Hong Kong’s Securities and Futures Commission (SFC) will impose new suitability requirements for the distribution of complex products, such as derivatives.
Starting 6 April 2019, the measures will apply to products sold offline. For example, when the sale is concluded with a client face-to-face or over the telephone.
After ensuring the suitability of complex products, distributors will have to provide product information containing the key features, risks as well as warning statements at the point of sale.
The disclosures will have to be made on a transaction-by-transaction basis. The regulator mandated the same measures for online platforms earlier this year, with effect from 6 April 2019.
‘We have aligned the requirements for intermediaries to conduct suitability assessments of clients in the sale of complex products so that they are the same both online and offline,’ said Julia Leung, SFC’s deputy CEO and executive director for intermediaries.
‘This levels the playing field, provides better protection for customers and prevents regulatory arbitrage,’ she added.
Intermediaries have been asked to classify products as non-complex or complex at their own discretion, but in line with SFC guidelines.
However, the regulator said that aside from derivatives, non-derivative investment products such as bonds with multiple credit support providers should also be classified as complex.
That’s because some bonds with multiple credit providers have no material operations, or involve complex structures which subordinate the bondholders’ rights to those of the multiple credit support providers.
In terms of high yield bonds, the SFC proposed that intermediaries consider features such as the complexities of the variables or formulas determining returns.
Whether they are perpetual or subordinated bonds, the terms of interest payments or the contingent write-down and loss absorption features before classifying them as non-complex products.
The suitability measures will also apply to complex products that are not on the distributor’s product list.
Moreover, intermediaries will not be allowed to request clients to sign a statement that exempts them from conducting suitability assessments. They are also prohibited from conducting an unsuitable transaction even if the client wishes to proceed.
The guidelines apply to all SFC-licensed and registered person. However, distributors will be exempted from the requirements when selling to institutional and corporate professional investors in Hong Kong.
Hong Kong has stepped up regulatory requirements around suitability and disclosure in recent months.
Since August, intermediaries have had to disclose the maximum percentage of trailer fees for a particular fund to their clients.