The Hong Kong Securities and Futures Commission (SFC) has sent a circular to intermediaries and authorised institutions following concerns over customer protection compliance.
The existing code of conduct requires intermediaries to “act honestly, fairly and in the best interests of their clients and the integrity of the market”.
They also need to “ensure that client assets are adequately safeguarded”, the regulator said.
The key concern, which prompted the circular, revolves around the terms and conditions signed between clients and their intermediaries and/or authorised institutions.
At times, they have contained a clause granting the intermediary or institution the right to “set-off” or “lien” client assets, which gives them the right to retain the asset if the client goes into default.
The SFC said that the clause is “fundamentally incompatible” with the code of conduct and does not meet the standard of protection afforded to client assets.
Strengthening rules
This resulted in the regulator sending a notice to all intermediaries and authorised institutions, requiring them to adopt the additional rules and sign and return the enclosed acknowledgement letter.
The set of rules now prohibits recourse against client assets; but, in the event of an issuer’s default, retrieving prepaid dividends or interests on a client’s securities will not be classified as recourse.
Similarly, if the recourse is required by legislation or a court order, the rules won’t be applicable.
The requirements will apply to accounts holding money, securities and accounts for holding “non re-pledged clients’ securities collateral”.
Intermediaries and authorised institutions have until 31 July 2020 to comply with the measures.
The circular, however, did not specify whether any sanctions would be applied to those who did not comply or breached the set of rules.
