Second SFC mystery shopping programme identifies deficiencies in selling practices

18 Dec 2014



The Securities and Futures Commission (SFC) today released the findings of its second mystery shopping programme. The findings demonstrate that licensed corporations must do more to improve compliance with the selling practices requirements (Note 1). A total of 150 samples were conducted in relation to 10 licensed corporations, including fund management, investment advisory and brokerage firms.

Some deficiencies noted in our previous mystery shopping programme in 2010 were still found to be present this year (Note 2). These included failures to consider the clients' relevant circumstances in full when making a suitability assessment or to properly explain why recommended products are suitable.

In addition, the 2014 programme identified the following major deficiencies in selling practices:

  • inadequate or inaccurate explanation of the features of, or disclosure of the risks of, high-yield bonds and derivative products;
  • failure to assess clients' knowledge of derivatives; and
  • failure to provide relevant and material information about the recommended products to clients, eg, product key facts statements.

"Licensed firms must enhance their systems and controls to ensure full compliance with the selling practices requirements," said Mr Ashley Alder, the SFC's Chief Executive Officer. "Management are responsible for maintaining an adequate corporate governance structure and proper oversight of sales activity."

The SFC will require relevant licensed corporations to take remedial action to address major deficiencies. In addition, the SFC will continue to assist the industry to comply with the selling practices requirements.

End

Notes:

  1. The selling practices requirements are set out in the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct), the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC and the Questions and Answers on Suitability Obligations issued by the SFC.
  2. This is the second time that the SFC has engaged a service provider to carry out a mystery shopping programme. The 2014 programme primarily focused on three key areas, namely the "know your client" procedures, explanation of product features and disclosure of risks, and suitability assessment. It also covered the enhanced requirements for selling practices under the Code of Conduct which became effective subsequent to the first programme conducted in 2010.


Page last updated : 18 Dec 2014