11 July 2019

SFC clarifies and introduces new acceptable approaches for remote client on-boarding by licensed corporations in Hong Kong

This article was written by Richard Mazzochi, Minny Siu, Agnes Chan and Patricia Wong. 

On 28 June 2019, the Securities and Futures Commission of Hong Kong (“SFC”) issued two circulars (“New Circulars”) which further clarified the requirements for online account opening by licensed corporations.

Online account opening, also known as remote client on-boarding, has been a fast developing area of regulation over the last two years. We published an article on 17 July 2018 covering the regulatory framework applicable to remote client on-boarding.

What are the New Circulars about?

The New Circulars consist of:

Circular to intermediaries - Amendment of paragraph 5.1 of the Code of Conduct (“Circular 1”) Circular to intermediaries - Remote onboarding of overseas individual clients (“Circular 2”)
Introduces:
  1. amendments to paragraph 5.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”); and
  2. launch of a designated webpage (“Webpage”)[1] which sets out the acceptable account opening approaches and relevant SFC circulars.
Introduces a new approach for the online onboarding of overseas individual clients.
Took effect on 5 July 2019. Took effect on 5 July 2019.

The New Circulars were issued after a substantial revision of the SFC’s Guideline on Anti-Money Laundering and Counter-Terrorist Financing (“SFC AML Guideline”) in October 2018 and various recent government and regulatory initiatives which aim to streamline banking and financial supervisory practices[2]. Enhanced transparency in the Hong Kong regulatory environment for remote client on-boarding is a very welcome development.

What are the key changes?

The Webpage essentially supersedes all the existing online account opening approaches prescribed in the previous Code of Conduct and various SFC circulars relating to remote client on-boarding issued by the SFC in the past (“Previous Requirements”).

We set out below a comparison table outlining the differences between the new account opening approaches and the Previous Requirements:


  New account opening approaches References to Previous Requirements Differences to Previous Requirements
1

Certified by other persons

The signing of the client agreement and sighting of identity documents can be certified by:

  • any other licensed or registered person;
  • an affiliate of a licensed or registered person (who must be a regulated financial institution);
  • a JP (Justice of the Peace); or
  • a professional person such as a branch manager of a bank, certified public accountant, lawyer, notary public or chartered secretary.
  • Old paragraph 5.1 of the Code of Conduct
  • SFC’s circular on client identity verification in account opening process dated 24 October 2016 (“SFC 2016 Circular”)

The list of “professional person” has been expanded to include a chartered secretary[3].

2

Certification services

The following are acceptable:

  • Certification services that are recognised by the Electronic Transactions Ordinance (Cap. 553) (ETO) can be employed.
  • Certification services provided by certification authorities outside Hong Kong whose electronic signature certificates have obtained mutual recognition status accepted by the HKSAR government.
  • Old paragraph 5.1 of the Code of Conduct
  • SFC 2016 Circular
No difference.
3

Mail approach

Verifying a client’s identity with procedural steps as elaborated in Part 3 of SFC's "Acceptable account opening approaches".

Old paragraph 5.1 of the Code of Conduct No difference.
4

Online onboarding of clients using a designated bank account in Hong Kong

Verifying a client’s identity with procedural steps as elaborated in Part 4 of SFC's "Acceptable account opening approaches".

SFC’s circular to intermediaries on online client onboarding dated 12 July 2018 (“SFC 2018 Circular”)

No difference.
5

Remote onboarding of overseas individual clients

Verifying an overseas individual client’s identity with procedural steps as elaborated further below.

  • This is a new approach prescribed under Circular 2
  • See further details below
N/A

What is the new approach for the online onboarding of overseas individual clients (“Overseas Client Procedural Steps”)?

