From July to November 2010, the SFC and HKMA conducted a mystery shopping exercise on the sales practices of authorised institutions and licensed corporations in respect of unlisted securities and futures investment products and structured deposits. The exercise covered three major areas, namely know-your-client process, explanation of product features and disclosure of risks, and suitability assessment.
The SFC and HKMA released their findings on 24 May 2011. Whilst some good practices by sales staff of selected intermediaries were noted, as expected, some deficiencies in selling practices were identified from the exercise. The major deficiencies noted included:
- insufficient understanding of the recommended products;
- inadequate or inaccurate explanation of the features and/ or disclosure of risks of the recommended products;
- inaccurate description of the SFC’s requirements or practices;
- inadequacy in the procedures of identifying vulnerable customers with low education; and
- failure to take into account all the relevant personal circumstances of the client when making the suitability assessment.
Both the SFC and HKMA have stated they will liaise directly with the licensed corporation or authorised institution as relevant where major deficiencies have been noted and that they will continue to use the mystery shopping exercise to assess the industry's compliance with requirements in terms of selling practices.
Remarks - For the securities sector, 150 samples were conducted on 10 licensed corporations, which comprised investment advisory firms as well as brokerages. For the banking sector, the exercise covered 350 samples from a mix of 20 small, medium and large authorised institutions which engaged in selling investment products to Hong Kong investors. A particular deficiency in collecting client information was noted with authorised institutions. In its circular, the HKMA stated that authorised institutions were required to collect and document, among other things, education and investment objectives of its clients as part of the KYC process.