The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have announced that they will commence a concurrent thematic review in the second half of 2020 to assess intermediaries’ practices in respect of spread charges and related disclosure to clients.
In recent years, the SFC has stepped up the use of thematic reviews, including the use of joint reviews with the HKMA, as a tool to assess cross-sector risks. The present review was one of the areas of focus which the SFC highlighted at its compliance forum in June 2019 (see opening remarks by Julia Leung, the SFC’s Deputy Chief Executive Officer and Executive Director, Intermediaries).
The SFC and the HKMA have indicated that the review will focus on aspects of selected intermediaries’ distribution of non-exchange traded investment products (such as bonds and structured products) to clients:
- whether there are adequate policies, systems, controls and management supervision over order handling and spread charges (including post-trade spread increases);
- whether the intermediaries’ prices, fees, monetary benefits received and trading capacity have been properly disclosed to clients (for example, spreads may be increased after a trade is executed and the price improvement is retained without agreement with or disclosure to clients);
- whether adequate records (such as telephone recordings) have been maintained to ensure compliance with internal policies and procedures as well as regulatory requirements, and to enable reviews or investigations by the intermediaries, their external auditors and the regulators.
The SFC’s main code of conduct sets out various requirements relating to the above, which focus on acting in the best interests of clients when managing trades for them, and addressing conflict of interest issues.
The SFC and the HKMA have indicated that they will take appropriate action (including regulatory action in the event of breaches) following the thematic review. As with prior thematic reviews, they will share the findings from the review with the industry and consider whether further guidance is required.
We will keep you posted regarding the outcome of the review.