SFC Concluded the Proposals to Enhance Investor Protection

Two weeks ago SFC has concluded the consultation on those proposals to enhance investor protection. The new measures include a consolidated product handbook with revised product codes for unit trusts and mutual funds and for investment-linked assurance schemes as well as a new product code for unlisted structured investment products. There are also requirements for product key facts statements to summarise the key features and risks of investment products, issuers to provide a post-sale "cooling-off" or "unwind" right for certain unlisted structured investment products to give investors a window to exit these investments, and conduct requirements for intermediaries to enhance selling practices relating to the sale of investment products.

In December 2009, I summitted the comments on the consultation paper on behalf of the Hong Kong Chapter of the International Academy of Financial Management (IAFM). The finalized measures relating to conduct of intermediaries are largely conforming to my expectations. My brief comments on the conclusions are set out as follows:

• Investor Characterization: It remains a subjective process for intermediaries to judge whether the client has derivative knowledge. In order to solicit more new clients for structured products, I expect the intermediaries will organize or sponsor "derivative training courses" for retail investors. 
• Professional Investors: As I've said, the proposal of increasing the portfolio requirement for professional investors is useless and finally scrapped by SFC. To ensure that a professional investor has the relevant product knowledge, again intermediaries had better provide free training sessions to them.
• Pre-Sale Disclosure of Monetary and Non-Monetary Benefits: As expected, SFC has compromised by requiring only the disclosure of the percentage ceiling, between the two extremes of specical disclosure in exact percentage and generic disclosure.
• Use of Gifts by Distributors in Promoting a Specific Investment Product: Non-bank intermediaries should have raised strong objection to the use of gifts for product promotion and SFC has no pressure to impose this restriction.
• Sales Disclosure Document: This proposal is probably the least controversial one.
• Audio Recording: Again non-bank intermediaries should have raised strong objection to mandatory audio recording as this is not practical. Banks are unfortunately forced by HKMA to do so.
• Post Sale Arrangements – Refund by Distributors Under a Cooling-Off Period: SFC has quite insisted on implementing the post-investment cooling-off period even though it is costly. Again banks are unfortunately required by HKMA to implement pre-investment cooling-off period as well.