Protection of investors and structured products

New measures added to various Ordinances to enhance protection for investors

The SFC has introduced amendments to its Code of Conduct for Persons Licensed by or Registered with the SFC (“the Code of Conduct”) to enhance protection for investors. The four major aspects of these amendments are:

1. Investors Characterization

A distributor should assess a client’s knowledge of derivatives and characterize the client based on his knowledge of derivatives (other than professional investors for the purpose of the Code of Conduct). The distributor should provide appropriate advice according to the characterization of the client.

Where a client without knowledge of derivatives wishes to purchase a derivative product, the distributor should explain the relevant risks associated with the product, warn the client about the transaction or provide appropriate advice to the client as to whether or not the transaction is suitable for the client in all the circumstances. Records of the warning and other communications with the client should be kept.

2. Pre-sale Disclosure of Monetary and Non-monetary Benefit

The New Code of Conduct requires distributors to provide relevant disclosure regarding the benefits they receive from product issuers for distributing their investment products.

3.Disclosure of Sale Related Information

Distributors are required to disclose sales related information to investors (i.e. the capacity in which a distributor is acting, any affiliation with the product issuer, monetary and non-monetary benefits received by distributor and including any discounts of fees and charges) prior to or at the point of sale.

4. Refund by Distributors under the Cooling-Off Period provision

A “cooling-off” period has been introduced to the investment product whereby for a specified time period following their signing of a contract, an investor can change their mind about purchasing the investment product and exercise their right under this mechanism to back out of the purchase and get a refund (including any sales commission), less a reasonable administrative charge.

This “post-sale” cooling period offers an additional layer of protection to the investors. The HKMA has also imposed a “pre-sale” cooling off period which applies to the period between the time of the provision of disclosure documents and the closing of the sale.