HKMA and SFC Provide Further Guidance on Compliance with Suitability Obligations
The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have issued further guidance on their expectations of the conduct requirements of financial intermediaries when selling investment products.
The SFC on 23 December 2016 published a circular together with two sets of new FAQs on the suitability requirement (Suitability Requirement) under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code), with one focusing on the triggering events for the Suitability Requirement (SFC Triggering FAQs) and the other on compliance with the Suitability Requirement (SFC Compliance FAQs) (together, the SFC Guidance).
On 28 December 2016 and 23 February 2017, the HKMA separately released two circulars to provide guidance to banks on its expectations for the provision of investment rationales to clients, and its risk-based supervisory approach to certain aspects of the Suitability Requirement (HKMA Guidance).
The following briefing discusses the key features of the SFC Guidance and the HKMA Guidance. The regulators have repeatedly emphasised that suitability is a cornerstone of investor protection. In light of the evolving market environment, it is a timely reminder for intermediaries to consider how these might impact their existing business practices, and assess whether staff training should be supplemented and internal processes and controls enhanced.
Actions to Take
In light of the recent regulatory guidance, we encourage intermediaries to undertake a thorough self-assessment of their selling process and consider the following actions:
Communications with clients
- Ensure frontline staff understand the implications of their interactive communications with clients, and the circumstances in which the Suitability Requirement will be triggered,
- Ensure frontline staff are experienced in engaging and communicating with clients in a manner which is consistent with the firm-wide business model (whether it be execution only, advisory or discretionary account services models).
- Consider the suitability assessment procedures for different product types having regard to their nature, features and risks (in particular the standards of compliance for exchange-traded products as compared to non-exchange traded products).
- Review if the suitability assessment procedures allow the adoption of a holistic approach in making suitability assessment, having regard to the overall circumstances of the client, in particular the concentration risks.
- Consider the extent and degree of pre-trade disclosure required for repeated transactions for different products.
- Establish appropriate record keeping policies for written and audio records and for different product types (in particular for exchange-traded products as compared to non-exchange traded products).
The regulators have made it clear that compliance with required standards on the selling of investment products will continue to be a supervisory focus, and that suitability is a cornerstone of investor protection. The recent guidance also reflects their collaborative efforts to ensure greater consistency in the standards of conduct expected in the market during the sales process and the supervisory approach they take.
Having the right measures in place is of paramount importance. Intermediaries in particular, will need to be prepared to comply with their suitability obligations from both a regulatory and contractual perspective, once the requirement to incorporate the New Clause into client agreements becomes effective in less than three months' time.