HKMA Fund Sale Misconduct Risks

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.

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.