In October, the Securities and Futures Commission released its conclusions to a consultation it issued in March that seeks to align requirements for the sale of complex products, which should create a level-playing field for both online and offline distributors.
One of the new requirements is around how distributors satisfy the suitability assessment in both the online and offline environment to make sure that the product being sold or recommended is appropriate for an investor.
A suitability assessment for investors has been required since the global financial crisis erupted in 2008. What has changed is the introduction of a set definition of a “complex product”.
The SFC has already provided an exhaustive list of non-complex and complex products on its website, which was last updated in March. Examples of complex products are futures contracts, equity derivatives, synthetic and futures-based ETFs, leveraged and inverse products and hedge funds.
The SFC left it up to the players to work out the reporting details. Distributors and asset managers will have to work together to decide whether an investment product fits the SFC’s definition of a complex product.
The regulations are focused on fund distribution. However, asset managers are also impacted because they will need a system to adequately explain whether their funds are complex products or not, said Jeff Floro, Hong Kong-based sales director for Asia at Fund Info, a Zurich-headquartered fund data provider that is working with the buy and sell sides on complex product reporting.
Given that the new guidelines will be in effect this April, a number of distributors as well as fund managers might not yet be ready for the new regulations. “It hasn’t given much time for all parties to implement changes in their systems,” Floro told FSA.
The difficulty lies in collecting the necessary information from asset managers, especially for huge distributors who have thousands of products on their shelf.
Matters get more complicated if the IT systems of fund providers and distributors are based outside of Asia, Floro added.
“It requires fund distributors to gear up their technology [in order to comply] with these regulations. Part of it is getting that information from fund managers and being able to add these fields into their systems so their relationship managers could easily see what’s suitable for their clients.
“Theoretically, it is a simple thing,” Floro said. “But people don’t realise some of these are global systems, so they may have to circle back to the US or Europe to make those changes. And sometimes, these systems are so large and complex that even making a simple change is not as easy.”
Are distributors ready?
Floro did not say whether distributors operating in Hong Kong are already prepared for the new regulations. However, he noted that fund distributors, including private banks, have begun talking to fund managers for relevant information to avoid mis-selling.
Floro believes that European banks that had to undergo a lot of changes with Mifid II will be more prepared than their Asian counterparts.
He explained that with Mifid II, private banks had already expected more regulatory changes to come in the future. That made them adjust their systems to be more flexible for any potential upcoming regulatory changes.
“Anyone that has gone through that Mifid exercise should be prepared for this. In a way, the new regulations in Hong Kong are an extension of Mifid.”
The ‘openfunds’ standard
One solution for easily getting information from fund providers is adopting the “openfunds” standard, according to Floro.
The Openfunds Association was founded by UBS, Credit Suisse, Julius Baer and Fund Info. The association’s goal is to establish a common industry standard for the characterisation of fund data, according to its website.
“It is basically a way for anyone in the fund industry to communicate their data quickly in a standardised format,” Floro said.
Openfunds has an Asia-Pacific working group that consists of global and domestic players, where distributors and fund managers share best practices and provide each other guidance to any regulatory changes, he added.
“There are domestic banks and wealth managers that do need help with [the new regulations in Hong Kong]. One of the reasons why there is an Asia-Pacific Openfunds working group is to make sure everyone is on the same level playing field in being able to sell their funds to investors.”
