In October, the Securities and Futures Commission (SFC) released its conclusions to a consultation it issued in March that seeks to align requirements for the sale of complex products, which should create a level-playing field for both online and offline distributors.
One of the new requirements is around how distributors satisfy the suitability assessment in both the online and offline environment to make sure that the product being sold or recommended is appropriate for an investor, Rolfe Hayden, partner at law firm Simmons & Simmons, told our sister publication Fund Selector Asia.
A suitability assessment for investors has been required since the global financial crisis erupted in 2008. What has changed is the introduction of a set definition of what a complex and non-complex product is, Hayden explained.
The SFC has already provided an exhaustive list of non-complex and complex products on its website, which was last updated in March. Examples of complex products are futures contracts, equity derivatives, synthetic and futures-based ETFs, leveraged and inverse products and hedge funds.
“In response to [aligning the regulation of online and offline sales of products], the SFC created these two categorisations of complex and non-complex products, and where the product is complex, there are greater obligations,” Hayden said.
Some banks don’t sell unauthorised products because of greater regulatory risk. A similar situation may develop with complex products.
New obligations for offering complex products include providing minimum information and warning statements to clients, which are outlined in the consultation. The new regulations will be in effect beginning April 2019.
Hayden noted that the new requirements are applicable to individual professional and retail investors.
Corporations, such as family offices, are also required to have a suitability assessment if they are identified as not having the expertise to assess complex products. Institutional investors, such as financial institutions, are exempt from the regulations.
Avoiding complexity
Distributors are expected to be more cautious to make sure they comply with the new regulations, according to Hayden.
“Intermediaries have to decide whether or not a product is complex, and if it is complex, must provide certain warnings. There is of course an added implicit burden, which means that additional caution must be made to make sure they are complying.”
Because of the new regulations, some distributors may choose not to distribute complex products at all to avoid the risk of non-compliance, Hayden said.
Hayden added that some banks that control the majority of Hong Kong’s investment product distribution are only willing to sell SFC-authorised retail funds to professional investors.
“They could sell unauthorised funds, but they don’t accept them because there is greater regulatory risk. And I suspect a similar situation may develop with regard to complex products.
“One could argue that a good distributor is already able to provide [the different levels of information of complex products to investors]. But when the rules are changed, it inevitably increases the expectations to comply.
“That is what distributors are going to have to work out over the next couple of months before it comes to force,” he said.
That said, Hayden believes that the SFC’s move is sound as the new requirements provide greater clarity on the regulations to prevent mis-selling of products.
“Mis-selling is an issue in most jurisdictions, and the onus has to be on the distributors. I think [the new regulations are] a step in the right direction.”
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