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HK moves on discretionary disclosure

New disclosure rules issued by the Securities and Futures Commission for discretionary accounts are seen as a positive move toward increasing transparency for investors, according to industry sources.
HK moves on discretionary disclosure

The SFC released last week consultation conclusions on proposed disclosure requirements for firms providing discretionary account management services.

Under the new rules, which will be enforced in six months, firms will be required to disclose benefits receivable from product issuers as well as trading profits they take from third parties in the service of clients. The new rules address potential conflicts of interest arising from incentives provided by product issuers, the SFC said.

Paul Moloney, a Hong Kong-based partner for investment funds and asset management at law firm Eversheds Sutherland, sees it as a positive development.

Paul Moloney, Eversheds Sutherland

“Most people support the idea that there should be increased transparency for investors. Investors will be more aware of what fees or other benefits the person giving advice is receiving and this will help reduce conflicts of interest,” he said.

Tara Buckley, Vanguard’s Hong Kong-based Asia-Pacific head of legal and compliance, shares the same sentiment.

“The SFC is trying to increase the transparency on fees and provide investors with a way to compare the fees they would pay to one investment provider as opposed to another so they could make the most informed investment decisions.”

Tara Buckley, Vanguard

Vanguard was one of the firms that responded to the SFC when the regulator first issued a consultation paper on proposals to enhance asset management regulation and point-of-sale transparency in November 2016.

The new rules

Eversheds’ Moloney explained that with the new rules, firms will be obliged to disclose any monetary benefits that they receive on a per product basis in their discretionary accounts.

Firms would only have to disclose the maximum benefits they receive from product manufacturers, he said.

Sample disclosure requirement

Source: Securities and Futures Commission

Besides monetary benefits, firms are also required to disclose non-monetary benefits.

“Non-monetary benefits may impair the independence of the person providing advice,” Moloney said.

The SFC noted in their conclusions that firms are exempt from the disclosure requirements with respect to institutional and corporate investors.

In the past year, the regulator has repeatedly highlighted sales malpractices in relation to discretionary accounts.

In July last year, the SFC identified a number of potential regulatory concerns over firms engaged in managing private funds and discretionary accounts. In September, the regulator released a circular that highlighted nine more areas of non-compliance concerns. After a few months, the SFC, together with the Hong Kong Monetary Authority, highlighted a number of areas where conflicts of interest may arise.

A road to fee-for-advice?

Moloney said that the new rules are a follow-up to the consultation conclusions released in November 2017 to enhance asset management regulation and point-of-sale transparency.

At the time, the regulator said it 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 also said that it will mandate enhanced disclosure on monetary benefits received from product issuers, in particular trailer fees.

However, on the same consultation conclusions, the regulator said it will not adopt a fee-for-advice model.

“The SFC did look at pay-for-advice, but in their view Hong Kong was not ready for that model because very few people in Hong Kong pay for advice and there was a risk of an advice gap opening up if you use that model. So they went down the road of increasing transparency.”

However, the SFC noted in the consultation that it will “keep under consideration the merits of pay-for-advice models taking into account local and international market and regulatory developments”.

Vanguard’s Buckley said that the firm will encourage the SFC to continue with its research on the fee-based advisory model.

A fee-based advice model would benefit ETF providers such as Vanguard. A key factor impeding the growth of ETFs in Asia is that the wealth management model is still mainly a commission-based one, and therefore advisors have less incentive to use cheap products like ETFs.

Part of the Mark Allen Group.