Risk of Product Mis-selling

Last year SFC published a report regarding a theme inspection on certain investment advisers (IA), which revealed a number of deficiencies of the selling practices. It is now conducting the second round inspection.

In her speech yesterday, SFC's Alexa Lam mentioned the following extreme cases of mis-selling:

• A teacher was advised to invest in an unauthorized fund with gearing and promised a potential return of 16%. He lost all his savings.
• A woman aged 86 had most of her savings switched into high-risk single country funds by bank staff. SFC passed the cass to HKMA.
• A distributor produced misleading marketing materials stating that the unauthorized fund (described as speculative investment in the offering document) was suitable for conservative investors.
• A retiree aged 63 was advised to purchase an ILAS that required an annual payment for 3 years and then he had to wait 9 years before receiving a stable monthly return over the next 25 years.
• A retiree aged 65 was advised to take out an insurance savings plan for his grandson that will run for the next 16 years.

Even though the above obvious cases represent only a small minority of total sales, they should alert us that the average quality of IA in HK has concerned SFC.

Under S.168 of SFO, SFC is empowered to make the rules for the intermediary to:

• prohibit the use of misleading or deceptive advertisements;
• require specified terms and conditions to be included in client
  contracts;
• require provision to the client specified information concerning the business of the intermediary, and the identity and status of any person acting on behalf of the intermediary;
• require ascertainment of each client's identity and his financial situation, investment experience and investment objectives;
• require disclosure of any interest in the financial product recommended to the client;
• require risk disclosure is made to the client;
• require disclosure of commission or advantage received from any third party is made to the client.

As these rules, if made by SFC, represent statutory requirements, they should have a greater deterrent effect on mis-selling. However, if SFC favors the principles-based regulatory approach adopted by FSA, it would rather issue more industry guidance notes and initiate more disciplinary actions again those irresponsible IA.