1. The Council welcomes the initiatives taken by the HKMA to set out its approach to supervising the regulated activities of Authorized Institutions (AIs) that are registered, or deemed to be registered, with the SFC under the Securities and Futures Ordinance (SFO). The Council's comments in this submission are directed at issues of specific relevance to retail investors.
Harmonization of regulatory approach
2. The intensified competition has driven the financial institutions to expand beyond their traditional product boundaries to seek and exploit new market opportunities. The Council considers there is a need for financial sector supervisors/regulators to increase supervisory cooperation and harmonization of policies and procedures across different functional areas, and to strengthen communication among themselves (banking, securities, and insurance).
3. As noted in subsection 1.4 of the supervisory policy manual, a memorandum of understanding (MoU) was signed by the HKMA and the SFC in respect of the securities supervisory regime. The HKMA will remain the front line supervisor of the AIs' securities operation, while the ultimate responsibility for the regulation of intermediaries in the securities market rests with the SFC.
4. In the interests of AIs, the above arrangement may lessen their burden in having to deal with different regulators which may help reduce costs. However, from a consumer's perspective, they would wish to have certainty as to whom they are dealing with and which regulator(s) is/are responsible for protecting them in relation to securities matters.
5. Given that there are two separate regulators , the Council accepts the MoU approach as it may keep regulatory costs low and avoid wasteful duplication. However, as noted in a previous submission on the Securities and Futures Bill and Banking (Amendment) Bill 2000, the Council expressed concern that fragmentation of regulatory oversight, based not on the markets involved, but on the organizational characteristics of market participants may compromise the effectiveness of protecting the interests of the investing public. As a long term objective and having regard to advantages in the creation of a single financial regulator such as
- consistency in regulatory direction;
- a single point of contact for consumers; and
- the ability to adapt to changes in the markets,
a comprehensive review of financial industry regulators in Hong Kong is worthy for further consideration.
Definition of registered persons
6. The Council is pleased to note that in section 20(10) of the Banking (Amendment) Ordinance provides that a "registered person" means not only a "registered institution" but also a "relevant individual". This clarifies that a "registered person", both the registered institutions and relevant individuals have the responsibility to comply with the SFO and the various rules, codes and guidelines equivalent to those applied by the SFC to securities dealers. The Council welcomes the amendment as it can ensure a level playing field by bringing all securities operations, including that carried out by AIs, within the same standards of regulation.
Transitional arrangements
7. The Council notes that there is a transitional period of two years from the commencement of the SFO for an AI which was an exempt dealer to apply for registration with the SFC. In order to enable consumers to know the status of those they are dealing with, the Council supports that the names of all relevant individuals, registered or deemed to have been registered, to be included in the HKMA Register, for public inspection, with the status clearly marked as "registered under transitional arrangements".
8. The Council would expect that the HKMA, as the front-line supervisor, will ensure AIs and their relevant individuals, including the deemed registered individuals, will comply with the relevant provisions in the SFO as well as the SFC rules, codes and guidelines, upon the start of the transitional period.
Guidance to investors over changes
9. In addition to the publication of the supervisory policy manual to AIs, the Council considers it important that certain guidance measures should also be provided to consumers over the changes in regulatory approach.
10. Investors may not be aware of the new requirements in that AIs, and their staff involved in regulated activities, are required to register with the SFC, and that the HKMA will remain the front line supervisor for these AIs. Investors may also not know they have to deal with relevant individuals when placing orders.
11. Therefore, guidance measures should be provided to ensure that investors:
- know they have to deal with relevant individuals; and
- know the persons they are dealing with are relevant individuals.
12. In this regard, information should be available to draw investors' attention to the fact that they should only place orders through relevant individuals. In most cases, AIs have already designated special counters for handling securities transactions for consumers. To better help consumers make sure they are placing orders with a relevant individual, the counter nameplate of the relevant individual should include his name, registration number and preferably his photo. As insurance intermediaries are required to print their registration numbers on business cards, similar requirements should be (if not already) imposed on relevant individuals.
