New SFC consultation on amending Code of Conduct

On 8 November 2011, the Securities and Future Commission (SFC) issued a consultation paper on proposals to amend the Code of Conduct for Persons Licensed by or Registered with the SFC.

The SFC has proposed the changes in order to:

• facilitate the establishment of an external financial dispute resolution scheme (FDRS) to be administered by the financial dispute resolution centre (FDRC) for SFC and Hong Kong Monetary Authority regulated financial institutions (FIs) to resolve monetary disputes with individual and sole proprietorship customers; and

• make “miscellaneous” amendments to the Code as part of the SFC's efforts to improve supervisory oversight of the financial market and strengthen effective enforcement against market misconduct.

The SFC has posed various questions in relation to the proposals and invited comments by 9 January 2012.

What will the FDRC mean for financial institutions?

The FDRS is the government's response to the call from the investing public for an independent dispute resolution scheme to enable customers to resolve financial disputes with FIs without having to resort to formal legal proceedings. FIs can therefore expect to need additional resources to handle customer complaints in the first place and then to manage the resolution process.

In terms of internal complaints handling, the proposed amendments to the Code specifically oblige FIs to:

• review each complaint properly;

• investigate and remedy the issues if the subject matter of the complaint relates to other clients or raises issues of broader concern; and

• inform the client of its right to take the complaint to the FDRC if a complaint cannot be resolved internally.

Where the internal complaints procedure fails, FIs would be obliged to participate in and would be bound by the FDRS process. They would also be obliged to make full and frank disclosure before mediators and arbitrators and render all reasonable assistance to the FDRS.

In addition, the FI would need to notify the SFC immediately upon:

• its receipt of a client complaint to the FDRC;

• the commencement of the FDRS in response to a complaint (including documentation if requested by the SFC);

• the determination or settlement of a complaint (including details if requested by the SFC).

The “miscellaneous” amendments

The SFC has also taken this opportunity to propose the following amendments:

• order recording:
  • prohibiting the taking of orders over mobile phones (currently this is only discouraged)

  • extending the retention period for telephone recordings of client orders to six months

  • requiring IP address records of clients to be kept for six months

• requiring written authorisation to effect transactions on a client's account

• prohibiting FIs from preventing staff from providing expert witness services to regulators

The SFC has also proposed that the obligation in paragraph 12.5 of the code for FIs to report actual or suspected material breaches by the FI or an employee, be expanded to cover such breaches by clients. In rationalising the need for this extension, the SFC has referred to the existing requirement to report transactions which appear suspicious under one of the three relevant ordinances to the Joint Financial Intelligence Unit. This controversial proposal has potentially far reaching consequences and is likely to generate heated debate.