The Securities and Futures Commission of Hong Kong (the SFC) has published a report summarises the findings of a thematic inspection of the selling practices of ten licensed corporations, including IFAs, wealth management operations of global financial institutions and stock brokers, across a wide range of investment products distributed/sold by them. The products ranged from plain vanilla funds/bonds, to accumulators and decumulators, OTC options and other structured products.
The SFC’s report identifies deficiencies in:
- management oversight, training and compliance monitoring;
- suitability assessment process;
- use of disclaimers and signing of declarations;
- compliance with the new Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct); and
- in the verification of the eligibility of Professional Investors
The report also outlines some examples of good practices observed during the course of the inspection, although the SFC stresses that intermediaries should not regard these as being the only methods for complying with the relevant regulatory requirements. Several of the good practice examples highlighted by the SFC have resonance with regulatory initiatives in other jurisdictions, including:
- The promotion of good compliance culture by taking into account a number of performance indicators (e.g. whether sales staff had breached any policies and procedures or were the subject of any client complaints) in the determination of the amount of discretionary bonus paid to the sales staff
Product due diligence process:
- Setting out in detail those aspects of the products considered to be suitable for different risk categories of investors
- Providing clear guidance to its sales staff: e.g. for a high risk structured product, the guidance clarified that such a product would only be suitable for clients with a high risk tolerance level, who hold a specific view regarding the market of the underlying asset (e.g. the client believes that the underlying currency accumulated will appreciate or trade sideways over time) and indicating the investment horizon of the clients (e.g. a six-month to one-year investment horizon).
- Preparing presentation materials to assist sales staff to provide effective and consistent explanations to clients regarding the product (in addition to providing training to sales staff);
- Putting in place additional controls when selling investment products to certain customer groups such as elderly people and those with relatively low level of education.
The report suggests that the SFC intends, where appropriate, take regulatory action against those licensed corporations found to have breached the Code of Conduct and other applicable requirements.
However, the SFC also plans to issue advisory circulars or frequently asked questions (FAQs) which offer specific guidance in areas where there is a lower level of compliance with its selling practices requirements.