HK SFC to issue guidelines on digital fund sales soon

HK SFC to issue guidelines on digital fund sales soon


Ignites Asia (

Date: 26April 2017


After receiving “a lot of complaints and enquiries” about new digital fund sales platforms, including robo advisors, that may not be properly authorised, Hong Kong’s Securities and Futures Commission (SFC) is now gearing up to issue operational guidelines on these platforms in a bid to reduce risks for investors, according to Christina Choi, executive director of the SFC’s investment products division.

Speaking Tuesday at Fund Forum Asia in Hong Kong, Choi also reiterated the regulator’s view that investors in the territory are not prepared to pay for advice and would still prefer to pay transaction fees.

Upcoming guidelines for digital distribution

Hong Kong has seen the emergence of new robo-advisor and digital distribution platforms over the last six months.

Earlier in April, Yunfeng Financial’s Youyu Robo, a mobile app that uses mutual funds to construct portfolios, was launched in Hong Kong, touting much lower fund transaction fees than traditional fund sales channels.

The regulator has in the past voiced its support for expanding the territory’s bank-monopolised distribution landscape. In her speech Tuesday, the SFC’s Choi said many different licensed businesses, including fund houses, are now trying to offer alternative distribution channels such as robo advisors.

“At the commission, we do recognise the significant benefits and opportunities for the development of these platforms in terms of providing access to a broader range of products and services at potentially lower costs,” she said. “On the other hand, we are also aware of the potential risks and challenges associated with all these platforms.”

There’s always a risk that some of these platforms operate without obtaining a licence or proper authorisation, Choi said, and the regulator has received complaints and enquiries about new platforms that may not be properly authorised.

All platforms that distribute any securities, even just to a small number of professional investors, if it is a business, it needs to be licensed by the SFC, she added.

Other potential risks the regulator has identified include the use of appropriate know-your-client (KYC) and suitability procedures, cyber security, and the possibility that clients don’t understand the services they are offered.

The SFC has set up an internal working group to cover areas such as licensing, supervision and enforcement for digital distribution, and the group has spent the last four months meeting with banks, brokerages and asset managers to discuss these issues.

“Very soon we will be issuing some proposed guidelines for the industry about the proposed operation and expected standards of operations for these platforms, including how to apply suitability,” Choi said.

She added that operators of these platforms have a duty to ensure that due diligence, KYC and suitability regulations are properly followed.

In December last year, the SFC issued additional guidance on what triggers suitability obligations and how regulated entities can stay in compliance. Determining whether a registered person has made a solicitation, thus triggering suitability requirements, “should be assessed against the circumstances of each case”, the circular to intermediaries on triggering suitability obligations notes.

The Monetary Authority of Singapore (MAS) is similarly working on its own set of regulations to curb potential risks related to financial technology innovation in the city-state, some of which will be specific to robo advisors.

“A common question is whether robo advisors present prudential risks and should therefore be subject to capital requirements,” Ravi Menon, managing director of the MAS, said in a speech in February.

“The failure of a robo advisor could potentially lead to contagion among other algorithm-driven service providers. This could present systemic risk if investors seek to withdraw their investments in securities through fire sales,” said Menon.

Industry supportive of fee disclosure proposals

In November, the SFC launched a three-month public consultation on proposals to bring greater clarity to investors over advice and fees linked to distribution of investment products.

One major proposal was that intermediaries should not just declare they receive trailer fee commissions from product providers but must disclose a maximum dollar amount and a percentage range of management fees that they receive from a fund house at the point of sale to end investors.

Choi said that the regulator received many comments from the industry to the consultation that was officially closed on February 22 but is still carefully considering the feedback. However, she indicated that there was little appetite from industry respondents to ban commission fees and foster a fee-based advice system.

“I think most agree that investors in Hong Kong are not ready to [move to] the pay-for-advice model, as per some of the market surveys conducted,” she said. “As per some of the market surveys conducted, investors still prefer to pay transaction fees instead of an AUM [assets under management] advisory fee.”

In its proposals, the regulator cited a survey of 1,000 individuals in the territory which found that 11% of investors would be willing to pay HK$15,000 (US$1,932) or more for financial planning services and 55% would be willing to pay only HK$5,000 (US$644) or less. The survey was carried out in 2015 by the Financial Planning Standards Board and global research firm GfK.

The regulator has received a “diverse” range of comments in response to the proposed disclosure requirements, according to Choi. Some suggested a maximum trailer fee dollar amount while others said the proposals don’t go far enough and the exact trailer fee figure for each transaction should be stated.

“I think, as a whole, the industry is still quite supportive of our proposals and some are seeking more clarification on technical issues such as how commissions should be disclosed,” Choi said. This includes private fund managers, such as hedge funds, asking for clarification on when a fund manager should be responsible for the overall regulation or operation of a fund.

Not all industry bodies agree with the regulator’s interpretation of investors’ acceptance of a pay-for-advice model, however.

In its response to the SFC consultation, the Institute of Financial Planners of Hong Kong (IFPHK) pointed to the two biggest evolving trends in the territory’s financial advisory industry, which are “fee-based and tech-obsessed”, as reported.

The IFPHK says it’s not easy for investors to obtain comprehensive planning advice due to a product-based and sales-oriented culture, and the IFPHK believes – contrary to the SFC’s interpretation – Hong Kong investors would choose fee-based advice.

Speaking Monday at a different panel discussion at Fund Forum Asia, Roger Bacon, Hong Kong-based head of investments for Asia Pacific at Citi Private Bank, said the bank has been presenting more holistic investment portfolios to customers, which is the start of transitioning investors to an advice-based fee model.

“It is something that everyone is talking about here in Asia, but the reality is that the take-up has, thus far, been relatively limited, especially compared to other regions around the world,” said Bacon.

“Ultimately, over the next two to three years, we will perhaps start to see more momentum building as the delivery mechanism moves to more of an advice-based, wrap-fee concept and away from the historical transaction fee model we have had in Asia,” he added.