Brokers fear burden of new investor rules

Making 'professional investors' answer queries on risk will add to workload and costs, they say

PUBLISHED : Thursday, 23 May, 2013, 12:00am
UPDATED : Thursday, 23 May, 2013, 4:39am

The proposed move to tighten regulations covering the sale by financial firms of risky and complex products to so-called professional investors will add to the costs and administrative burdens of banks and brokers, according to industry players.

The Securities and Futures Commission last week released a consultation paper to collect views over the next three months on a range of proposals to increase regulatory requirements covering the sale of complex and risky investment products to "professional" investors, who are defined as experienced investors with portfolios valued at more than HK$8 million.

The proposed tightening of regulations comes after lawmakers said they had received hundreds of complaints from customers in recent years who said banks or brokers had mistakenly treated them as professional investors and sold them products that were too risky.

The SFC decided to keep the HK$8 million threshold unchanged as it said it was in line with international standards.

Instead, it said, it would require banks and brokers to carry out suitability tests to assess if certain complex products were too risky for professional investors. The proposed tests, which will require brokers and banks to ask a range of questions to assess an investor's risk appetite so as to match their risk profile to the products it sells, currently apply to ordinary retail investors but not professional investors.

This is one of the proposals that the SFC wishes to get opinions on from banks and brokers during the consultation process.

Joseph Tong Tang, executive director of Sun Hung Kai Financial, said the proposed suitability testing requirements would add to the workload and costs of brokers. "The new proposals will mean brokers will have to ask professional investors many questions. Since these customers are experienced and wealthy clients who want to make their own investment choices, they may not like this," he said.

"We may upset our clients, and it is going to make our lives more difficult."

Louis Tse Ming-kwong, director of VC Brokerage, said he was concerned about another proposal in the consultation paper, that the commission would require banks and brokers to add a clause in client agreements declaring that the complex investment products sold to them were suitable for professional investors. This would make it easier for investors to sue financial firms for compensation if they believed they had been sold the wrong products, he said.

"The proposal to add such a clause to the client agreements would add to the risks for financial firms," Tse said.

Kenny Lee Yiu-sun, the chief executive of First China Securities, said the new proposals would increase compliance costs for financial firms: "Overall, the SFC's new proposals would benefit investors, but it will also add to the operation costs of brokers."