What are the conduct and CDD requirements for marketing public OFCs?
Following the increasing interest of fund managers in registering their funds as public open-ended fund companies (OFCs) under the Securities and Futures Ordinance, quite a number of these managers are also interested in marketing such OFCs to the retail investors in Hong Kong.
If these managers have not marketed public funds directly to Hong Kong retail investors in the past, they will need to establish and maintain new investment take-on procedures and forms (Procedures) to ensure that they comply with a wide range of investor protections and in particular the suitability obligations under paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). Most of these investor protection requirements are referred to in paragraphs 15.4 and 15.5 of the Code of Conduct.
Fund managers also need to be familiar with the specific requirements as set out in the SFC’s dedicated webpage entitled “Suitability requirement” (link).
Separately, the Procedures also need to cover the onboarding customer due diligence requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations).
As we near the final quarter of 2022, be reminded that the SFC’s grant scheme funded by the Hong Kong government will continue to provide subsidies to cover up to 70% of the eligible expenses (subject to a cap of HK$1 million per OFC) in connection with the formation or re-domiciliation of OFCs until May 2024.
SFC’s review of online brokerage, distribution and advisory services
Licensed corporations that undertake online brokerage, distribution and advisory services will want to pay careful attention to the SFC’s Circular to licensed corporations – Review of online brokerage, distribution and advisory services issued on 31 August 2022 (link). The circular highlights various deficiencies that have come to the SFC’s attention, some examples of which include the following:
- Non-face to face client onboarding
- inadequacies in client verification procedures
- Online trading, distribution and marketing
- restrictive disclaimers relating to suitability obligations
- insufficient product due diligence
- inadequate client risk profiling
- failure to implement adequate mechanisms to mitigate cybersecurity risks
- Resources planning and complaint handling
The circular includes a useful appendix which is a report of the review (link).
The report sets out the SFC’s expected regulatory standards. In light of this circular and the increasing interest of retail investors to use online platforms for investing, it is a timely reminder for platform providers to review and assess the suitability of their current systems, controls and procedures to ensure that they are compliant with all applicable rules and regulations.