Reliance on Individual Consultants to Conduct Product Due Diligence

As announced on 19 Mar 2020, SFC reprimanded and fined Convoy Asset Management Limited (CAML) $6.4 million for control failures in solicitation and recommendation of bonds to clients.

CAML referred clients to a third party platform between Mar 2015 and Jan 2017 (Relevant Period) to execute 30 transactions of Chapter 37 Bonds, some of which involved solicitation or recommendation made to clients.

In recommending Chapter 37 Bonds to clients, CAML failed to:

• conduct proper and adequate product due diligence on these bonds before making recommendation or solicitation;
• have an effective system in place to ensure that the recommendation or solicitation in relation to bonds was suitable for and reasonable in all the circumstances;
• maintain proper documentary records of the investment advice or recommendation given to its clients and provide each of them with a copy of the written advice; and
• have adequate and effective internal controls and system in place to diligently supervise and monitor the sale of bonds through the third party platform and to ensure its compliance with applicable regulatory requirements.

The SDA revealed further details:

• During the Relevant Period, CAML introduced its clients to a third party platform to execute 30 Chapter 37 Bonds transactions in the secondary market for 28 retail clients. Clients who purchased bonds via the third party platform had to open accounts at both CAML and the third party platform. They were clients of both firms.
• CAML did not have product approval and due diligence procedures on Chapter 37 Bonds. It relied solely on individual consultants to conduct product due diligence (PDD) and to assess the risks of the bonds.
• CAML engaged the bond dealing services of the third party platform to assist its consultants to understand each bond product before recommending such product to clients. The platform offered the services of a designated bond expert to CAML, and provided briefings, presentations and articles to CAML’s consultants on bond products, as well as responded to enquiries from CAML’s consultants. However, the third party platform did not assign a risk rating to the bonds, and did not identify which of the bonds on its platform were Chapter 37 Bonds.
• CAML provided limited guidance to its consultants on how they should conduct PDD on the bonds, including for instance, what features they had to review and the criteria to be adopted, what other factors they should take into account, and the weight to be attributable to those factors. Its consultants were also not required to record in writing what documents they had reviewed, in what respects the bonds were considered suitable for different risk categories of investors, and justification for such findings.

SFC does not disclose the identity of the third party platform, probably due to the fact that another disciplinary action is being taken against this firm.

SFC's Statement on HSBC's Cancellation & Suspension of Dividends

As we know, HSBC Holdings plc made an announcement made on 31 March 2020 relating to the cancellation of its fourth interim dividend for 2019 (Cancellation) and the suspension of payment of any further dividend until the end of 2020 (Suspension).

SFC said it has received a large number of enquiries and complaints from the investing public and professional bodies in Hong Kong in relation to the Cancellation and the Suspension.

SFC does not usually comment on individual cases. However, in light of the significant public interest in this matter, SFC issued a statement on 15 May 2020 to inform the public about the actions that SFC has taken, including its communications with the Bank of England’s Prudential Regulation Authority (PRA) and HSBC.

Matters relating to the banking and prudential supervision of HSBC lie outside the SFC's regulatory ambit. SFC communicated with HSBC and PRA to establish the circumstances leading up to the Cancellation and the Suspension. SFC also conveyed to them the views of Hong Kong investing public, including:

• the overall impact on Hong Kong retail shareholders;
• reliance of many Hong Kong retail shareholders on dividend distributions by HSBC as a form of regular income; and
• that the Cancellation was made after the ex-dividend date in relation to the fourth interim dividend.

SFC understands that PRA's request for the Cancellation and the Suspension, and HSBC's agreement to such request, was made after carefully considering and balancing various factors, including the following:

• In line with regulators internationally, PRA has been monitoring the impact of COVID-19 on PRA-regulated firms and their groups and has put in place various measures to advance its general objective during this difficult time.
• As at 31 March 2020, there was a high level of uncertainty as to the duration and impact of the economic implications of COVID-19 on a global basis. PRA noted that there was a real risk of a very rapid reduction in economic activity globally in response to restrictions imposed by a number of governments and a particular need for additional lending to help real economies bridge the gap to the eventual removal of those restrictions.
• PRA considered the need for early action to preserve the capital position of firms in the face of continuing economic uncertainty. Further, PRA has the necessary statutory power to require HSBC to take capital preservation actions and it was clear that PRA stood ready to exercise such powers should HSBC not agree to take the requested action.
• The interests of HSBC's shareholders around the world balanced against the urgent need for capital preservation to finance the global economy during, and following, the COVID-19 pandemic. In particular, the PRA noted that a cessation of dividends to ensure adequate capital to support lending, in the case of HSBC, was likely to benefit the Hong Kong economy as well as the UK and the global economy.
• The announcement made by the European Central Bank on 27 March 2020 recommending banks not to pay dividends or engage in share buy-backs.

Further, according to the board of HSBC, HSBC's long-term interests were best served by acceding to PRA's requests, instead of requiring PRA to exercise its statutory power.

SFC also notes that HSBC received the PRA's direct request for the Cancellation at around 5:03p.m. (London time) on 31 March 2020 and HSBC published its announcement on the Cancellation prior to trading in Hong Kong on 1 April 2020.

SFC has conducted a careful examination of all information available to it to date (including, but not limited to, the matters mentioned above), and assessed it against the threshold criteria for investigating matters under the SFO such as insider dealing, failure to disclose inside information, disclosure of false or misleading information and unfair prejudice to shareholders, and has concluded that there is at present no ground on which regulatory action should be pursued under the SFO in respect of the Cancellation and the Suspension.

SFC's lengthy statement may reveal that it has been under a high political pressure to pursue this matter. Hong Kong, as of today, is still an international financial centre. SFC respects PRA's request and defends HSBC's action.

Checking of SFC licence records

When we check whether a firm or an individual is licensed by SFC, of course we visit SFC's public register. But today I accidentally find another website, which extracts data from SFC's public register but may be useful to a certain extent.

This homepage of SFC Licence Guru lists out licensed corporations with RO/rep most recently licensed. When inputting an individual's name into the search box, you can find out his licence history (no matter his licence is active or inactive) and the link to the official SFC record is also provided. However, you can't get any result by inputing a company name into the search box, which is a limitation.

Of course, David Webb's website can also provide similar licence checking function, where the data are more comprehensive.