Hong Kong’s regulator, the Securities and Futures Commission (SFC), is to push ahead with proposals to make intermediary commission disclosure mandatory as part of a wider beefing up of its investor protection regime.
The SFC said it was clear sales staff were sometimes “inappropriately” incentivised to sell products, creating potential conflicts of interest between what was best for the investor and what product paid the most commission.
The proposal is contained in a raft of measures the SFC has set out in a consultation to protect retail investors from intermediaries mis-selling investment products.
It comes in the wake of the Lehman Brothers minibonds scandal, in which thousands of investors were left with worthless structured products backed by Lehman Brothers after the US investment bank collapsed a year ago.
More than 20,000 complaints were received by the SFC about the minibonds, nearly all making allegations of mis-selling.
The regulator wants to see pre-sale disclosure of all commissions, fees and “other benefits” paid by product issuers to distributors for the sale of their products.
Proposals
Numerous other measures are set out in the paper, including the introduction of simplified product literature in the form of Key Facts Statements, the banning of gifts as inducements to buy products and a ban on selling products that use derivatives to clients who are judged not to possess “derivative knowledge”.
The SFC is also consulting on whether intermediaries should make audio recordings of all meetings with clients to ensure compliance with sales procedures – something banks have been made to do this year. However, the SFC said it acknowledges there could be difficulties for smaller businesses in doing this.
Unveiling the consultation, the SFC said: “The Minibonds incident has exposed issues in connection with the sale of investment products and has negatively impacted on the reputation of our market both locally and internationally.
“In order to restore the trust and confidence in our market we believe that the Government, the regulators and the industry need to collectively demonstrate that the lessons of this incident have been learned and that appropriate action has been taken. This consultation paper offers a number of suggestions as to what this action should be.”
The consultation, which ends in December, can be found at http://www.sfc.hk/sfc/doc/EN/speeches/consult/q3_consult1.pdf
