“While intermediaries in general had put in place policies and procedures in respect of conflict of interest, some key areas warrant further attention by intermediaries,” the regulators said in a joint circular.
Intermediaries that sell in-house products include financial groups that have businesses in both wealth management or private banking and asset management.
The regulators highlighted a number of areas where conflicts of interest may arise, which include the management of discretionary accounts, order execution, product due diligence and selling process.
For example, on the discretionary portfolio management (DPM) front, the regulators found there were instances where a client’s investment portfolio was comprised of substantial investments in in-house products.
However, there were insufficient controls in place to ensure adequate disclosure about the practice of investing in in-house products and whether the overall risk exposure for DPM investment portfolios matched with the risk expectations agreed with clients.
The regulators said that distributors should disclose to clients any preference for internally-managed strategies and allow clients the option to exclude investment products that are managed by the group’s companies.
Distributors should also disclose on a monthly basis the percentage split of the investment allocation between in-house and third-party managed strategies.
Similarly, for transactions in some structured products, the regulators found that some distributors would only select their related entities as counterparties without clearly disclosing the arrangment to clients.
Although distributors require their staff to obtain quotes from different market participants when they execute the orders of certain investment products for clients, some of the staff were not required to follow such requirement if they considered that the in-house quote was reasonable based on the staff’s own assessment.
Distributors should implement proper controls and monitoring to ensure compliance with their established policies and procedures, including requiring staff to obtain and compare quotes from external market participants.
The regulators further noted that if the external quote is not obtained or not available, staff should disclose this to clients.
“Senior management of intermediaries are reminded that they bear the primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper policies and procedures,” the regulators said.
Without naming any firm, the regulators said that the distributors concerned have been required to undertake remedial actions.