Hong Kong SAR – SFC and HKMA remind firms of client interests amidst COVID-19 outbreak

In light of the impact of COVID-19 outbreak on market volatility and liquidity – the SFC has published two circulars to remind: (i) fund industry participants; and (ii) intermediaries of their obligations to look after the interests of clients. The HKMA circulated the SFC’s circular with additional commentary to all Registered Institutions (RIs).

SFC Circulars

SFC reminds all intermediaries of their obligations under the Code of Conduct when distributing investment products, such as funds and bonds to clients, to consider;

  1. suitability obligations when they make a solicitation or recommendation and
  2. the obligation to disseminate information in a timely manner where they hold an investment product directly or indirectly on behalf of their clients.

In practice, intermediaries are asked to:

  • ensure sufficient due diligence is conducted on investment products at a continuous basis having regard to the nature, features and risks of the products themselves, having regard to the potential impacts the COVID-19 outbreak and other factors which may have an effect on the risk return profile and growth aspects of the investments;
  • give due consideration to all circumstances of a client when assessing suitability of an investment product, including but not limited to the client’s financial situation and investment objectives and taking into account their entire investment portfolio;
  • explain to the client the risks and features of the investment product, including its credit quality, liquidity, termination conditions and transaction costs;
  • when recommending an investment product to a client, present balanced views at all times, including explanation of advantageous terms such as high coupon rates or yields as well as disadvantages and downside risks such as credit deterioration and illiquidity; and
  • when holding investment products directly or indirectly on behalf of clients, to disseminate notices and other communications by the issuers (or equivalent) of such investment products in a timely manner.

The SFC has said it will continue to assess compliance with the regulatory requirements during its on-going monitoring of licensed corporations. The SFC has been very clear that the protection of clients during times of market volatility must be front and centre and there will not be regulatory forbearance in this area.

In the separate circular to management companies, trustees and custodians of SFC authorised funds, managers are reminded to closely monitor, keep investors informed, and manage funds with due care, skill and diligence have regard to the possibly volatility impacts caused by the Covid-19 outbreak in the similar principles applicable to intermediaries. Trustees and custodians are reminded of their duty to safeguard fund assets and provide independent oversight of the management of the funds.

The SFC has stepped up the monitoring of SFC-authorized funds and asks all managers, trustees and custodians to cooperate with SFC on heightened reporting requirements and give the SFC early alerts of any material issues affecting their funds.

HKMA Circular

The HKMA circular reminds RIs to conduct proper product due diligence on a continuous basis, taking into account the fluctuating market conditions amid the COVID-19 situation, which may impact on the risk return profiles and prospects of the investments. Where the review of an investment product results in a higher risk rating being attributed to the product, the RI should follow the existing HKMA requirements of disclosing such increase in risk rating to customers to whom it recommended and sold the product.

The HKMA also states that it will continue to monitor RIs’ compliance with the regulatory requirements as part of its on-going supervision.