SFC and FRC conclude MOU to strengthen regulation of capital markets

SFC and FRC conclude MOU to strengthen regulation of capital markets

SFC and FRC conclude MOU to strengthen regulation of capital markets 1402 790 Charing

The Securities and Futures Commission (“SFC”) and the Financial Reporting Counsel (“FRC”) entered into a new Memorandum of Understanding (“MOU”) on 24 February 2021, superseding the old MOU signed in 2007.  The new MOU sets out the working arrangements between the two parties in order to reduce any duplication of effort and to ensure efficient and effective co-operation and coordination of their respective functions in relation to the regulation of PIE Auditors and the compliance by listed entities of regulatory requirements in financial reporting.

The FRC is a statutory body established under the Financial Reporting Council Ordinance (Cap. 588) (“FRCO”).  Under FRCO, PIE means a “public interest entity”, which is either (a) a listed corporation on the Stock Exchange of Hong Kong (“HKSE”) whose listed securities comprise at least shares or stocks; or (b) a listed collective investment scheme on the HKSE.  A PIE Auditor is an auditor who carries out a PIE engagement.

The FRC’s main function relevant to this MOU are two-fold, in relation to auditors of listed entities and in relation to listed entities.

The FRC regulates auditors of listed entities by a system of registration (implemented by the HKICPA and overseen by the FRC) and recognition whereby Hong Kong and non-Hong Kong auditors of listed entities are required to be registered and recognised (and be renewed annually) as PIE Auditors.  The FRC will conduct inspections of PIE Auditors’ internal quality control system and selected engagements, prepare reports of inspection, take follow-up measures after inspection, and publish annual inspection findings with highlights of important issues identified.  The FRC will also conduct investigations into possible misconduct and irregularities in practice and impose relevant sanctions.

In relation to listed entities, the FRC monitors the compliance by listed entities of regulatory requirements for financial reports by conducting enquiries and preparing reports, secures the removal and rectification of non-compliance, and makes referral to other authorities for follow-up action where necessary.

The parties concluded a series of enhanced collaboration measures in cases of overlapping authority and matters of mutual interest, which includes joint investigations, complaint referrals, mutual assistance and consultation, and information sharing.  In particular for enforcement actions in relation to listed entities, if the FRC finds, following any enquiry and investigation, that there is relevant non-compliance, the FRC may inform the SFC of its consideration to exercise powers conferred to it where the relevant non-compliance may also be a matter of interest or concern to the SFC.

To ensure better coordination in their regulatory efforts, the SFC and FRC have also agreed to notify each other when developing new guidelines and policies which may have a significant impact on their respective regulatory function.

Although the MOU does not modify or supersede any regulatory requirement in Hong Kong nor does it fetter the discretion of either parties in any way in the discharge of their functions, it is envisaged that the enhanced collaboration between the two will increase the overall effectiveness of both regulators in ensuring the quality of financial reporting by listed entities and the audit quality of listed entity auditors.

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