On 9 April 2020 the Securities and Futures Commission (SFC) released a report on its survey of 32 firms licensed for Type 3 regulated activity (leveraged foreign exchange trading (LFET)) between 1 January 2018 and 31 December 2018. The SFC has long been concerned about LFET, which poses high risks to retail clients. There have been a number of prosecutions of firms carrying on unlicensed Type 3 activities in Hong Kong, typically by firms operating in Macau or elsewhere.
The survey found that 98% of active LFET clients were retail clients and all LFET products were traded on an over-the-counter basis.
The survey showed that a substantial number of clients made net trading losses in LFET and some lost over HK$1 million. The results of the survey raise serious questions about the suitability of LFET products for retail clients, particularly the more complex forex products such as futures and options.
All LFET dealers should take note and take extra care to ensure that their clients fully understand the nature and risks of these products and have sufficient financial resources to assume the risks and bear the potential losses, Mr Ashley Alder, the SFC’s Chief Executive Officer warned in the SFC’s press release.
The report highlights some expected regulatory standards (covering customer due diligence, handling of client orders, conflicts of interest and information for clients) and good industry practices observed by the SFC which intermediaries may find useful. In its circular announcing the release of the report, the SFC mentions that LFET brokers are expected to review their policies and controls to ensure compliance with the expected standards highlighted in the report by 1 January 2021.