Execution Standards for Supplier and Customer Interviews in Sponsor Due Diligence

Supplier and customer interviews remain the single most scrutinised area of sponsor due diligence in Hong Kong IPO enforcement actions, yet the quality of execution across the industry has not materially improved since the SFC issued its landmark thematic review findings in 2017. The SFC’s 2024 enforcement report noted that 62% of disciplinary actions against sponsors between 2019 and 2024 involved deficiencies in third-party verification procedures, with interview failures cited in 47% of those cases. This persistent gap between regulatory expectation and field execution is not merely a compliance risk — it directly threatens the viability of listing applications, as the Listing Committee has demonstrated by returning applications at the A1 stage where interview documentation failed to meet the standard set out in HKEX Listing Rules Chapter 19A and the SFC’s Code of Conduct paragraph 17.6. For sponsors holding Type 6 and Type 6A licences, the margin for error has narrowed to zero in 2025, as the SFC’s new inspection protocol now subjects interview workpapers to real-time sampling during live transactions, rather than retrospective review after a listing fails.

The Regulatory Baseline: What the SFC and HKEX Actually Require

The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC, specifically paragraph 17.6 and the associated Practice Note 21, establishes that sponsor due diligence must be “reasonably designed to ensure that the listing document does not contain any untrue statement of a material fact.” This is not a standard of perfection, but it is a standard of professional competence that the SFC has defined with increasing precision through enforcement actions. The 2017 thematic review of sponsor due diligence, which examined 12 IPO transactions completed between 2014 and 2016, found that 8 of the 12 sponsors had failed to conduct adequate supplier and customer interviews, with deficiencies including failure to verify the identity of interviewees, failure to corroborate oral statements with documentary evidence, and failure to document the basis for selecting interview subjects.

The SFC’s 2023 consultation conclusions on sponsor regulation, effective from 1 January 2024, introduced three specific requirements that directly affect interview execution. First, sponsors must now maintain a “contemporaneous record” of all interviews, defined as a written or electronic record created within 24 hours of the interview. Second, the sponsor must identify each interviewee by reference to a government-issued photo identification document, with the document number and issuing authority recorded in the workpaper. Third, where an interview is conducted through an interpreter, the interpreter’s identity and qualifications must be documented, and the sponsor must satisfy itself that the interpreter is independent of the issuer and the interviewee.

HKEX Listing Decision LD107-2019, which concerned a Main Board applicant in the manufacturing sector, established that the Exchange will reject an application where the sponsor cannot demonstrate that it has taken “reasonable steps” to verify the existence and business relationship of key customers and suppliers. In that case, the sponsor had conducted interviews with 12 of the applicant’s top 20 customers, but had not verified that the individuals interviewed were actually employees of the customer entities. The Exchange found that the sponsor had relied on introductions from the issuer’s management, and had not independently confirmed the interviewees’ employment status through company directories, LinkedIn profiles, or direct contact with the customer’s human resources department.

The Interview Selection Methodology: Statistical vs. Judgmental Sampling

The SFC has never prescribed a minimum number of interviews, nor has it mandated a specific sampling methodology. However, enforcement actions have established clear expectations through negative inference. In the SFC’s 2020 disciplinary action against Sponsor A, which was fined HKD 30 million and had its licence suspended for 18 months, the regulator found that the sponsor had interviewed only 5 of the issuer’s 47 largest customers, representing 23% of total revenue, and had selected those 5 based solely on the issuer’s recommendation. The SFC held that this constituted “blind reliance” on the issuer, and that the sponsor should have applied a risk-based judgmental sampling approach that considered factors including geographic concentration, payment terms, and the length of the business relationship.

The current industry standard, as articulated in the Hong Kong Investment Funds Association’s 2024 guidance note on sponsor due diligence, is to apply a hybrid approach: statistical sampling for the top 10-15 customers and suppliers by transaction value, supplemented by judgmental sampling for entities that exhibit red flags such as recent incorporation, identical registered addresses, or related-party indicators. For a typical Main Board applicant with 100-200 active customers, the industry benchmark is 15-25 interviews, with a minimum coverage ratio of 40% of revenue on the customer side and 35% of procurement on the supplier side. These figures are not regulatory requirements, but they represent the threshold below which the SFC has consistently found due diligence to be inadequate.

The Identity Verification Protocol: Beyond the Business Card

The single most common deficiency cited in SFC enforcement actions is the failure to verify the identity of the person being interviewed. In the 2022 disciplinary action against Sponsor B, which involved a GEM listing applicant in the construction sector, the sponsor had conducted 18 customer interviews, but had verified the identity of only 6 interviewees against government-issued identification. The remaining 12 interviews were conducted with individuals whose business cards were accepted as proof of identity. The SFC found this unacceptable, noting that business cards can be printed by anyone and do not constitute reliable evidence of identity or employment.

