Some examples he cited are “tenor matching” (synchronising the maturity of assets with liabilities); assessing investor suitability of individual fund products; and audio-recording the sales process.
In regards to tenor matching, Yuen said that industry players were asking why the HKMA was requiring a product tenor for every fund product because it is not a requirement. “We were scratching our heads, and it actually took us quite a bit of time to find out what actually happened.”
The misunderstanding started when the HKMA came across incidents where distributors wrote in their internal policy documents that the investment horizon is not important when distributing funds to clients as they are highly liquid products.
“There were cases where we have seen a fund that has been designed clearly for investors with a longer investment horizon having been distributed to investors with a clear short-term investment horizon,” he said.
The HKMA then reminded the banks that they should consider investment horizon when distributing products. However, as the message was getting through to compliance departments, people added their own interpretation of what the HKMA meant.
“It ended up with tenor matching. ‘Oh, the safest way is to tenor match.’ And then when they were challenged by the fund houses and the Investment Funds Association, they conveniently said that ‘oh, this is part of the supervisory requirements’.”
Another over-interpretion involves performing a suitability assessment of each fund product, even though the funds are already distributed in a portfolio recommendation.
“If you are doing a portfolio recommendation, you have to make sure that the portfolio overall is suitable. You don’t have to make sure that the individual elements of the portfolio are suitable.”
The third most often misinterpreted regulation is having to audio-record each and every product that distributors sell to investors.
Yuen clarified that the HKMA only requires audio-recording to retail customers when they are offered a complex product.
“So a simple SFC-approved fund without any derivative elements in it should not require banks to make a recording of the selling process,” he said.
Besides misinterpretations, Yuen also cited some malpractices that the HKMA have observed.
One is recommending an investment-linked assurance scheme (ILAS) as a good choice for customers who like “free fund switching”.
“Those products are actually structured in such a way that it allows the customers to switch funds a certain number of times without any commission. But there will always be costs that are embedded in the structure of the scheme,” he said, adding that these costs are not very transparent.
If customers are into fund trading, they might as well trade funds and not use a structured product that seemingly provides a free option, but in reality does not, he said.
He added that fund churning was another problem. It involves recommending that clients switch funds to different currencies within the same asset class, a practice that generates more commissions for distributors.
Yuen said that in resolving these issues, setting the tone from the top of the firm is not enough. Senior management should make sure that the tone is influencing the behaviour on the ground.
“Are you sure that what is going on in the customer interfacing process is actually what you are promoting?” he said.