SFC reforms aim to boost safeguards for investors

Responding to concerns over the marketing of complex products, SFC proposes tests to check that professional traders understand risks

PUBLISHED : Thursday, 16 May, 2013, 12:00am
UPDATED : Thursday, 16 May, 2013, 4:03am

The Securities and Futures Commission has released a long-awaited reform plan to tighten regulations on how financial firms sell complex risky investment products to so-called professional investors.

Under the proposals released yesterday for a three-month consultation, banks and brokers would be required to carry out suitability tests to assess if certain complex products are too risky for these clients.

At present, such tests, which include a range of questions, apply only to ordinary retail investors. Excluded are professional investors deemed to be experienced traders with portfolios of more than HK$8 million.

Some complex products such as some high-yield bonds or equity-linked notes can be sold only to professional investors.

SFC chief executive Ashley Alder said the proposed regulation was intended to keep intermediaries "honest", as the commission would require banks and brokers to add a clause in client agreements declaring that the offered complex investment products are suitable for professional investors.

"This would make it easier for investors to sue financial firms for compensation if the clients considered the financial firms had sold the wrong products to them," said Stephen Po Wai-kwong, senior director of the SFC.

The reform plan marks the first major changes to the professional investor regulatory regime since the securities law was introduced in 2003. International regulators have called for a review of rules related to the sale of complex investment products. Locally, lawmakers have pushed for the HK$8 million compensation threshold to be increased after receiving hundreds of complaints from customers who said banks or brokers had mistakenly treated them as professional investors and sold them products that were too risky.

However, the SFC has decided to keep the threshold unchanged. "The HK$8 million threshold is in line with the US, although it is lower than in Singapore and Australia. We believe the threshold is appropriate," Po said.

The SFC also rejected another suggestion from lawmakers that the sale of complex products to individuals is banned altogether, citing the need for sophisticated investors to have choices.

Po said the SFC would not give detailed guidelines on how the suitability test should be done. "The SFC believes the banks and brokers can use common sense to ask the right questions to determine if products are suitable for professional investors," Po said.

He said the proposed reforms would also relax some rules to make it easier for banks and brokerages to sell complex products to corporate customers.

If the market supports the proposals, the SFC would offer a grace period for financial firms to prepare for the changes.

Kenny Lee Yiu-sun, the chief executive of First China Securities, welcomed the SFC's proposals to enhance investor protection. "However, for banks and brokers, this would mean we have to increase our compliance costs," Lee said.