The current regulatory expectation, as set out in the SFC’s 2024 inspection manual, requires the sponsor to:

1. Obtain a copy of the interviewee’s government-issued photo identification (passport or national identity card) and verify it against the person physically present.
2. Confirm the interviewee’s employment status through an independent channel — either by calling the customer’s or supplier’s published telephone number and asking for the individual by name, or by cross-referencing against a company email address that matches the domain name.
3. Record the verification method in the workpaper, including the date, time, and the name of the sponsor staff member who performed the verification.

Where the interview is conducted by video conference — a practice that has become standard since 2020 — the sponsor must record the entire session and must verify the identity of the interviewee by holding the identification document up to the camera. The SFC’s 2023 guidance on remote due diligence confirmed that video interviews are acceptable, but only if the sponsor can demonstrate that the verification standards are equivalent to those applied in person.

The Interview Process: Structuring the Conversation for Evidentiary Value

The substance of the interview — the questions asked, the answers given, and the corroboration of those answers — is where most sponsors fall short of the regulatory standard. The SFC’s 2017 thematic review found that 75% of interview records reviewed were “insufficiently detailed” to support the conclusions drawn in the sponsor’s due diligence report. Common deficiencies included: failure to ask follow-up questions when answers were inconsistent with documentary evidence; failure to explore the basis for the interviewee’s knowledge; and failure to document the interviewee’s actual words, instead paraphrasing or summarising.

The current regulatory expectation, as articulated in the SFC’s 2024 enforcement report, is that the interview record must be a “substantially verbatim” account of the conversation, not a summary. The sponsor must prepare a written transcript or, if the interview is recorded, a written summary that captures each question and answer in sufficient detail to allow a reviewer to understand what was said and by whom. The SFC has stated that it will not accept interview records that consist of a single paragraph of conclusions, such as “the customer confirmed that it has a business relationship with the issuer and is satisfied with the quality of products.”

The Question Protocol: From General to Specific

The industry standard for interview structure, as recommended by the Hong Kong Sponsor Compliance Association’s 2024 best practice guide, follows a three-tier framework:

Tier 1: Relationship Verification. The sponsor must first establish the factual basis for the business relationship. Questions should include: How long has your company been doing business with the issuer? What is the approximate annual volume of transactions? Who is your primary contact at the issuer? How did the business relationship begin? The purpose of this tier is to confirm that the relationship is genuine and that the interviewee has direct knowledge of it.

Tier 2: Transaction Verification. The sponsor must then verify specific transactions. Questions should reference actual invoices, purchase orders, or delivery receipts that the sponsor has obtained from the issuer’s records. For example: “We have a copy of invoice number 12345 dated 15 June 2023, which records a transaction of HKD 500,000 for the supply of widgets. Can you confirm that you received these widgets and that the quantity and price are accurate?” The sponsor must not accept a general confirmation — the interviewee must be asked about specific documents, and the documents must be presented during the interview.

Tier 3: Red Flag Exploration. The sponsor must proactively explore any indicators of fraud or misrepresentation. If the customer’s registered address is a residential building, the sponsor must ask about the nature of the premises. If the customer was incorporated shortly before the first transaction with the issuer, the sponsor must ask how the business relationship was established. If the payment terms are unusually favourable to the issuer, the sponsor must ask why.

The SFC’s 2022 enforcement action against Sponsor C, which involved an applicant in the technology sector, found that the sponsor had failed to ask any Tier 3 questions despite clear red flags: one of the issuer’s top five customers had been incorporated only 6 months before the first transaction, and the customer’s registered address was a shared office space with 200 other companies. The sponsor had accepted the customer’s explanation that “it was a new business venture” without further inquiry. The SFC held that this constituted a failure to exercise professional scepticism.

The Corroboration Requirement: Oral Statements Must Be Supported by Documentary Evidence

The SFC has repeatedly stated that an interview is not a standalone verification tool — it is a means of testing and corroborating documentary evidence. Paragraph 17.6(b) of the Code of Conduct requires the sponsor to “take reasonable steps to verify the accuracy and completeness of information provided by the issuer,” and the SFC’s interpretation of this requirement is that oral statements made during interviews must be supported by independent documentary evidence.

