Joint reviews by HKMA and SFC on managing conflicts of interest in financial groups

24 Nov 2017



This circular shares with intermediaries1 some key observations and good practices in relation to potential conflicts of interest that may arise from the sale of in-house products2

Conflicts of interest are a major regulatory focus for both the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC).  In Hong Kong, the business conducted by conglomerate financial institutions through their Registered Institutions (RI) and Licensed Corporations (LC) ranges from manufacturing and managing financial products to distributing them to clients.  Conflicts of interest may arise during the day-to-day operations of the intermediaries3.  It is therefore fundamental for protecting the interests of clients that conflicts of interest are identified and managed.  In essence, intermediaries should act in the best interests of clients4, disclose the potential conflicts and take all reasonable steps to ensure fair treatment of clients, if the conflicts of interest cannot be avoided5.  In particular, intermediaries should take into account clients’ interests when recommending or soliciting in-house products to the clients or making discretionary investment decisions on clients’ behalf. 

To assess the effectiveness of controls in respect of conflicts of interest, the HKMA and the SFC have jointly conducted thematic reviews on the sale of in-house products by intermediaries within the same financial group.  The scope of the joint thematic reviews included order execution, product due diligence, selling processes, the management of discretionary accounts, management supervision, and controls and monitoring.  The reviews revealed that, while intermediaries in general had put in place policies and procedures in respect of conflicts of interest, some key areas warrant further attention by intermediaries. Details are set out in the Annex.  In respect of the issues identified, the intermediaries concerned have been required to undertake remedial actions.

Senior management of intermediaries are reminded that they bear the primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper policies and procedures.  They should holistically review the robustness and effectiveness of the controls relating to the identification and management of potential conflicts of interest arising from the sale of in-house products, and ensure that intermediaries comply with relevant regulatory requirements pursuant to General Principle 9 of the Code of Conduct and Part I of the Internal Control Guidelines6.  Intermediaries are also encouraged to adopt the good practices, as applicable, to manage potential conflicts of interest in carrying out regulated activities on a group basis.  

Should you have any queries regarding the contents of this circular, please contact Ms Eloise Pun at the Banking Conduct Department of the HKMA on 2878 1903 or Ms Lorraine Chan at the Intermediaries Supervision Department of the SFC on 2231 1751.

Banking Conduct Department            Intermediaries Supervision Department, Intermediaries Division
Hong Kong Monetary Authority          Securities and Futures Commission

Enclosure

End

SFO/IS/045/2017


1 As defined in Schedule 1 to the Securities and Futures Ordinance (Cap.571), “intermediary” means a licensed corporation or a registered institution.
2  In-house products refer to various investment products that are manufactured and distributed by different entities within the same financial group, including but not limited to, structured products and investment funds.
3  For example, RI and/or related entities provide wealth management and/or private banking related services to their clients, while LC and/or related entities provide asset management related services as well as execution and investment banking services to RI and/or related entities.
4 General Principle 1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”).
5 General Principle 6 and Paragraph 10.1 of the Code of Conduct.
6  Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission.


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Supplementary document:
Annex


Page last updated : 24 Nov 2017