SFC examines IA selling practices

Although not a witchhunt, regulator''s theme inspection points to flaws in the investment advisor market

Hong Kong's Securities and Futures Commission (SFC) has issued a report designed to enhance industry awareness of standards of investment advisors (IAs) and to reiterate the code of conduct for the selling of funds in the territory. Entitled the "Report on Selling Practices of Licensed Investment Advisers," the SFC conducted a theme inspection of a mixed bag of 15 investment advisors to address the problem of misselling to customers and to study measures to enhance investor protection and industry transparency in the industry.

According to the regulator and the information collected, several key requirements need to be adhered by investment advisors when giving advice to ensure reasonably suitable recommendations on fund and investment selections.

The sample group for the report consisted of roughly 10% of all SFC licensed advisors in Hong Kong and covered a broad scope of varying operational characteristics including corporate structure, clientele: local vs. expatriates, number of local sales staff, number of clients and range of services.

Foremost, the SFC stressed that in order to avoid cases of misselling, investment advisors should know the client and their specific needs, conduct product due diligence, document proper basis of recommendation to protect not only the client but themselves, avoid actual, potential or perceived conflicts of interest and finally, help clients make informed decisions, while always putting the client first.

In terms of the main deficiencies unearthed by the SFC's report, investment advisors making investment recommendations without proper basis and those not giving sufficient explanation or information to the clients for them to make informed decisions ranked as the most common problems.

In response to these findings, the regulator has issued a clarification of existing requirements grouped into three categories. In terms of integrity and professionalism section of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, it specified that IAs should always act with integrity and in the best interests of their clients, while also clarifying paragraphs related to conflicts of interest.

In regards to the reasonable recommendations portion of the code, the SFC also clarified sections relating to knowledge of clients, product due diligence, making reasonable decisions, helping clients make informed decisions and issues of IA competency. Whereas on the compliance matters side, amendments and clarifications on client agreements, waivers and disclaimers, management supervision and selling of unauthorized products were also raised by the report.

"Through the release of the report we aim to remind the industry of the code of practice and move to tighten existing practices," says Alexa Lam, the SFC's executive director of intermediaries and investment products. "We are hoping that the report will remind the industry that clients interests come first."

The industry body also pointed to its recent enforcement actions against Barber Asia Limited (the first case in Hong Kong where an investor successfully sued an IA) and Towry Law (Asia) as examples that it will take misselling of funds and negligent investment advice by investment managers very seriously, with Lam stressing that the selling of unauthorised funds will prompt action from the regulator.

"Had these advisors followed the principles they would not have made these infractions," Lam told a luncheon hosted by the Institute of Financial Planners of Hong Kong. "Although we are not drawing conclusions that the problems were rampant, we suggest that those who have strayed from the code should come back."

Going forward, the SFC will continue to study measures to enhance investor protection and industry transparency. In particular, Lam says that the SFC will look to possibly implement a disclose commission rebate, as is mandatory in the UK and Australia, professional indemnity insurance and disclosure of the exact nature of services to avoid another Barber Asia or Towry Law-type scenario.

Increased investor education detailing the right questions to ask, the correct methods to obtaining suitable advice and empowering investors to assess the suitability of investment advice will also be on the agenda for the SFC.

On the whole, Lam reiterated the SFC was not drawing concretes conclusions from the 15 IA sample report, saying that the objective was to remind investment advisors and clients of their positions in the market. The regulator also plans to conduct a similar exercise next year and will understandably expect better compliance with its code to avoid full-scale action.