate accounts maintained at two external custodians as required by the Client Securities Rules ("CSR").
Section 5(1) of the CSR requires an intermediary (or its associated entity) to ensure client securities it receives are deposited in safe custody in a segregated account which is designated as a trust account or client account established or maintained in Hong Kong with an authorized financial institution, an approved custodian or other intermediaries licensed for dealing in securities, asap.
Between Nov 2015 and Jan 2016, HKMA conducted an on-site examination on BEA and expressed concerns regarding BEA’s non-compliance with the CSR. In Dec 2016, following further enquiries from the HKMA, BEA made a report to SFC and HKMA regarding its failure to deposit client securities in a designated segregated account in accordance with the CSR.
SFC conducted an investigation and found that BEA failed to segregate its client securities and proprietary securities in accounts maintained at two external custodians, CCASS and Sumitomo Mitsui Banking Corporation ("SMBC"), from Apr 2003 to Dec 2016.
According to BEA, its failure to segregate client securities and proprietary securities was caused by its belief that the identification and segregation of client securities and proprietary securities in its internal electronic accounting records was sufficient to comply with section 5(1) of the CSR.
BEA had made a basic mistake, which was caused by a silly belief. Who in BEA made the non-segregation decision? Did they consult their lawyers or compliance team in advance? Why such problem had not been detected by BEA's auditors (internal and external) over 13 years?
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