On 28 March 2018 Hong Kong’s SFC published the consultation conclusions on proposed Guidelines on Online Distribution and Advisory Platforms. At the heart of the responses received from a number of respondents to the consultation, both professional firms and industry participants, were concerns over the applications of the suitability obligation and the practicality of engineering online solutions to KYC, product and suitability assessment requirements in an online environment.
The Financial Conduct Authority in the UK (FCA) identified promoting innovation and competition as cross-sector priorities in its Business Plan 2017/2018, which also stated that the FCA would monitor developments and review services providing automated investment services to help inform its regulatory strategy.
The FCA recently published a report setting out its expectations of providers of “automated online discretionary investment management” services and firms providing retail investment advice exclusively through automated channels (commonly called “robo-advisers”). The report follows a review of seven firms providing online management services, representing over half of the firms in this particular market in the UK and three firms who were early entrants into the market for providing automated investment advice. Whilst the regulations in the UK governing robo-advisers differ from the proposed guidelines in Hong Kong, the FCA’s report makes interesting reading.
Key FCA findings
UK rules require robo-advisers to give appropriate information about their services, costs and associated charges in a clear way. This helps clients to understand the nature and risks of the service and the type of investment that is being offered, so that they can make informed decisions.
The service and fee-related disclosures at most robo-advisers covered by the report FCA were unclear. Some firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary. Some firms also compared their fee levels against peer services in a potentially misleading way. For example, they compared a non-advised, non-discretionary service with a discretionary service solely on a cost basis without explaining the difference in the nature of the service.
Robo-advisers in the UK must undertake a suitability assessment to make sure that a personal recommendation or a decision to trade is suitable for each client. The obligation is less extensive than in Hong Kong, where it arises both where there is a recommendation or a solicitation and even in an execution-only transaction (where there is neither a solicitation nor a recommendation) if the transaction involves a complex product (which is a much wider concept in Hong Kong than in the UK).
The FCA concluded that many firms of robo-advisers did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments. Some firms did not ask clients about their knowledge and experience at all, as they felt their service was suitable for all individuals regardless of their investment knowledge and experience.
The FCA were not satisfied with the strength of information gathering about clients' financial circumstances. For example, some services failed to request or gather adequate information about customers’ debt and other outgoings.
The FCA found examples where clients could disregard advice given by the automated offering without any safeguards or risk warnings to prevent or challenge this. This created uncertainty about whether the business was transacted on the advice of the automated offering, or on an execution-only or insistent client basis. Sometimes an adviser intervened in the automated process without recording the nature of the intervention. In these instances it would be difficult for firms to show the suitability of the advice provided.
Ongoing client relationship
If firms have ongoing relationships with clients such as providing ongoing portfolio management services, they need to maintain adequate and up to date client information. This helps to ensure that the client remains invested in a suitable portfolio service.
Most firms covered by the FCA report were unable to show that they had adequate and up to date information about their clients when providing an ongoing service.
There were weaknesses in identifying and supporting vulnerable consumers, with some offerings relying on the client to self-identify as vulnerable.
There appeared to be little consideration of auto advice-specific risks in firms’ governance processes. For example, awareness of the need for adequate stress testing and cyber security was mixed (this included considerations such as testing around sales volumes, developing action plans to address losses of connectivity or other eventualities, and continuing to test systems post-launch).
Firms should consider how they review the outcomes produced by the service. This should include whether adequate testing of the offering has taken place, and the action that should be taken where unsuitable recommendations are identified.
Intermediaries in Hong Kong intending to distribute financial products or provide investment advisory services online under the new SFC guidelines would be prudent to consider the issues raised by the FCA report, but need to bear in mind that the regime under which they will be operating in Hong Kong is more exacting than the UK regime.
电话: +852 2825 9211
Click here to share this shortlist.
(It will expire after 30 days.)