SFC routine inspection update

Inadequate internal controls: Earlier this month the SFC reprimanded and fined an asset management firm HK$24 million for failures to implement proper internal controls in relation to fund distribution between 2007 and 2012. The SFC specifically referred to the failure of the firm's systems and processes for understanding its customers' financial situation, investment experience and investment objectives.

The firm had introduced changes to its suitability procedures in 2010 after the Lehman mini-bond mis-selling issue had come to light, but the SFC found that the new processes had not been fully implemented in relation to all customers. It also said that use of KYC forms, risk profile questionnaires and suitability check tables cannot be regarded as a record of investment advice or the underlying rationale.

This disciplinary action is a reminder to all firms marketing funds and other investment products of the importance of ensuring that:

1. recommendations / solicitations are reasonably suitable;
2. client agreements describing the services to be provided are entered into before services commence;
3. updated and sufficient KYC information is obtained; and
4. investment advice is documented and a copy provided to the investor,

unless compliance with those obligations can be and has been properly waived.

The SFC stated that this disciplinary action sends a clear message to the market that it will not tolerate breaches of the Code of Conduct.