Hong Kong's challenging changes

By Charlotte Robins
22 August 2011
Hong Kong is one of the world’s fastest growing private wealth management (PWM) markets.

Reforms such as the liberalisation of renminbi regulations and greater access to the mainland Chinese market present new opportunities for the industry.

Yet recent developments to enhance investor protection in the wake of the Lehman mini-bond crisis, and future regulatory and legal developments, such as the Anti-Money Laundering Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), presents the wealth industry with notable operational and regulatory challenges.



HK sales suitability increasing

Most relevant to intermediaries providing private wealth services are the changes to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code).

There is now a clear requirement to assess whether an investor has sufficient knowledge and expertise as well as investment experience.

This includes awareness of risks, in the context of the relevant products and markets before a professional investor (PI) under the Securities and Futures (Professional Investor) Rules (PI Rules).

The SFC has noted that a holistic approach may be adopted, however all relevant and reasonable considerations should be taken into account, including whether a client is, or has worked in, the financial sector for at least one year, or has had training or attended courses relevant to the product.

Additionally, where an existing PI invests in a different product type or market, or where a PI has ceased to trade in the relevant product or market for more than two years, further assessment is called for.



Professional investor rules tightened

Proposed revisions to the PI Rules will allow intermediaries to choose how they demonstrate that a person meets the requisite PI asset threshold tests.

This may include continuing to adhere to existing waivers from the PI Rules, using other robust methods of assessment and considering to what extent self-certification is sufficient.

Until the proposals become law, the current PI Rules should be adhered to, for example the requirement to obtain auditor or custodian statements in support of the asset threshold.

From April 2012 failure to conduct appropriate customer due diligence will become a criminal offence under the AMLO.

Regulators are working on guidelines to assist those they regulate in creating and adhering to suitable systems and controls.

The SFC’s approach to regulation is principle-based, and guidance such as the Code applies to intermediaries conducting various regulated activities.



KYC testing procedures face scrutiny

It is incumbent on the PWM intermediaries to consider carefully how best to reflect the relevant guidance, in practical terms, into their KYC policies and procedures, taking the nature of their industry into account. The rationale behind policy content may need to be documented.

It will not be enough to ask clients to represent that they have the requisite knowledge and experience and that they meet the PI asset test.

Internal policies, client due diligence and documentation should be reviewed to ensure compliance, including appropriate disclosure so that a PI understands the consequences of being treated as such.

Assessment of PIs will be carefully viewed by regulators, including where the "examples" are not referred to (eg, because they are inappropriate).



Adequare reporting essential

It is paramount that assessments satisfy the Code, and that the basis of these – and their results – are recorded in writing, including in due course why self-certification alone is sufficient.

PWM personnel must know their regulatory duties, not least under the Code and internal policies. This may require a regular review of training and ongoing compliance monitoring.

This is reinforced by the Hong Kong Securities Institute’s recent launch of a competency guidelines programme and certification (the Certified International Wealth Manager).

As the PWM market continues to develop, PWM intermediaries will need to review regularly, and critically, their internal procedures and compliance, ensure ongoing training of staff and to monitor activities and the keeping of records.

Charlotte Robins is a partner in Norton Rose’s financial services and regulatory practice in Hong Kong