In practice, this means that the sponsor must obtain, during or immediately after the interview, documents that corroborate the interviewee’s statements. If the customer confirms that it has a distribution agreement with the issuer, the sponsor must obtain a copy of that agreement. If the customer confirms that it has paid for goods received, the sponsor must obtain a copy of the bank statement showing the payment. If the customer confirms that it operates from a specific location, the sponsor must obtain a utility bill or lease agreement showing that address.

The SFC’s 2023 thematic review of sponsor due diligence in the healthcare sector found that 6 of the 10 sponsors reviewed had accepted oral confirmations without obtaining supporting documents. In one case, a sponsor had conducted 22 customer interviews and had obtained supporting documents for only 3 of them. The SFC noted that this practice “effectively renders the interview process meaningless, as the sponsor is relying on unverified statements that could be fabricated by the issuer.”

The Use of Third-Party Verification Services

The Hong Kong market has seen a significant increase in the use of third-party verification firms — commonly referred to as “due diligence vendors” — to conduct supplier and customer interviews on behalf of sponsors. The SFC’s 2024 enforcement report addressed this practice directly, stating that while sponsors may delegate the conduct of interviews to third parties, they cannot delegate the responsibility for the quality of those interviews.

The SFC’s position is that the sponsor must retain “meaningful oversight and control” of the interview process. This means that the sponsor must:

1. Approve the interview questionnaire in advance.
2. Review the vendor’s interview reports for completeness and consistency.
3. Conduct its own follow-up interviews where the vendor’s work raises questions.
4. Ensure that the vendor maintains the same standards of identity verification and documentation that the sponsor would apply.

In the 2023 disciplinary action against Sponsor D, the sponsor had engaged a third-party vendor to conduct 35 customer interviews, but had not reviewed the vendor’s workpapers before submitting the listing application. The SFC found that 12 of the 35 interviews were deficient — the vendor had not verified the identity of the interviewees, had not obtained supporting documents, and had not recorded the questions asked. The sponsor was fined HKD 15 million and the vendor was reported to the SFC’s enforcement division.

The Documentation Standard: Building a Regulatory-Defensible Workpaper File

The workpaper file is the sponsor’s primary defence in any regulatory inquiry, and the SFC has made clear that it will judge the quality of due diligence by the quality of the documentation. The 2017 thematic review found that 80% of sponsors had “inadequate documentation” of their interview procedures, with common deficiencies including missing dates, missing names of attendees, and missing records of the documents reviewed.

The current regulatory expectation, as set out in the SFC’s 2024 inspection manual, requires the following minimum documentation for each interview:

1. Interview Record: A written record of the interview, including the date, time, location (or video conference link), and duration. The record must identify all persons present, including the sponsor’s staff, the interviewee, and any interpreter or third-party observer.
2. Identity Verification Record: A copy of the interviewee’s government-issued photo identification, together with a note confirming that the sponsor verified the identity against the person present.
3. Questionnaire: A copy of the interview questionnaire, showing which questions were asked and which were not. The sponsor must document the rationale for any questions that were omitted.
4. Supporting Documents: Copies of all documents obtained during or as a result of the interview, including contracts, invoices, bank statements, and utility bills.
5. Corroboration Notes: A written analysis of how the interviewee’s statements were corroborated by documentary evidence, or, if they could not be corroborated, an explanation of the steps taken to resolve the inconsistency.
6. Supervisor Review: Evidence that the interview workpaper was reviewed by a qualified supervisor, defined as a person holding a Type 6 or Type 6A licence with at least 5 years of relevant experience.

The Timing Requirement: Interviews Must Be Conducted Before the Draft Prospectus Is Filed

The SFC’s 2023 consultation conclusions introduced a new timing requirement: all supplier and customer interviews must be completed before the draft prospectus is filed with the HKEX under the A1 submission. This requirement was introduced in response to the SFC’s finding that 40% of sponsors interviewed in the 2022 thematic review had conducted interviews after the A1 filing, effectively treating them as a “clean-up” exercise rather than a core due diligence procedure.

The practical implication of this requirement is that sponsors must plan their interview programme at the outset of the engagement, and must allocate sufficient resources to complete the interviews within the pre-filing period. For a typical Main Board applicant, this means that the interview programme must be initiated at least 8-10 weeks before the planned A1 filing date, allowing time for scheduling, travel, follow-up, and documentation review.

The Remote Interview Protocol: Regulatory Requirements for Video-Based Verification

The COVID-19 pandemic normalised remote interviews, and the SFC has accepted that video-based verification is a permanent feature of sponsor due diligence. However, the regulator has imposed specific requirements that sponsors must satisfy when conducting remote interviews.

