Getting it right with the SFC in 2025: insights from Marex’s Hong Kong lunch and learn

Regulatory priorities: a sharper focus on asset managers

Regulatory evolution isn’t new, but the panel agreed that 2025 signals a distinct shift in the SFC’s priorities. The conversation opened with a fundamental question: What’s changing? The SFC’s attention seems to be firmly fixed on asset managers. This isn’t about ticking boxes; it’s about how firms engage with the core principles of regulatory compliance.

One area under the microscope is client categorisation. The SFC is increasingly scrutinising how firms distinguish between professional investors and non-professional investors. This isn’t just semantics – misclassification can expose firms to significant regulatory risks. It’s a reminder that compliance begins at the very first interaction with a client.

Equally critical is the management of conflicts of interest. The panel’s view is that the SFC clearly wants to see not just policies, but how firms are applying them in practice – especially when it comes to relationships with associated dealers. The message is clear: transparency isn’t optional.

Then there’s the issue of marketing practices. Some firms are still marketing funds without the necessary type 1 license, either out of oversight or an underestimation of the risks. The SFC isn’t likely to be lenient here. Firms need to align their licensing with their activities, or risk being caught on the wrong side of enforcement actions.

The role of circulars: more than just regulatory noise

SFC circulars often land on Friday afternoons, but dismissing them as routine updates is a mistake. They are, in fact, a direct line to the regulator’s current thinking – a pulse check on what’s moving up the priority list.

The October 2024 circular on deficiencies in managing private funds and discretionary accounts was a wake-up call. The deficiencies highlighted were outrageous failures, exposing conduct that has no place in a regulated environment. These were not minor oversights but fundamental lapses in governance, risk management and compliance practices.

This circular sent a clear message about the SFC’s zero-tolerance stance on misconduct and its expectations for firms to uphold robust systems and controls. It’s a stark reminder that even firms with the best intentions can fall short if compliance isn’t embedded into the day-to-day fabric of operations.

More than just listing regulatory breaches, the circular paints a picture of the SFC’s expectations – especially around valuation practices, conflict management and process documentation. It’s not just about avoiding missteps; it’s about building resilient structures that stand up to scrutiny.

Inspections: moving from reactive to proactive

If there’s one certainty about 2025, it’s that SFC inspections are becoming more frequent and more rigorous. The panel was unanimous on this: inspections are no longer rare events – they’re part of the new normal.

This shift calls for a change in mindset. Compliance can’t be reactive anymore. Firms need to operate as if an inspection could happen at any time because, increasingly, it can. That means having documentation ready, not scrambling to pull it together when the SFC comes knocking.

But readiness isn’t just about paperwork. It’s also about approach. The panel stressed the importance of engaging proactively with the SFC. If deadlines are tight or issues arise, open communication can go a long way. Silence or defensiveness? Not so much.

What’s the SFC focusing on during inspections? Conflicts of interest, valuation methods and fund marketing practices are high on the list. But beyond the specifics, the regulator seems to be looking for a culture of compliance; firms that don’t just follow rules but understand their purpose.

Licensing: understanding the nuances

The topic of licensing sparked lively debate. It’s an area where many firms stumble, not because of intentional non-compliance, but due to misunderstanding the nuances. The panel highlighted two contrasting trends.

On one hand, mainland firms often over-license, securing multiple authorisations for perceived flexibility. On the other hand, some overseas firms under-license, trying to minimise reporting obligations. Both approaches carry risks, either in the form of unnecessary regulatory burdens or potential compliance gaps.

The takeaway? Licensing isn’t just a checkbox exercise. It’s about aligning regulatory authorisations with actual business activities. A well-calibrated licensing strategy not only reduces risk but also supports operational efficiency.

Outsourcing: efficiency with accountability

As outsourcing becomes more common in the industry, it’s also attracting more regulatory attention. The SFC has not suggested it is opposed to outsourcing; in fact, it has recognised the efficiencies it can bring. But efficiency can’t come at the expense of accountability.

The discussion highlighted a key point: firms remain responsible for outsourced functions, even if those functions are handled by third parties. That means conducting thorough due diligence on service providers, regularly reviewing their performance and ensuring they meet regulatory standards.

Interestingly, the SFC has scrutinised firms not for outsourcing per se, but for failing to fully use the capabilities of their risk management systems. It’s not enough to have the tools – you have to use them effectively.

Emerging trends: what’s on the horizon?

No discussion about the future of compliance would be complete without looking at emerging trends. Three stood out.

First, the rise of AI in compliance. While AI offers efficiency gains, it also introduces new risks. The panel suggested that AI could be the next big regulatory flashpoint, with firms needing to demonstrate not just the benefits of these tools, but also how they manage associated risks.

Next, ESG (environment, social, governance) dynamics. ESG has become a global focus, but attitudes vary. While ESG investing continues to gain traction in Hong Kong, there’s growing pushback in some markets, particularly the US. This divergence presents challenges for firms with cross-border strategies, requiring a nuanced approach to compliance.

Finally, the ongoing debate around crypto exposure. The SFC’s 20% cap on crypto investments remains a point of contention, with some firms advocating for more flexibility. Whether the regulator will shift its stance remains to be seen, but the industry is watching closely.

The bottom line

What emerged from the session was clear; compliance in 2025 isn’t just about avoiding regulatory pitfalls. It’s about building resilient, adaptable organisations. The SFC’s evolving approach reflects a regulator that’s not just enforcing rules but shaping industry standards.

For firms that are proactive, engaged and open to dialogue, these changes are not just challenges, they’re opportunities. Opportunities to strengthen governance, enhance operations and, ultimately, build trust in an increasingly complex environment.

At Marex, we’re committed to supporting that journey. The Lunch and Learn series is just the beginning, and we’re excited to continue the conversation as the regulatory landscape evolves.

To learn more about this topic, or to find out more about Marex prime services, contact us.