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The circular is focused on the cross-selling activities of conglomerate financial institutions, but is relevant to all intermediaries. The Regulators’ observations in the four review areas, and related expectations, are listed out below.
1. Order execution: Preference over in-house products and insufficient disclosure of related entities’ transactions
The Regulators expect financial institutions to achieve best execution by implementing appropriate control measures to:
2. Product due diligence: Lack of independent and adequate assessment
Financial institutions are expected to understand their in-house products thoroughly before soliciting investment from or making recommendation to clients. An adequate and independent conflict assessment should be conducted and include the following elements:
3. Selling process and discretionary portfolio management: Inadequate disclosure of fee implications of different products; and concentration of investments in in-house products
Financial institutions are expected to consider all relevant information (e.g. charges, mark-ups or fees of different products and clients’ circumstances) before selling or recommending investment products to clients. They should select products which match with the clients’ investment strategies, risk expectations and personal circumstances when managing clients’ portfolios. They should also disclose their material interests in a transaction with or for a client or a relationship which gives rise to actual or potential conflicts of interest, for example:
4. Management supervision, and controls and monitoring: Defective conflict management
The Regulators expect financial institutions to establish proper policies and procedures to address potential conflicts arising from the distribution of in-house products, review the effectiveness of their implementation and provide regular training and guidance to staff. Examples of good practices are:
The thematic review is the latest in a series of reviews undertaken by the Regulators into sales practices in the financial services industry. The expectations expressed are not new but for the most part reiterate standards of conduct which have been published in circulars, FAQs and reports on several previous occasions. It therefore speaks volumes that the Regulators have felt it necessary following this latest review to draw shortcomings to the attention of the industry. Intermediaries would be wise to conduct a critical review of their practices and systems to ensure that none of the weaknesses identified by the Regulators apply to their businesses, as vigorous enforcement action can be expected in future.
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