The Overseas Client Procedural Steps prescribed under Circular 2 are as follows:

ekyc

  1. Identity document authentication – access the embedded data in the client’s official identification document (“ID document”), and then use appropriate and effective processes and technologies to authenticate the client’s ID document. For example, intermediaries should check the security features of the ID document or verify the data using an independent and reliable source. Prior consent and authorisation from the client should be obtained if a third party account opening procedures involve personal information of the client.
  1. Identity verification – use appropriate and effective processes and technologies to obtain biometric data of the client and match it with the identity document. For example, intermediaries may capture the facial image of client in real time and match it with the photograph stored in the chip of the client’s biometric passport. Intermediaries should also implement appropriate safeguards such as data encryption and presentation attack detection to protect the biometric data of clients.
  1. Execution of client agreements electronically – obtain a client agreement signed by the client by way of an electronic signature
  1. Designated overseas bank accounts – procure the transfer of an initial deposit of not less than HK$10,000 to the licensed corporation’s bank account from another bank account in the client’s name maintained with a bank which is supervised by a bank regulator in an eligible jurisdiction. The list of eligible jurisdictions is available on the SFC’s website. The client should conduct all future deposits and withdrawals for the client’s investment account through that bank account.
  1. Record keeping – maintain proper records for each client’s account opening process in a manner which is readily accessible for compliance checking and audit purposes.
  1. Training – ensure that staff responsible for online on boarding receive adequate training and possess sufficient knowledge and skills to perform and oversee the relevant procedures set out above.
  1. Assessment – conduct a comprehensive assessment to evaluate the appropriateness and effectiveness of the adopted processes and technologies prior to implementation by competent qualified assessors and at least annually after implementation. The assessment should test whether the process establishes the true identities of clients and compliance with the requirements set out above. An assessment report must be prepared which details of the processes adopted and the work performed, potential limitations (if any) and recommendations for improvement.

Implications for intermediaries

Intermediaries should update their internal policies and procedures to reflect the current list of acceptable account opening approaches, and keep clear and complete records of their account opening processes.

The Hong Kong Monetary Authority (“HKMA”) has confirmed that registered institutions (“RIs”) (ie banks that are registered under the Securities and Futures Ordinance to carry on regulated activities) that have already implemented a process to determine the true and full identity of a client when opening a bank account are not required to observe the procedural steps set out in paragraph 5.1 of the Code of Conduct[4]. Registered Institutions are therefore not affected by the New Circulars.

Conclusion

We welcome the New Circulars as they enhance transparency and clarify the SFC’s approach to online account opening.

Fundamentally, the overriding principle for non-face-to-face client on-boarding remains unchanged – an intermediary must take additional measures to compensate for any risks associated with customers not being physically present for identification purpose, and take all reasonable steps to establish the true and full identity of each of its clients.

Nonetheless, the New Circulars are significant in the sense that, for the first time, the SFC has provided a definitive list of acceptable approaches for online account opening. Instead of relying on scattered guidance and rules spread across several circulars issued by the SFC and other regulators (which may not necessarily be coherent or consistent), intermediaries now have a clear set of procedures for online account opening. Intermediaries are now able to reduce the regulatory risks associated with remote client on-boarding as long as they adhere to the acceptable account opening approaches. This encourages more intermediaries to permit remote client on-boarding and further stimulates the development of Hong Kong as a financial technology hub and a “smart city”.

King & Wood Mallesons has advised a wide range of clients regarding e-ID and e-KYC initiatives. Please speak to us if you have any questions, and we look forward to working with our clients.



[1] https://www.sfc.hk/web/EN/rules-and-standards/account-opening/

[2] For example, the Hong Kong Monetary Authority (“HKMA”) has published a circular on “Remote on-boarding of individual customers” on 1 February 2019 encouraging the use of technology solutions for remote on-boarding of bank customers (“HKMA 2019 Circular”): https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2019/20190201e1.pdf

[3] “Chartered secretary” refers to a person who is a current full member of the Institute of Chartered Secretaries and Administrators or its designated divisions.

[4] See the HKMA’s circular “Clarification on Remote Investment Account Opening” dated 24 August 2018: https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2018/20180824e2.pdf

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