Fund houses oppose HK's vague rules on referrals

Fund houses and investment advisers operating in Hong Kong are transacting with business referrers that are unlicensed and technically illegal due to badly out of date rules, say market insiders.

The apparent reluctance of the territory to update its oversight of this grey area of financial services promotion risks damaging its status as a financial centre, they add.

Referrers are professional services providers that can suggest financial advisers and fund managers to clients. In Hong Kong they are an essential means for many fund houses and financial advisers to get clients, said Philip York, Hong Kong-based director of Myo Capital Advisers, an investment advisory firm.

However, many fund houses and advisers in Hong Kong are operating with referrers that are, under the letter of the Securities and Futures Ordinance, operating illegally. 

"Asset managers are signing agreements with unlicensed introducers in breach of the law simply for commercial efficiency; so they can attract clients," York told AsianInvestor.

The Securities and Futures Commission (SFC) last addressed the issue of referrers in 2000, stating that they need to be licensed with the exception of solicitors and accountants. But many other types of referrers have emerged in the years since.

York said he has been asked by asset managers, including some large global fund houses, to prevail upon the Hong Kong regulator to broaden the types of referrers exemptions from requiring a licence.

"They’re too scared to go to the SFC themselves, because they don’t want to be singled out for making trouble," he said.

The regulator could, after all, find these fund houses to be in trouble for their dealings with unlicensed referrers.  

Outdated rules

The dated rules on ‘mere referrals’ are a particular problem in Hong Kong, where many fund houses and financial advisers typically rely on introductions from friends and family. 

"The current laws and rules in Hong Kong do not forthrightly legitimise such referrers, leaving an uncertainty that is hampering the efficiency of the industry," noted York.

York said he did approach the SFC on the behalf of asset managers, and suggested that it issues "clear and pragmatic" guidance on the question of licensing exemptions for mere referrals.

"I told them how this is making Hong Kong technically uncompetitive," York said. "The funds industry has taken it into their own hands and are acting in breach of the legislation, so it’s about time the regulator created a guidance note to give the industry some clarification."

In response, the SFC recommended York take up the issue through an association like Asia Securities Industry and Financial Markets Association (Asifma). That would require him to become a member firm, “at membership fees of $12,000 a year", he said.

AsianInvestor asked the SFC and Asifma to comment on the issue of referrals but received no response at press time. 

Meanwhile, a senior committee member of the Hong Kong Investment Funds Association told AsianInvestor that from his enquiries, "our members are not hearing anything on this topic and it is not on the radar of any of our sub-committees". 

While the HKIFA isn’t prioritising the issue, other market players do feel it to be important. Hong Kong wealth adviser Rick Adkinson of Private Capital agreed that lack of clarity on the question of referrals was damaging to Hong Kong's professional image, at a time when it is already considered the “last frontier” of poorly regulated financial services.

Light touch

Regulators in other financial jurisdictions generally take a light touch when it comes regulating mere referrals, but they acknowledge the issue requires clarification.

The Australian Securities and Investments Commission (Asic), for example, offered a 2016 update to regulations originally issued in 1998 that provided a general exemption for mere referrals. It said referrers are exempt from licensing if they inform the client that an intermediary can provide a particular financial service, tell them how to contact the company, and disclose any benefits, including commission, they may receive when doing so.

The Australian regulator's view is that if all introduction service providers had to be licensed “the regulatory burden for such services is too great and imposes significant costs on the fundraising process".

It added that it did not believe investor protection would be greatly diminished by not licensing all referrers, and therefore it would allow these services to operate "without complying fully with the law".

"Asic said ‘as long as these people (referrers) are not selling securities, that's fine’. They’ve been very careful in their terminology. They are saying ‘we are not enforcing it, in that regard’. So it’s kind of a class order exemption, or a no-action letter," said York.

In Singapore, the MAS has imposed more of a blanket exemption, but York says they are going about it the same way as Australia, and not enforcing that part of the law in relation to referral services.

Hong Kong, in constrast to these jurisdictions, appears to be well behind the times.