A new circular from the regulator highlighted nine more areas of non-compliance concerns.
They include a failure to ensure that the funds or mandates recommended to clients were suitable for them. For example, when a firm provides discretionary account management services, but the investment objective and strategy are either absent from the client agreement or unclear.
Another area is inadequate protection of client assets. A number of firms failed to demonstrate the harminisation of holdings through records issued by banks and custodians of the funds or discretionary accounts, to detect errors, omissions or missing assets.
The regulator urged firms to review their existing internal control procedures and operational capabilities.
It also reminded asset managers about licence requirmenmts. If they are only licensed to provide investment advice, they are not conducting asset management activities and as such are not eligible for distributing mutual funds.
“The SFC will continue to monitor compliance by asset managers with applicable regulatory requirements and will not hesitate to take action against any asset managers and/or their management, including the relevant managers-in-charge of core functions, for failure to comply with regulatory requirements, including fitness and properness.”
At the end of July, the SFC identified other non-compliance concerns, emphasising situations in which fund investors or discretionary account holders were either a substantial shareholder, director or affiliate of the companies that the funds or discretionary accounts invested in.
SFC’s observations were drawn from around 250 inspections which covered asset managers of varying sizes based in the US, Europe and mainland China, as well as Hong Kong-based managers generally operating on a smaller case, according to the more recent circular.
Nine areas of non-compliance identified by the SFC
1) Inappropriate receipt of cash rebates giving rise to apparent conflicts of interest.
2) Failure to ensure suitability of funds or discretionary account mandates when making solicitations or recommendations of funds under their management, or providing discretionary account management services to clients.
3) Failure to put in place a proper liquidity risk management process to ensure that liquidity risks of funds and discretionary accounts under management are adequately addressed.
4) Deficiencies in setting up a proper governance structure and implementing comprehensive policies and procedures for fair valuation of assets.
5) Deficiencies in systems and controls to ensure best execution.
6) Failure to ensure fair order allocation.
7) Inadequate systems and controls in relation to protection of client assets.
8) Inadequate systems and controls for ensuring compliance with investment restrictions and guidance.
9) Inadequate systems and controls to address the risk of market misconduct.
To read specific examples of common instances of non-compliance, click here (PDF).