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The SFC has stepped up suitability requirements governing selling practices of certain products, as announced in a circular (issued in December). The regulator has noted that sales volumes of complex and high-risk products by licensed corporations (LCs) have increased recently and reminds LCs to observe the requirements of selling practices and suitability obligations, under the Code of Conduct, when they distribute structured products and corporate bonds with complex features or high risks.
Derivative products, such as equity-linked accumulators or bonds with non-viability loss-absorption features, are subject to the risk of market performance or substantial losses. As such, the SFC says that these products should be considered complex and high-risk products for the purpose of compliance with the Guidelines on Online Distribution and Advisory Platforms and the new paragraph 5.5 of the Code of Conduct.
To provide better protection for investors and prevent regulatory arbitrage when distributing complex products, LCs should comply with the requirements for conducting suitability assessments of clients in the sale of complex and high-risk products. This is to ensure that the products’ risk-return profiles match the client’s risk profile and other specific circumstances. Moreover, LCs are required to consider the complex products’ features, risks and any restrictions on their sale or target clients, and in what aspects they are considered suitable for clients.
After ensuring the suitability of complex and high-risk products, LCs will need to provide clients with sufficient and accurate product information at the point of sale, including their features and risks. They’ll also need to present balanced views on the products’ advantages. Meanwhile, they should provide staff with sufficient training on the products distribution and how to appropriately disclose the products’ features and risks to investors.
Time to review your practices
The SFC will use a range of supervisory tools, including inspections, to monitor compliance and takes regulatory action against licensed corporations found to have breached the requirements. In the meantime, it’s a good idea to take an early look at your practices around these requirements and make sure you evolve as the regulator does.
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