Background 

The Financial Dispute Resolution Scheme (“FDRS”) came into force in June 2012 following a positive response from the public on the establishment of a scheme which would provide “financial institutions and their customers with an independent and affordable avenue, as an alternative to litigation, for resolving monetary disputes”. 

To give effect to the FDRS, the Financial Dispute Resolution Centre Limited (“FDRC”) was established to administer a two-stage “mediation first and arbitration next” resolution scheme. 

To prevent financial institutions from simply side-stepping the FDRS, two amendments were made to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC) (the “Code”) both obliging licensed or registered persons to bind themselves to and comply with the FDRS. 

The Pride Fund Management Limited (“Pride Fund”) 

Pride Fund is licensed under the Securities and Futures Ordinance (Cap 571) to carry out various regulated activities. 

In or around March 2008, H was introduced to an investment opportunity by K. K recommended that H invest in a fund named ‘The Pride Opportunities Fund – Series 11’ (the “Fund”). H asserted that she wanted to invest in a fund in which her capital was protected and K informed her that this was just such an investment. To the contrary, the Fund was not a financial product authorised by the SFC and once invested, money paid into the Fund could not be redeemed at will. 

The Fund was managed by a company named The Pride Investments Group Limited (ie the fund manager) and neither the Fund nor the fund manager had any presence in Hong Kong. For that reason an ‘administration services agreement’ had been entered into between Pride Fund and The Pride Investments Group Limited in terms of which, among other responsibilities, Pride Fund was obliged to “answer client enquiries”. 

H’s investment turned out to be a very poor one and she suffered loss of US$68,557.6 as a result1, H sought redress. As to the basis of her claim, although H did not know it at the time, K was at, the time he introduced her to the Fund, a licensed representative of Pride Fund. 

The FDRC found H to be eligible to proceed against Pride Fund under the FDRS pursuant to Clause 12.1(f) of the Terms of Reference for FDRC in relation to FDRS (“Terms of Reference”). W, the majority shareholder of Pride Fund, contended that it should not be made subject to the FDRS. Among other matters, he argued that (i) the matter had already been investigated by the ICAC, the Police and the SFC with no action taken (H initially reported the matter to the SFC, the ICAC and the Police and later sought to make good a civil claim against Pride Fund under the FDRS), (ii) that H had never been a client of Pride Fund and there was no contractual relationship between the parties, and (iii) that mediation was “surely optional”. It appears that W accepted through correspondence with FDRC staff members that he “fully understood the consequences of this non-compliance with the FDRS” and was “fine” with the matter being reported to the SFC. 

With regard to (ii) above, although H did not have a formal investment contract with Pride Fund, the FDRC found H to be eligible to proceed against Pride Fund on the basis that her dispute arose out of acts or omissions of Pride Fund acting as an agent of the fund manager (ie The Pride Investments Group Limited) in the provision of financial services to her, including providing information to clients and potential clients and in receiving applications for investment. 

The FDRC issued a Notice of Non-Compliance to Pride Fund in June 2013. It was only after the SFC commenced disciplinary proceedings against Pride Fund that it eventually agreed to enter into mediation with the claimant. The SFC imposed a public reprimand and a fine of $700,000 on Pride Fund. 

On appeal, the SFAT considered whether the FDRC was clearly wrong in its determination in finding H eligible to proceed against Pride Fund under the FDRS. The SFAT concluded it was satisfied that there are no grounds for holding that the decision made by the FDRC officers was so plainly wrong as to vitiate the decision itself. 

Pride Fund claimed it had not understood that it was required to comply with the FDRS. The Hon Mr Justice Hartmann NPJ, who upheld the SFC’s decision but varied the fine from $700,000 to $400,000, found that Pride Fund’s non-compliance was deliberate and that although the obligations under the FDRS may not be generally understood, after the SFAT’s reasons in this case and the public reprimand there can be no further excuse “… on the part of members of the financial industry for a lack of understanding, at least, of the scheme’s basic architecture”. The Hon Mr Justice Hartman also warned that “… sterner penalties can be expected in the future …”. 

Implications 

This is the first time the SFC has enforced the Code of Conduct obligations of intermediaries to comply with the FDRS. 

The SFAT determination reinforces the position that all licensed or registered persons are bound to the FDRS in terms of the Code that governs their conduct and in terms of the Terms of Reference that govern the FDRS itself. They cannot unilaterally opt out on the basis, for example, that mediation is meant to be a voluntary process. 

Once the ‘Case Officers’ employed by the FDRC have determined the eligibility of claimants and their claims, the decision will be final and conclusive and cannot be challenged2. 

The SFC has indicated that it takes non-compliance with the FDRS seriously and will continue to take action against SFC-licensed intermediaries who fail to comply with the FDRS. Financial institutions should therefore pay attention and ensure compliance with the FDRS.