Hong Kong’s securities regulator last week again showed its readiness to punish firms that break the rules on the sale of investment products by slapping a HK$5 million ($637,000) fine on wealth manager Noah Holdings.
Fund houses should take note because the tighter requirements will apply to them too from November 17.
Industry experts expect to see further such action taken by the Securities and Futures Commission (SFC), amid worries that some firms may not be clear what constitutes a breach of the regulator’s Code of Conduct for licensed persons. There are also concerns that the watchdog is being over-cautious on the types of instrument it allows professional investors to buy.
“The SFC is sending a very clear signal ... that [product] suitability and KYC [know-your-customer] are genuine requirements that need to be applied,” Rolfe Hayden, head of financial services for Asia at law firm Simmons & Simmons, told AsianInvestor.
“This goes back to the Lehman minibond affair, that servicing professional investors does not exempt a licensed corporation from the tighter Code of Conduct requirements now in place,” Hong Kong-based Hayden said.
The sale of so-called minibonds – structured notes backed by US bank Lehman Brothers, which collapsed in September 2008 – led to big losses for investors in Hong Kong and Singapore.
The new, tighter requirements in the 'Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission' were issued on November 17, 2016. They will come into effect for fund managers on the same date this year, as part of the revised Fund Manager Code of Conduct.
Not all of the rules will be as relevant to fund houses as they are to distributors – such as product training and due diligence – but the Noah case is of some interest to them because the suitability assessment is still relevant to an asset manager if selling its own fund directly to clients, Hayden noted.
Noah HK had failed to comply with requirements on know-your-client, product due diligence, suitability assessment, information for clients, and sales supervision and controls.
“Smaller fund managers will look at this and may be concerned,” Hayden said. “I suspect many fund managers are not as clear as they should be about the risk of non-compliance with [these rules].”
And there has been a big rise in the number of firms obtaining SFC licences in the past year or two, with Chinese fund managers forming a substantial chunk of these applications.
The Hong Kong Investment Funds Association did not respond to an emailed request for comment.
MORE PENALTIES TO COME
Other firms are likely to receive sanctions similar to those handed to Noah, forecasts Philippa Allen, chief executive of Hong Kong-based consultancy ComplianceAsia. The action against Noah is part of a concerted strategy by the SFC to send a message about the tighter regime, she told AsianInvestor.
There have been many examples of such sanctions since 2017, Allen said, citing the HK$39.3 million fine handed to Credit Suisse in February 2018 for, among other things, its failure to ensure investment products were suitable for customers.
“The SFC is picking out bigger names to have a go at, to get the message across,” she added, noting that the regulator's head of enforcement, Tom Atkinson, has intimated as much in public comments he has made.
A key issue is that often product distributors are not pushing their clients to fill in the relevant forms to disclose the required information on areas such as risk appetite, Allen said.
There is also a structural problem that the industry faces, she added: the SFC is being too strict about the kind of products that it will authorise for sale in Hong Kong. “By making it so difficult to sell a fund or a structured product to individual investors, the flipside is that they are going off and investing in higher-risk products without advice,” Allen said.
The SFC is effectively only allowing relatively low-risk funds compliant with Europe's Ucits rules, she noted, so many professional investors are using brokers to buy structured products or leveraged exchange-traded funds.