Circular
24 October 2016
Advisory circular to intermediaries
Client identity verification in account opening process
Further to the circular concerning know your client and account opening procedures issued
by the Securities and Futures Commission (“SFC”) on 12 May 20151, the SFC is issuing this
advisory circular to provide more guidance to the industry for compliance with the regulatory
requirements on account opening.
Importance of client identity verification in the account opening process
Client identity verification is an essential element of an effective customer due diligence
process which intermediaries need to put in place to guard against reputational, operational,
legal and financial risks. Effective client identity verification procedures are also necessary to
protect investors and maintain the integrity of the markets by preventing securities fraud,
market abuse and illegal use of the securities industry. Since intermediaries could be used
as channels to launder criminal proceeds and to finance terrorism, the SFC requires
intermediaries to implement effective anti-money laundering measures including proper
customer due diligence to prevent and detect these criminal activities2.
The requirements on account opening are set out in paragraph 5.1 of the Code of Conduct3
which requires intermediaries to take all reasonable steps to establish the true and full
identity of each of its clients. In a face-to-face situation, the signing of the account opening
documents (e.g. client agreement) and the sighting of the identity documents can be
performed in the presence of an employee of the intermediary.
In a non-face-to-face situation where a client is not physically present, intermediaries will
generally not be able to determine the identity documents provided to them belong to the
client. Paragraph 5.1 of the Code of Conduct provides specific guidelines to intermediaries
on acceptable approaches in performing the client identity verification which could apply to
the situation where onboarding of clients is conducted online (A summary is provided in the
Appendix).
Initial client onboarding versus ongoing client authentication
In the past few months, the SFC has considered proposals from the industry to apply the
latest financial technology to account opening in a non-face-to-face situation, including the
use of facial recognition of the client to match the photo in his or her identity card and the
use of service providers to connect to overseas national citizen identity database for
checking of client’s identity, the use of overseas certification authorities and other
approaches, for cross-border client identity verification.
1
Circular concerning Know Your Client and Account Opening Procedures dated 12 May 2015
http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=15EC28
2
Please refer to the news release of SFC titled “SFC notifies the industry of anti-money laundering concerns” and dated 21
September 2016 on http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR95
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Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”)
1
Tel: (852) 2231 1222
Fax: (852) 2523 4598
Website: www.sfc.hk
In our study which covers practices in overseas jurisdictions, we found regulators worldwide
have generally adopted a cautious approach in allowing remote or cross-border account
opening. Where there is an increased use of biometrics (fingerprint, face and sound
recognition) in client authentication, the technology is often being applied to authorise
transactions conducted by clients. In such cases, the intermediary is able to collect biometric
information from clients into a database it maintains, against which the client identity could
be authenticated with the biometric information provided in each transaction.
But this should not be confused with verifying the identity of a client in the initial onboarding
process. To verify the identity of the client, his or her identity information should be checked
against a reliable and authoritative source of documents or database, such as the national
citizen identity database maintained by the government. In many jurisdictions, access to
such database is not allowed because of privacy issues, and where it is allowed, the
reliability and competency of the service providers connecting to the database needs to be
assessed.
Based on our study and feedback from the industry, the SFC considers the requirements set
out in the Code of Conduct are adequate and on par with international standards. However,
we would like to provide more guidance on how the three approaches set out in paragraph
5.1 are applied in a non-face-to-face situation in today’s environment.
(1) Certification services provided by certification authorities
The SFC considers the use of overseas certification authorities a practical means to facilitate
cross-border account opening. The Code of Conduct currently allows certification services
that are recognized by the Electronic Transactions Ordinance (ETO)4 to be employed for
client identity verification. There are certification authorities outside Hong Kong whose
electronic signature certificates (“recognised signing certificates”) have obtained mutual
recognition status5 accepted by the HKSAR government and the electronic signatures
generated by these recognised signing certificates shall have the same legal status as that
of handwritten signatures within the applicable scope of the ETO in Hong Kong. The SFC
considers that the use of the certification services provided by such certification authorities
outside Hong Kong could be accepted for client identity verification.
Intermediaries onboarding clients online can also allow clients to use the recognised signing
certificates to create electronic signatures in executing client agreements.
(2) Client identity verification through professional persons or affiliates