The SFC’s 2023 guidance on remote due diligence, issued as a circular to all licensed sponsors, requires that:

1. The video conference must be recorded in its entirety, and the recording must be retained for at least 7 years after the listing application is withdrawn or the listing is completed.
2. The sponsor must verify the interviewee’s identity by asking the person to hold their government-issued photo identification up to the camera, and the recording must capture this verification.
3. The sponsor must confirm the interviewee’s location by asking them to share their screen and display a map showing their current location, or by asking them to describe their surroundings.
4. The sponsor must obtain an electronic copy of the interviewee’s identification document and any supporting documents during the video conference, not after.

The SFC has also stated that remote interviews are not appropriate where the interviewee is located in a jurisdiction with a high risk of fraud or where the sponsor has identified red flags that require physical inspection. In such cases, the sponsor must conduct the interview in person, or must provide a written explanation of why an in-person interview was not possible.

The Enforcement Landscape: What the Sanctions Reveal About Regulatory Priorities

The SFC’s enforcement actions against sponsors provide the clearest indication of the regulator’s priorities in the interview space. Between 2019 and 2024, the SFC imposed sanctions on 14 sponsors for due diligence failures, with total fines exceeding HKD 180 million. Of these 14 cases, 11 involved deficiencies in supplier or customer interviews.

The most significant case was the 2020 action against Sponsor A, which was fined HKD 30 million and suspended for 18 months. The SFC found that the sponsor had failed to conduct interviews with 15 of the issuer’s top 20 customers, and had accepted the issuer’s explanation that these customers were “too busy” to participate. The SFC held that the sponsor should have escalated this issue to the HKEX or withdrawn from the engagement, rather than proceeding with an incomplete interview programme.

The 2022 action against Sponsor B established the principle that interview deficiencies can be fatal even where the underlying business is legitimate. In that case, the issuer was a genuine operating company with verifiable revenue, but the sponsor’s interview documentation was so poor that the SFC could not satisfy itself that the due diligence had been properly conducted. The sponsor was fined HKD 12 million and required to engage an independent reviewer to audit its future interview procedures.

The 2024 action against Sponsor E, which involved an applicant in the financial technology sector, introduced a new enforcement theory: the SFC held that the sponsor’s failure to conduct adequate customer interviews had caused the prospectus to contain untrue statements, because the sponsor could not confirm that the revenue figures disclosed in the prospectus were accurate. This represents a significant escalation, as it directly links interview deficiencies to prospectus liability under the Securities and Futures Ordinance (Cap. 571), section 109.

The HKEX’s Role: Gatekeeping at the Application Stage

The HKEX has increasingly taken an active role in reviewing interview documentation during the listing application process. Since 2022, the Exchange’s Listing Division has conducted targeted reviews of interview workpapers for 30% of Main Board applications, and has returned 8 applications at the A1 stage where the interview documentation was found to be inadequate.

The Exchange’s approach is set out in Listing Decision LD124-2023, which concerned an applicant in the consumer goods sector. The Exchange found that the sponsor had conducted interviews with 18 customers, but had not documented the basis for selecting those 18 from the issuer’s total customer base of 120. The Exchange held that the sponsor had failed to demonstrate that its interview programme was “reasonably designed” to address the risks identified in the due diligence plan, and required the sponsor to conduct additional interviews with 10 more customers before the application could proceed.

The practical implication of the Exchange’s increased scrutiny is that sponsors must now prepare interview documentation that is “Exchange-ready” at the time of the A1 filing. This means that the workpaper file must be organised, indexed, and cross-referenced in a manner that allows the Exchange’s reviewers to quickly assess the completeness and quality of the interview programme.

Actionable Takeaways

1. The SFC and HKEX now require sponsors to complete all supplier and customer interviews before the A1 filing, with contemporaneous documentation that includes identity verification against government-issued photo identification, a substantially verbatim interview record, and supporting documents obtained during the interview.
2. Sponsors must apply a hybrid sampling methodology — statistical sampling for the top 10-15 customers and suppliers by transaction value, supplemented by judgmental sampling for entities with red flags — and must document the rationale for the selection of each interview subject in the workpaper file.
3. The interview questionnaire must follow a three-tier structure that moves from relationship verification to transaction verification to red flag exploration, with each tier requiring specific questions that reference actual documents obtained from the issuer’s records.
4. Oral statements made during interviews must be corroborated by independent documentary evidence obtained during or immediately after the interview, and the workpaper must contain a written analysis of how each statement was corroborated or, if not corroborated, the steps taken to resolve the inconsistency.
5. Where third-party verification vendors are used, the sponsor must retain meaningful oversight and control, including approval of the questionnaire, review of the vendor’s workpapers, and conduct of follow-up interviews where the vendor’s work raises questions.