SFC guidance on internal product approval process

Hong Kong’s Securities and Futures Commission (SFC) issued a circular on 30 April 2014 to provide guidance on the internal product approval process to be undertaken by providers of SFC authorised unit trusts and mutual funds, investment-linked assurance schemes and unlisted structured investment products. The guidance covers the entire product development chain from inception to post-sale and explains the requirements for a robust process with a strong emphasis on investors’ interests.

The guidance covers 14 general principles under the following areas:

• Accountability
• Infrastructure
• Target market identification
• Product design
• Risk monitoring and stress testing
• Termination / de-authorization
• Modification of contract terms / constitutive documents
• Fees
• Distributor selection
• Investor education
• Disclosure
• Legal and compliance
• Conflicts of interest
• Post-sale obligations

Product providers should consider investors’ interests in designing products, the fees being charged (including the rates and structure), and keep investors informed at all times. The provider’s product approval committee should comprise senior management from key functions and must ensure that the products comply with all applicable rules and regulations, and are monitored on an on-going basis. Products providers are also expected to ensure that distributors have the necessary product knowledge and are provided with ongoing training. Any changes to the products should be fair and reasonable, and adequate notice must be given to investors.

As part of the SFC’s product authorisation process, the SFC requires applicants to submit a written confirmation that the SFC’s guidance has been and will be fully complied with. During a transitional period from 1 May to 31 July 2014, applicants can submit a draft confirmation, but an executed confirmation must be submitted to the SFC before the formal authorisation is granted. For existing SFC authorised products, it is expected that the general principles of the SFC’s guidance will be complied with.

Key Contacts

Alwyn Li

Partner | Financial Services

Email or call +852 2825 9627