SFC reports on IA selling practices

Findings from inspection and investigation designed to further enhance industry awareness of expected standards.

Hong Kong's Securities and Futures Commission (SFC) has issued a report 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. In its "Report on Selling Practices of Licensed Investment Advisers," the SFC conducted a theme inspection with a mixed bag of 15 investment advisors. The idea was to address the problem of misselling to customers and study measures to enhance investor protection and industry transparency.

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 (which ranged from between firms with 30 and firms with around 4,000), and range of services.

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

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 both 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, the most common problems involved investment advisors making investment recommendations without proper basis and not giving sufficient explanation or information to the clients.

Also outlined in the report is the regulator's clarification of existing requirements. These are grouped into three categories.

The integrity and professionalism section of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, specified that IAs should always act with integrity and in the best interests of their clients.

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're hoping 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 and Towry Law (Asia). It said these showed it will take misselling of funds and negligent investment advice by investment managers very seriously.

Looking forwards, the SFC said it will continue to study measures to enhance investor protection and industry transparency. In particular, Lam says the SFC will possibly look to 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 that the SFC is not drawing concrete conclusions from the 15 IAs focused on in the report, saying that the objective is to remind investment advisors and clients of their positions in the market. The regulator also plans to conduct a similar exercise next year.