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

24 Nov 2017



The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) today issued a circular highlighting observations from their recent joint thematic reviews on the potential conflicts of interest arising from the sale of in-house products by registered institutions and licensed corporations within a single financial group. The reviews mainly focused on internal controls and compliance.

Conflicts of interest are a major regulatory focus for both the HKMA and the SFC. In Hong Kong, the business conducted by conglomerate financial institutions through their intermediaries (Note 1) 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 intermediaries (Note 2). It is therefore fundamental for protecting the interests of clients that conflicts of interest are identified and managed.

This circular reminds intermediaries about the regulators’ expected standards in respect of conflicts of interest and provides examples of good practices in areas including client order execution and disclosure, product due diligence and discretionary portfolio management mandates. Specifically, senior management are expected to manage risks on a group basis, assess the robustness and effectiveness of systems and controls holistically, and ensure compliance with all applicable legal and regulatory requirements across the group.

"As a further collaborative effort, the HKMA and the SFC initiated joint reviews of financial groups since early this year. We are happy to share key observations and good practices in relation to recent reviews of potential conflicts of interest in the sale of in-house products," said Mr Arthur Yuen, Deputy Chief Executive of the HKMA. "The HKMA and the SFC will continue to work closely together in supervising intermediaries in financial groups to ensure a holistic and consistent approach across different group entities."

"Senior management bear the primary responsibility for ensuring appropriate standards of conduct and adherence to proper policies and procedures," said Ms Julia Leung, the SFC’s Executive Director of Intermediaries. "Both the HKMA and the SFC strive to deliver a clear, unified message to financial institutions about exercising management supervision and putting in place sound internal controls."

Collaborating closely, the HKMA and the SFC will take into account the results of these reviews in their supervision. This will help set unified regulatory standards for the financial industry and sustain market integrity.

End

Notes:

  1. As defined in Schedule 1 to the Securities and Futures Ordinance, "intermediary" means a licensed corporation (LC) or a registered institution (RI).
  2. For example, an RI within a financial group provides wealth management or private banking-related services to its clients, while an LC in the same group provides asset management-related services as well as execution and investment banking services to the RI.


Page last updated : 24 Nov 2017