Intermediaries can rely on their affiliates which are regulated financial institutions, certified
professional accountants or notary public to witness the signing of the client agreement and
the sighting of the identity document. Intermediaries have been reminded in the SFC’s
circular of 12 May 2015 that they are strongly discouraged from appointing any affiliate
which is not a regulated financial institution to conduct the client identity verification process
for account opening because such affiliate may not possess the necessary knowledge and
experience to properly carry out the process.
Electronic Transactions Ordinance (Cap.553) (“ETO”)
Please refer to the website of Office of the Government Chief Information Officer
http://www.ogcio.gov.hk/en/business/mainland/cepa/mr_ecert/index.htm
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2
Tel: (852) 2231 1222
Fax: (852) 2523 4598
Website: www.sfc.hk
Given the importance of client identity verification as explained above, the SFC expects that
in future any affiliate performing client identity verification for account opening purpose
should be a regulated financial institution. The SFC is minded to closely review and follow up
on any potential non-compliance in this area and take appropriate regulatory actions.
Intermediaries when onboarding clients overseas should also be mindful of the requirements
imposed by the domestic regulatory authorities in this regard.
(3) Client identity verification by provision of client agreements, identity documents
and drawing on a Hong Kong bank account
Intermediaries can continue to verify the client’s identity by obtaining a signed physical copy
of the client agreement together with a copy of the client’s identity document for verification
of the client’s signature and identity against a cheque drawn from the client’s Hong Kong
bank account as set out in the procedural steps under paragraph 5.1 of the Code of Conduct
(please refer to the Appendix).
The SFC hopes that the above explanatory information could assist intermediaries to comply
with the Code of Conduct’s requirements on account opening. The SFC will keep in view
technology development and continue to communicate with the industry on any suggestions
regarding the use of technology for reliable and effective client identity verification for
account opening purpose. Should intermediaries have any questions regarding the contents
of this circular, please contact Ms Denise Chan at 2231 1188.
Intermediaries Supervision Department
Intermediaries Division
Securities and Futures Commission
End
SFO/IS/034/2016
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Tel: (852) 2231 1222
Fax: (852) 2523 4598
Website: www.sfc.hk
Appendix - Requirements on client identity verification for account opening
Paragraph 5.1 of the Code of Conduct requires a licensed or registered person to take all
reasonable steps to establish the true and full identity of each of its clients, and of each
client’s financial situation, investment experience, and investment objectives. It allows both
face-to-face and non-face-to-face approaches for account opening. Where a non-face-toface approach is adopted, it should be one that satisfactorily ensures the identity of the client.
Face-to-face approach
This refers to the execution of account opening documents in the presence of an employee
of the licensed or registered person.
Non-face-to-face approach
Where the account opening documents are not executed in the presence of an employee of
the licensed or registered person, the Code of Conduct stipulates that the identity of the
client may be verified by any of the following means:
1.
The signing of the client agreement and sighting of related identity documents are
certified by any other licensed or registered person, an affiliate of a licensed or
registered person, a JP (Justice of the Peace), or a professional person such as a
branch manager of a bank, certified public accountant, lawyer or notary public.
2.
Certification services that are recognized by the ETO, such as the certification
services available from the Hongkong Post, may be employed for client identification
purpose. As clarified above, the use of the certification services provided by
certification authorities outside Hong Kong whose electronic signature certificates
have obtained mutual recognition status in Hong Kong could also be accepted for
client identity verification purpose.
3.
Alternatively, the identity of the client may be properly verified if the licensed or
registered person complies with the following procedural steps:
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
the new client sends to the licensed or registered person a signed physical copy
of the client agreement6 together with a copy of the client’s identity document
(identity card or relevant sections of the client’s passport) for verification of the
client’s signature and identity;

the licensed or registered person should obtain and encash a cheque (amount
not less than HK$10,0007 and bearing the client’s name as shown in his identity
document) issued by the new client and drawn on the client’s account with a
licensed bank in Hong Kong;

the signature on the cheque issued by the client and the signature on the client
agreement must be the same;

the client is informed (in the client agreement or by way of a notice) of this
account opening procedure and the conditions imposed, in particular the
condition that the new account will not be activated until the cheque is cleared;
and

proper records are kept by the licensed or registered person to demonstrate that
the client identification procedures have been followed satisfactorily.
Please refer to paragraph 6.2 of the Code of Conduct for the minimum content of a client agreement.
The minimum cheque amount required is subject to periodic review and will be revised when appropriate.
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Tel: (852) 2231 1222
Fax: (852) 2523 4598
Website: www.sfc.hk