The SFC conducted a second mystery shopping exercise between April and September last year on 10 licensed corporations (five brokers, two fund managers and three investment advisors) and it released its findings in December. The focus was on three main areas: KYC procedures; investment product feature explanations and risk disclosure; and suitability assessment.
The SFC again found deficiencies in suitability assessments. It also identified deficiencies in the KYC process; inadequate explanations / risk disclosure in particular for high-yield bonds and derivatives; and deficiencies in assessing and recording investors’ “knowledge of derivatives”.
The SFC’s findings indicate that staff at some licensed corporations:
- encouraged the mystery shoppers to change their risk tolerance level
- did not properly document why an investment product was suitable for the investor
- failed to provide key fact statements for authorised funds
- recommended SFC-authorised funds which were permitted to invest in derivatives without first assessing the shoppers’ knowledge of derivatives
- determined that an investment product was suitable for an investor simply because the product's risk rating matched the shopper’s risk tolerance level without demonstrating that all relevant circumstances had been taken into consideration
- failed to make clear whether they were acting as principal or agent
The SFC criticised some licensed corporations for promoting ILAS products over non-insurance investment products.
The SFC took the opportunity to emphasise once again the need for management to maintain proper oversight of sales activity. The SFC required the firms involved to take remedial action.