HKMA Fund Sale Misconduct Risks

• HKMA letter to draw attention to misconduct risk in selling of investment funds.
• Provide guidance on expected standard of prevention and management of risk.
• Reminded registered institutions (RIs) to ensure investment recommendations,
  or solicitation for customers were reasonable in all circumstances.
• Firms must act with due skill, care and diligence and in the best interest of their
  customers, and avoid conflicts of interest with customers, ensure fairly treated.

Management

• Senior management should assume responsibility in ensuring appropriate firm
  policies and procedure in place, and effectively guard against churning by fund.
• Sufficient management oversight is to be exercised so red flags are brought to
  management attention for timely review, follow-up, implement remedial action.

Monitoring and Review

• Firms should conduct independent monitoring, reviews, and ensure monitoring
  and review mechanisms effective, for purpose of identifying suspicious trading.
• Management information system (MIS) reports should be properly designed so
  that suspicious trading patterns or potential churning trades could be captured.
• Parameters or thresholds used in generating MIS reports should be reasonable.
• On identification of suspicious trade pattern or a potential or actual investment
  fund churning activity, adequate and timely follow-up actions should be taken.

Incentive Systems and Feedback

• Firms should ensure sales targets are realistic, especially amidst a challenging
  business environment, and avoid setting target on specific investment product.
• Incentive system is properly structured to ensure non-financial performance of
  staff form a significant part of overall performance measurement, good conduct.
• Clear and appropriate consequences for individuals engaging in misconduct, or
  undesirable/unacceptable behaviors should be established, and communicated.
• An effective feedback mechanism, including whistleblowing, escalation policy, to
  be in place to encourage timely reporting of misconduct or malpractice identified.

Staff Training

• Firms should give adequate, appropriate training for relevant staff, in front line
  control functions, to ensure adequate understanding of regulatory requirements.
• Besides, training program should aim to cultivate a sound culture within the RI.
• Should also help sales staff properly assess suitability of investment solicitations
  or recommendations to customers, include circumstances to be duly considered.
• Firms should review policies, procedures, systems and controls, make necessary
  enhancement to ensure compliance with regulatory requirements and standards.
• HKMA will continue to monitor RIs’ selling practices and compliance with circular.