Authors: William Hallatt, Hannah Cassidy and Jennifer Fong
On 14 May 2019, the Securities and Futures Commission (SFC) issued further guidance identifying and reiterating the key standards of conduct and internal controls relating to client facilitation expected of licensed corporations (LCs).
By way of background, conflicts of interest may arise in a facilitation transaction where LCs assume a risk-taking principal position against clients as opposed to acting as an agent. Such conflicts of interest have long been identified by the SFC as a recurring regulatory concern, which they take very seriously.
- Guidance issued to date on client facilitation
- Recent inspection findings
- Expected standards of conduct and internal controls – the key ones
- Way forward
Back in 2014, the SFC organised a supervisory briefing session so as to draw the industry’s attention to common deficiencies and vulnerabilities associated with the provision of client facilitation services identified during its routine inspections.
Two years on, the SFC commenced a thematic review in 2016, which assessed the effectiveness and adequacy of management supervision and controls concerning client facilitation.
In 2018, the SFC published detailed observations from its thematic review, and set out guidance on the standards of conduct and internal controls expected of LCs providing client facilitation services. Four main areas of expected standards of conduct and internal controls relating to client facilitation were identified:
- controls, monitoring and management supervision;
- segregation of agency and facilitation activities;
- consent and disclosure; and
- indications of interests (IOIs).
Most recently, on 14 May 2019, the SFC issued a circular to LCs to:
- outline its inspection findings relating to client facilitation in recent years; and
- remind LCs of the expected standards of conduct and internal controls in respect of providing client facilitation services.
Since mid-2018, the SFC has reviewed the level of compliance with expected standards during the course of its inspections of selected brokers. In particular, the SFC found that certain traders:
- misrepresented a house or client facilitation trade as an agency trade;
- were silent or not transparent about whether facilitation would be involved in a trade; or
- failed to obtain express consent from clients prior to effecting client facilitation trades;
The SFC also discovered that:
- some IOIs were described as natural although they were not based on a genuine client intent to trade; and
- some firms’ policies and procedures were not clear and failed to ensure compliance with the expected standards.
The SFC identified in its 14 May 2019 circular the standards of conduct and internal controls relating to client facilitation expected of LCs it considered were key, all of which were covered in the 2018 observations and are not new:
- controls, monitoring and management supervision: establishing policies and procedures which cover key client facilitation controls such as client consent and accuracy of IOIs;
- segregation of agency and facilitation activities: recording and monitoring on a timely basis communications between agency traders and client facilitation traders;
- consent and disclosure: disclosing to clients the nature of trades and obtaining clients’ prior explicit consent to each client facilitation trade to ensure that they are fully informed of the inherent conflicts of interest; and
- IOIs: disseminating IOIs with accuracy and sufficient details only in cases of a genuine client or proprietary intent to trade.
Ensuring compliance with the SFC’s expected standards in relation to client facilitation, especially the key ones identified in the 14 May 2019 circular, is of utmost importance as it helps to protect clients who rely on LCs to act in their best interests and to maintain market integrity and confidence.
In doing so, licensed individuals should, when dealing with clients, always act honestly and fairly, disclose conflicts of interests and take all reasonable steps to ensure fair treatment of clients if such conflicts cannot be avoided.
In light of the SFC’s close scrutiny of non-compliance on the part of LCs and the increasing enforcement focus on individuals (including Managers-in-Charge), LCs are advised to critically review existing policies and procedures for client facilitation and implement all necessary measures to ensure full compliance with the SFC’s expected standards.