On 28 March 2018, the Securities and Futures Commission (SFC) published its Consultation Conclusions on the Proposed Guidelines on Online Distribution and Advisory Platforms (Guidelines). The Guidelines aim to provide tailored guidance to the industry on the design and operation of online platforms and to clarify how the suitability requirement, set out in the SFC’s Code of Conduct, would operate in an online environment.
The key comments received in response to the SFC’s consultation paper of 5 May 2017 (Consultation Paper) focused on the types of investment products that would be considered to be non-complex or complex and on the requirement to ensure suitability online, particularly in the sale of complex products. Deacons’ response to the Consultation Paper is available here.
The SFC is conducting a further consultation on adopting the additional measures applicable to online sales of complex products (e.g. to ensure suitability) to offline sales of such products.
Complex or non-complex?
As proposed in the Consultation Paper, the Guidelines will include examples of investment products which are deemed non-complex and examples of complex products.
Not all SFC authorised products are considered non-complex. In particular, SFC authorised products which are characterised as derivative funds as defined in the Code on Unit Trusts and Mutual Funds (UT Code) will be deemed complex. The UT Code is currently under review, and it is proposed that funds with derivative investments exceeding 50% of NAV, calculated on the commitment approach, will be classed as derivative funds. It is therefore expected that a substantial number of UCITS funds will be classed as complex products.
As background to the formulation of its policy on the classification of derivative funds, the SFC has referred to the December 2017 report of the Investor Education Centre on a study of retail investors in Hong Kong, which found that 63% of fund investors surveyed regarded funds investing in derivatives as complex.
It will be the platform operator’s responsibility to determine whether a product to be sold on its platform is complex having regard to the factors set out in the Guidelines and the non-exhaustive list of examples of non-complex and complex products. A platform operator should consider whether the product being offered is of the same type as an investment product in the list and whether the product is regulated in or traded on an exchange in a jurisdiction specified on the SFC’s website (i.e. jurisdictions referred to the SFC’s list of recognised jurisdiction schemes and jurisdictions with which the SFC has a mutual recognition arrangement).
It must be emphasised that investment products which are not authorised by the SFC cannot be offered online to the public, whether or not they can be classed as non-complex: offerings online of unauthorised products must comply with the existing restrictions on public offerings.
Ensuring suitability in the sale of complex products online
The SFC has decided to proceed with its proposal to require platform operators to ensure suitability in the sale of complex products online, including those sold on an unsolicited basis.
The SFC has clarified that the scope of robo-advice under the Guidelines only applies to the provision of investment advice using client-facing technology tools. Intermediaries should, however, comply with other requirements applicable to their use of non-client-facing technology tools (e.g. the Code of Conduct, applicable frequently asked questions published by the SFC, and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC).
Triggering of the Suitability Requirement
More examples of situations where the suitability requirement will, or will not, be triggered have been provided and the guidance materials in respect of the suitability requirement have been consolidated in one page on the SFC’s website which can be accessed here.
It seems likely that suitability will need to be assessed in most online sales. The SFC has dismissed concerns about the difficulties in an online environment of discharging the obligation to ensure suitability.
The final version of the Guidelines is available here.
The Guidelines will become effective on 6 April 2019.