On 18th December 2014, the Securities and Futures Commission of Hong Kong (SFC) released the findings of its second mystery shopping program, which demonstrate that licensed corporations must improve compliance with the selling practices requirements as set out in the Code of Conduct, Internal Control Guidelines and the Q&A on Suitability Obligations.
Following its first mystery shopping program in 2010, the regulator conducted the program again this year on 10 licensed corporations, covering fund management, investment advisory and brokerage firms. On top of the deficiencies found in the previous program (such as failure to consider the clients’ relevant circumstances in full when making a suitability assessment or to properly explain why recommended products are suitable), the SFC also identified the following major deficiencies in selling practices:
- inadequate/inaccurate explanation for features or risks disclosure of high-yield bonds and derivative products;
- failure to assess clients’ knowledge of derivatives; and
- failure to provide relevant and material information about the recommended products to clients.
The SFC expects licensed firms to enhance their systems and controls to ensure full compliance with the selling practices requirements. The management should also be mindful that they are responsible for maintaining an adequate corporate governance structure and proper oversight of sales activity.
Remedial actions will be required for the relevant licensed corporations to address the major deficiencies identified. In addition, the SFC will continue to assist the industry to comply with the selling practices requirements.
