Posted inRegulation

SFC warns of malpractice in AM industry

As Hong Kong's asset management industry grows, the Securities and Futures Commission (SFC) issues new guidance on sales practices and managing conflicts of interest.
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At the end of September, there were 1,472 asset management firms in Hong Kong, making up 54% of all intermediaries, SFC noted in the first issue of “SFC Compliance Bulletin: Intermediaries”, published on its website.

The number of firms with an asset management license surpassed the number of firms that are registered for securities dealing (such as brokerages) in early 2014 and has since increased faster. They engaged in a wide range of activities, including managing public and private funds and discretionary accounts.

The number of individuals licensed for asset management also rose by 54% to 10,252 in September from 3,575 in 2012. This was the largest increase among all ten types of regulated activity, the bulletin noted.

“In response to changes in the industry landscape, the SFC repositioned the way in which it supervises intermediaries by placing more emphasis on front-loaded regulation and real-time supervision,” the regulator said in a statement.

The bulletin is part of SFC’s efforts to enhance communication with managers-in-charge (MIC) of core functions of licensed corporations. It aims to provide guidance to asset managers, distributors and market practitioners on SFC’s regulatory and supervisory priorities.

Conflicts of interest

The report highlighted the importance of managing conflicts of interest in selling practices and asset management, by using case studies identified by the SFC’s during recent on-site inspections and off-site monitoring.

“Through real life examples, we hope that the bulletin can be an additional tool for senior managers to understand our requirements,” Julia Leung, SFC’s executive director of intermediaries, said in a statement.

It cites several cases of conflicts of interest, such as the lack of appropriate risk management policies to address concentration and liquidity risks in private funds and the unusually large cash rebates a fund manager has received from transactions made by his fund.

It also highlights conflicts of interest arising from selling of in-house products by large financial institutions.

This is not the first time that the SFC has warned the industry of selling malpractices.

Sale practices of in-house products were the subject of a warning the regulator issued in November . “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 SFC, together with the Hong Kong Monetary Authority, said then in a joint circular.

In September, the SFC also highlighted nine areas of non-compliance concerns regarding the management of private funds and discretionary accounts.



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