On Dec. 21, HKMA warned misconduct risks in selling of funds.
- 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.
- 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.
- 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.