HKSI Paper 1 Business operations and practices question: Segregation of duties at a small broker

HKSI Paper 1Business operations and practices

Lam Kee Securities Ltd is a licensed corporation with six staff. Its senior dealer also arranges settlement of his own trades and posts them to the accounting records, as the firm cannot afford a separate team. How will the SFC approach this?

A It will disregard the point, because the segregation guidance applies only to firms with separate compliance and internal audit departments
B It will take a pragmatic view of the firm's size and consider whether compensating management and supervisory controls are in place
C It will require the firm to outsource settlement to a clearing participant within 30 days, failing which its licence is suspended
D It will treat the overlap as an automatic breach, because full segregation of dealing and settlement is a licensing condition for every firm

Show the answer and explanation

Answer: B. It will take a pragmatic view of the firm's size and consider whether compensating management and supervisory controls are in place

Part II of the Internal Control Guidelines asks that sales, dealing, accounting and settlement be segregated where practicable. The introduction says the SFC adopts a pragmatic approach, giving the inability of a small firm to segregate duties as an example, and takes into account compensatory management and supervisory measures. Segregation is therefore not an automatic licensing condition for every firm. The guidance is not limited to firms that have separate compliance and audit departments. There is no rule requiring outsourcing within 30 days. Source: SFC Internal Control Guidelines (April 2003), Introduction and Part II (as at October 2026).

Common mistake

Reading 'where practicable' out of the guideline. The SFC expects segregation, but for a small firm it asks what compensating controls are in place.

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Original study material mapped to the public HKSI Paper 1 syllabus. Unofficial, not endorsed by HKSI Institute or the SFC. Verify figures and rules against current guidance before relying on them.