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Latest amendments to the Code of Conduct – How will they affect you?

The Securities and Futures Commission (SFC) issued its conclusions on its proposals in relation to the establishment of a financial dispute resolution centre and to amend the Code of Conduct (Code) on 21 May 2012 and the conclusions are available on the SFC website.

On 19 June 2012 the SFC released the revised version of the Code.

The SFC received 27 written submissions in response to its consultation paper. Please refer to the December 2011 issue of our newsletter for a discussion on the consultation paper.

The SFC made 13 specific proposals. They will proceed with seven of them as originally proposed, four will be adopted but with a more limited scope in an effort to address industry concerns and the SFC has agreed to shelve the other two proposals for now.

The most contentious change is the imposition of a new obligation to report suspected market misconduct offences by clients to the SFC.

For now it will not be necessary to notify the SFC upon receipt of a complaint to the Financial Dispute Resolution Centre Ltd (FDRC) but the SFC has expressly reserved its position and “may consult again if there are difficulties in resolving any regulatory issues arising in relation to disputes handled by the FDRC”. The SFC will not require IP address records to be kept although the SFC says it “encourages all firms to retain IP addresses wherever possible to ensure that its online transaction facilities are not a vehicle for market misconduct”.

The bulk of the substantive amendments will not come into effect until 1 December 2012 so SFC licensees and banks (intermediaries) should have plenty of time to update their Compliance Manuals and any internal procedure documents as well as conduct relevant training before then. However, the amendments relating to the establishment of the FDRC came into effect on 19 June 2012.

Obligation to report suspected market misconduct by clients to SFC

Section 12.5 of the Code will be supplemented by the addition of a new paragraph (f) under which intermediaries will have to report any clients they suspect of market misconduct to the SFC immediately.

The market was concerned that this requirement would conflict with their duty of confidentiality to clients and that it would damage their client relationships. The SFC dismissed these concerns and noted that the duty of confidentiality can be overridden in appropriate circumstances.

The SFC also confirmed that as a result of this change, concurrent reports would have to be made to the SFC and the Joint Financial Intelligence Unit under Hong Kong’s anti-money laundering legislation.

The SFC stated in the conclusions that they “do not require firms to conduct any investigation or make any decision on whether or not a client has been guilty of misconduct …[they] simply require firms to report the facts or matters indicating that a client may be guilty of misconduct … [There is] no duty on firms to report clients … based merely on unsupported speculation or vexatious comment”.

Finally, the SFC noted specifically in the conclusions that a fund investor would be considered a client of a fund manager for these purposes.

Financial Dispute Resolution Centre Ltd and how to handle complaints moving forward

The SFC’s stated preference is for intermediaries to resolve client complaints internally where possible but when their internal complaints procedures fail to resolve matters, intermediaries will now need to resolve the dispute through the Financial Dispute Resolution Scheme (FDRS) should customers chose to do so.

In connection with the establishment of the FDRC, two new paragraphs have been incorporated into the Code as follows:

  • Paragraph 12A – Intermediaries are obliged to comply with the FDRS in full and will be bound by the dispute resolution processes under the FDRS
  • Paragraph 12.6 – Intermediaries will have to make honest and diligent disclosure before mediators / arbitrators and render all reasonable assistance to the FDRS.

When an intermediary receives a complaint, it must:

  • properly review the subject matter of the complaint;
  • if the subject matter of the complaint relates to other clients or raises issues of broader concern, take steps to investigate and remedy such issues; and
  • if the complaint cannot be resolved internally, inform the client of the client’s right to refer the complaint to the FDRC.

Order recording

Intermediaries will be obliged to have a written policy banning the use of mobile phones for taking orders when staff are at work. The retention period for telephone recordings will be increased from three to six months. The use of mobile phones for order taking offsite will continue to be “discouraged” and anyone taking an order over a mobile phone will need to record the order on their firm’s recorded telephone system immediately. Intermediaries which still permit the use of mobile phones for order taking will therefore need to make some adjustments to their systems.

Third party authorizations to be in writing

Third parties will need to produce written authorization from the client to effect transactions on the client’s account (where this is not already happening).

Providing expert witness service to the regulator

Intermediaries may not, without reasonable excuse, prevent their staff from providing expert witness services to Hong Kong regulators. The SFC “reiterated” that the objective of the change “is not to impose a positive obligation on firms to make their employees available as expert witnesses to the SFC or the HKMA”. In other words the SFC wants to ensure that employees who can and wish to, are not unreasonably prevented from doing so.

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