The investment advisory world is under renewed pressure in Hong Kong. So far, the biggest blow has been Towry Law's closure to new business in the wake of a mis-selling scandal. This involved leveraged 'with-profits' products that left investors penniless instead of protecting capital.

Now the SFC has launched what a spokesman calls a "theme-focused inspection" round of 10 investment advisors that will look into their conduct. The 10 firms were selected either because they have been the subject of complaint, sell very complicated products, or have a large client base.

The SFC declines to name the firms, but says inspections began about a month ago and will carry on for approximately two more months.

"We've spent a lot of resources on securities brokers, and felt it was now time to concentrate on intermediaries," the spokesman says, adding the inspections were not triggered by any recent cases.

Separately, Andrew Gregory Eden has had his securities advisory licence suspended for seven weeks by the SFC for a breach he committed in 1999, when he told investors that Ernest Maude Continental Investment, the firm he founded, was registered as an advisor with the SFC when it was not.

The SFC spokesman was careful to differentiate an inspection into firms' conduct, versus the decision to suspend Eden's license, which concerned unlicensed activity. However, when asked if the investigation into Eden was now closed, he said he could not confirm that the SFC was through investigating.

Eden is travelling, according to his secretary, and could not return calls.

This follows a similar seven-week suspension for another director at Ernest Maude, Michael Fawdry, who committed a similar breach in 1998 and was penalized in January, 2004. A spokesman says the SFC began its investigation in 2001 following a complaint and had to take three years to conclude the case because of the due process involved. The SFC imposed lenient penalties because Eden accepted he did not exercise the required care at the relevant time.

This case could have wider repercussions. Eden holds an important position on the general committee of the Confederation of Insurance Brokers. He is chairman of the CIB's life and investment-linked policy subcommittee, and, ironically, a member of the disciplinary committee. He has been in the private banking and financial services industry for 22 years, the past 13 of which have been in Hong Kong.

CIB chairman Mark Johnson, who is also managing director at Heath Lambert's non-marine division, says the industry organization only regulates insurance brokers, many of whom may also be investment advisors, and it is not responsible for regulating that activity.

Under the current regulatory framework defined by the Securities and Futures Ordinance, there is no clear definition of insurance broking versus investment advice. Johnson says, "It's very difficult to tell where one begins and the other ends. We can't regulate financial advisors in respect to the advice they give."

Gloria Siu, director and general manager at insurance broker Gain Miles, agrees. "For insurance brokers, it's not clear what we can offer under the SFO in terms of investment advice."

She thinks the industry faces a problem, however: "A lot of insurance brokers and IFAs do not understand their responsibilities," she comments. With a wide variety of products, many of which are complicated, clients frequently do not understand what they are being sold. She thinks the regulations could be clearer about disclosure to differentiate insurance and investment-linked products.

"There is a crisis of confidence in the industry," says a fund management veteran, adding that the market-timing scandal in the United States has contributed to this. "The industry has done nothing to defend itself or to restore confidence... Everyone knows the industry is bereft of decent organizations and so blowups are only to be expected."