The issue of sales commissions and fees for advice has been a key topic of the year-long consultation on SFC proposals to enhance asset management regulation, point-of-sale transparency and disclosure requirements for discretionary accounts.
Hong Kong’s Securities and Futures Commission published the results of the consultation period yesterday and said it would adopt the initial proposals.
Sales commissions are at the core of the conflicts of interest arising from intermediaries receiving payments for sale of investment products. The inherent bias toward products that generate higher commissions results in narrow product selection and is therefore not in the client’s best interests, the argument goes.
The alternative fee-for-advice model is broadly thought to mitigate conflicts of interest, to increase product access, competition and cost transparency. Investors “would be in a better position to compare products”, noted one of the respondents quoted by the SFC.
The fee-for-advice model has been broadly adopted in the US, Canada, UK and Australia. The latter two went even further by banning sales commissions.
M&G Investments’ Ben Cherrington noted that after commissions were banned in the UK in 2013, the industry saw downward pressure on fund fees, increased competition among distributors and a surge in passive products.
A survey report published by Vanguard in February showed that Hong Kong advisors saw a trend toward fee-based portfolio management, but most did not foresee their own practices adopting that model within the following five years. It also showed that the difference between commission-based and fee-based advice was not clear to many investors.
The SFC noted that adoption of the fee-for-advice model might result in an advice gap – a situation where investors unable or unwilling to pay the advice fee would be left with limited access to investments.
A majority of the respondents to the SFC consultation paper came out against adoption of the fee-for-advice model in Hong Kong. One warned of “severe unintended consequences” without any further explanation. Another noted that “more investor education would be needed” before it is adopted.
Most, however, supported enhancing point-of-sale disclosure of fees.
While backing away from the idea of banning commissions outright, the SFC stated it would adopt a two-pronged approach to address the issue, as initially outlined in the consultation paper in November 2016.
The regulator will forbid the use of the term “independent” when referring to financial advisors if they receive commissions or non-monetary benefits from product issuers. It will also mandate enhanced disclosure of monetary benefits received from product issuers, in particular trailer fees.
The amendments to the FMCC and the Code of Conduct for Persons Licensed by or Registered with the SFC, will become effective in 12 and nine months, respectively.
