Investment Advisory Activities of Banks

HKMA has recently completed a thematic exam of investment advisory activities of both retail and private banks. This exercise was done concurrently with SFC's inspections on its licensed investment advisers.

Overall, all banks examined had implemented the baseline control requirements. The following issues, largely expected, were identified:

Retail Bank

• Information on clients' investment experience by types of products was not kept in written form.
• No specific procedures were put in place to require frontline staff to properly compare investment horizons of clients and the product tenors.

Private Bank

• Only product term sheets of mutual funds were provided to clients. Prospectuses and annual reports were only provided upon client request.
• No formal procedures were carried out to classify clients as professional investors (PI).
• No central log for keeping track of sale of unauthorized investment products to PI clients was maintained.
• No regular compliance reviews on investment advisory activities were performed.

On the other hand, certain "good practices" of banks were also highlighted in HKMA's findings:

• A risk tolerance level was assigned to each client for matching against product risk ratings.
• Specific criteria for classifying clients into "vulnerable clients" (e.g. elderly) subject to special handling procedure were established.
• Specific MIS reports to detect potential mis-selling were generated for management review.
• Mystery shopping inspections and post-transaction surveys were conducted.
• Formal sales compliance checklists were established for frontline staff.
• Frontline staff were required to pass an internal competence test on an annual basis.

Compared with five years ago, the investment sales compliance procedures of banks have substantially improved. Look forward to reading SFC's report on its second round theme inspections.