13. To ensure investors are better informed, the Council further suggests that the HKMA should issue, or require AIs to issue, a consumer leaflet, setting out the following:
- investors should study carefully the SFC leaflet "Invest Wisely" before engaging into securities transactions;
- AIs are required to register with the SFC to engage in regulated activities and the regulated activities are subject to rules and regulations of the SFC;
- individual particulars and type of services provided by the relevant individuals are available for public inspection in the form of an on-line record on the HKMA website;
- investors should only place orders with a relevant individual;
- the statement that securities related investments are not protected by the deposit protection scheme;
- the warning as to certain products (e.g. non-HKEx traded) that are not protected by the investor compensation arrangement;
- the enquiry and complaints channels;and
- the HKMA will remain the front line supervisor of the AIs regulated activities, while the ultimate responsibility for the regulation of intermediaries in the securities market rests with the SFC.
Concern over certain sales practice
14. A Council survey has uncovered areas of concern over certain sales practices of financial institutions in marketing investment (and insurance) schemes. Details were published in CHOICE magazine (volume 314, December 2002).
15. It was noted that problems occur if front-line staff do not possess the necessary training and knowledge to provide sufficient information and give sound investment advice. Some may also be under pressure to meet sales targets or motivated by the commissions from the transactions.
16. The Council urges the HKMA, in carrying out its prudential inspection, to ensure AIs provide sufficient training to front-line sales staff to ensure they act in a professional manner in providing fair and objective recommendations to customers. AIs should also have internal monitoring procedures in place to ensure their staff will act in accordance with professional codes and in the best interest of customers.
17. In relation to this, the HKMA has issued a circular entitled "Calls in relation to Securities or Futures Products and Services" which provides specific guidance on the restrictions on unsolicited calls (cold calls) in relation to securities and futures contracts. For instance, unsolicited calls to general banking customers (i.e. those who are not existing clients of regulated activities) are not permitted. The Council welcomes making this in line with the requirement under the SFO for prohibiting the use of unsolicited calls to induce consumers entering into an agreement to sell or purchase any securities or futures contract.
Reporting of certain events
18. Section 5 refers to the reporting requirements of AIs to the SFC and the HKMA, but not the reporting requirements of AIs to investors. For example, paragraph 5.1 states that under section 135 of the SFO, an AI is required to notify both the SFC and the HKMA in writing, giving at least seven business days' advance notice of any intended cessation of any regulated activity. However, there is no requirement for the AI to give investors similar advance notice. Investors may need notice to make any necessary consequential arrangements.
19. It is therefore suggested that a similar reporting requirement be imposed on AIs to notify their consumers by letters (to last known address), posting on their websites, and a poster prominently displayed in public area of the AI branches.
HKMA's options of disciplinary actions
20. Section 6 notes that the Securities and Futures Appeals Tribunal shall have at its disposal the full range of disciplinary sanctions administered by both regulators in considering an appeal, or that the HKMA can refer the case to the SFC to carry out disciplinary action. Despite this, the Council considers that the discplinary options available for the HKMA may not be comprehensive enough because the HKMA can only remove or suspend the name of a person from its Register, or withdraw or suspend the consent given to an executive officer of a registered institution.
21. Consideration should be given to empowering the HKMA to make public or private reprimand and impose the paying of pecuniary penalty similar to the SFC. These additional powers can give the HKMA more comprehensive discplinary options to better deal with, not just the securities operation related misconduct, but other misconduct that would be detrimental to consumers' interests and pose a threat to the integrity of the banking system.
Relevant individual's responsibility to misconduct
22. Paragraph 6.5 notes that it is essential for senior management to draw to the attention of their relevant individuals, and persons involved in the management of regulated activities, that they shall be personally and legally liable to these disciplinary actions if they are found guilty of misconduct and/or considered to be not fit and proper.
23. It is not difficult to understand personal liability in case of misappropriation or fraud committed by AI's staff. However, front-line staff may work according to various operation manuals and procedure guidelines as laid down by the banks' management which is in turn influenced by senior management.
24. For this reason, it seems to be appropriate to add that if the relevant individual's misconduct is committed under circumstances that is not within the individual's control but subject to management decision, the senior management and/or the institution should be held liable for the conduct.
25. The Council also expresses a concern that if a consumer has suffered loss as a result of market misconduct, seeking redress may be difficult under the above circumstance (if the consumer cannot establish the responsible person for the misconduct). The Council suggests that the HKMA and the SFC should explore this aspect further.
