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Hong Kong regulator protects consumers as the industry innovates

Posted by on 25 April 2017
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The Hong Kong regulator is setting its sights on online fund distribution and robo managers to ensure consumers are adequately protected.

Speaking at FundForum Asia, Christina Choi, executive director of investment products at the Securities and Futures Commission (SFC), said the regulator had concerns about cyber security and whether products sold online were suitable.

She said: “The rapid development of online investment and trading platforms has put pressure on traditional brokerage houses and asset management firms to provide customised access to products and services across multiple distribution channels.

“This has led to an increasingly cost competitive environment, promoting the use of technology to automate processes and increase product breadth and depth.”

But she said that while the regulator recognised the significant benefits of these platforms in terms of providing access to a broader range of products and services, and potentially lower costs, it was also aware of the potential risks and challenges associated with them.

Choi warned that while any firm distributing securities to investors in Hong Kong had to be licensed by the SFC, many of these platforms were not licensed.

She added that the SFC was also concerned about whether online platforms were fully complying with know your customer and product suitability requirements, and if they have adequate cyber security measures in place.

Choi said providers should also model risk for robo advisors, including the risk that clients may not understand the services provided and the products being offered.

“Our regulatory regime is technologically neutral and we are open-minded about licensed corporations and new entrants deploying technologies that achieve the right outcome and expected standards,” she said.

“There are specific risks that are pertinent to the operation of online platforms, which may not emerge from traditional distribution channels.”

Choi said the SFC had formed an internal working group with different divisions to consider the regulatory issues surrounding online platforms.

“We will be issuing some proposed guidelines for the industry about the operation and expected standards of these platforms, including how to apply suitability,” she said.

Choi added that the SFC did not assume that every transaction carried out on online was just execution, with many different models operated by online platforms, including robo-advice.

“The operator has a duty to ensure the relevant regulations, including know your client, due diligence of your products, suitability etc, are properly discharged,” she said.

Commission disclosure

Choi also gave an update on the SFC’s consultation on commission disclosure.

She said it had received many responses from the industry, which it was carefully considering, but on the whole the industry was supportive of the proposals on enhanced disclosure.

She said some respondents were seeking clarification on technical issues about how commission should be disclosed.

In terms of independent advice and commission disclosure, she said most respondents agreed that individuals in Hong Kong were not ready for a pay-for-advice model, with investors still preferring to pay transaction fees.

Meanwhile there were diverse opinions on how far fee disclosure should go, with some saying the maximum dollar amount a consumer would pay should not be disclosed, while others thought the actual amount being paid should be made clear and what the SFC was proposing did not go far enough.

Choi said: “The regulatory objective to ensure disclosure should be clear, fair and meaningful and easily comparable.

“Disclosing the maximum dollar amount gives investors a better sense of how much is received by intermediaries.

“We hope that this would not only encourage investors to seek quality advice and services from intermediaries, but also facilitate comparison and competition and drive down fees in the long run.”

She added that the SFC was carefully evaluating the comments, and planned to issue a consultation conclusion as soon as possible.

Product innovation

Choi said the SFC was keen to support product innovation, as demonstrated through the recent authorisation of leveraged and inverse products.

She said it had sought to address the potential systemic risks that may arise from the products through an enhanced disclosure regime.

She added that while assets under management for the products were still small, one month cumulative turnover for the 17 newly launched leveraged and inverse products linked to Hong Kong indexes was HK$14.3 billion, comparable to the combined turnover of the three most popular Asian ETFs in Hong Kong for the same period.

At the same time, the SFC has not received any complaints about the products from consumers.

Choi said: “The aim of the Commission is to ensure we have proper and balanced measured to enable the growth of the industry and not to compromise investors’ interests.

“We have an open door policy and we welcome industry providers to engage with us.

“It takes both sides to make sure the market will work.”

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