Sales of investment products to vulnerable customers (VCs)
The implementation of the Pre-Investment Cooling-off Period since 1 January 2011 has further strengthened the protection provided to VCs during the sales process. Taking this into account, it is appropriate to allow VCs the flexibility in choosing whether they wish to continue to enjoy the safeguards mentioned below.
For all investment products, banks should allow VCs to choose during the initial transaction
whether they would like to
- bring along a companion to witness the sales process; and/or
- have a second front-line staff member to handle the sales.
The VC can choose to have either, neither or both safeguards. Banks should adopt the VCs' choices and maintain proper audit trails of the choices.
Streamlined sales process for plain vanilla investment products
Where there is no risk mismatch, and subject to the exceptions set out in the next paragraph, audio recording is not required for the face-to-face sales process in respect of:
- plain vanilla investment products (without embedded derivatives and without leverage) where the products or product documents have been authorized by SFC;
- sovereign bonds issued by Ministry of Finance of PRC; or
- bonds issued by HKSAR Government.
Certain categories of bonds are not common investment products and their risks and nature are substantially different from other plain vanilla bonds. Therefore, audio-recording is still required for bonds that have the following features:
- either the issue or the issuer, or both, have a credit rating below an investment grade;
- both the issue and the issuer are unrated;
- perpetual bonds; or
- subordinated bonds.
Banks should ensure that their frontline staff have ready access to clear and comprehensive lists of individual products whose sales process does not require audio recording (e.g. through system enquiry) so that there is clarity and consistency in applying the above framework.
As always, banks are required to provide a clear explanation of the product nature and risks to the customers during the sales process. Banks are also reminded to consider each customer's personal circumstances (such as his/her financial situation, investment objectives, experience, knowledge, horizon and risk tolerance before making any recommendation or solicitation to the customer) and to maintain proper documentary records of the recommendation, including the underlying rationale. For transactions involving risk mismatch, banks should follow the existing regulatory requirements, including audio recording the sales process.
Jack's comment: After the Lehman Minibonds incident, HKMA has more actively and frequently fine-tuned the regulation of investment sales, even performing risk assessment of different products.
