Tue. May 11th, 2021

Regulation HK

Financial Regulator

HKMA Updates Rules on Sales of Banking Products

4 min read

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Banks may not sell investment, insurance and MPF products in areas that are used for deposit-taking activities, and the face-to-face sales process must be audio-recorded.

The HKMA (Hong Kong Monetary Authority) has refined the investor protection measures governing the sale of investment, insurance and MPF products by authorised institutions (AIs).

With regard to the sale of investment products, banks may sell and distribute investment products only in areas of branches that are not used for deposit-taking activities. This physical segregation is meant to prevent any possible confusion for retail customers in distinguishing between deposit and investment products.

Further, there should be “complete information separation” between customer deposit accounts and investment accounts. This is to prevent bank staff from making use of deposit-related information to target customers for investment product sales – except if the bank has obtained customer consent to access such deposit information for investment and wealth management purposes.

Physical segregation is also applicable to the sale of ILAS (investment-linked assurance scheme) products, MPF registered schemes or their constituent funds, and annuity insurance products – where the sale must take place in non-deposit taking areas. It does not, however, apply to the sale of certain general insurance and traditional long-term insurance products.

Audio recording of the face-to-face sales process with retail banking customers is required to ensure adequate records of the disclosure and suitability of investment recommendations and transactions.

This will apply to the solicitation or recommendation of complex investment products, non-complex products (stocks, bonds, funds, exchange-traded derivatives, etc.), ILAS products and annuity insurance products. It is not required for the sale of MPF schemes if no risk mismatch is involved, as has been the case under previous requirements.

“AIs should also put in place robust policies, procedures and controls to prevent any possible undue influence or misrepresentation by sales staff before the start of audio-recording,” the HKMA said, adding that the audio records should be retained for at least seven years. Non-vulnerable retail customers, however, may opt-out of the audio-recording requirement on a one-off basis for comparable products.

AIs may adopt a risk-based approach in deciding on the content of risk disclosures provided to customers, while still ensuring they understand the investment product before entering into a transaction. Where particular conditions are satisfied, AIs may streamline the risk disclosure for subsequent transactions of comparable products, the HKMA says.

The pre-investment cooling off period has also been refined, now only required for investors who are elderly, inexperienced, and high asset concentration. It will not apply to online transactions that do not involve solicitation or recommendation.

AIs are expected to exercise extra care when dealing with vulnerable customers, and must “consider holistically” the individual circumstances of customers to assess whether they are able to understand the risk and withstand the potential losses of an investment.

The HKMA has set out an assessment framework for retail banking customers, whereby those who are elderly, have a low education level, low net worth coupled with low income, observable disabilities, or little investment experience should be considered to be vulnerable.

Vulnerable customers may elect whether to bring along a companion to witness the sales process, and/or to have a second front-line staff member handle the sale to ensure that due selling process is being followed.

AIs should also put in place appropriate structure and procedures to separate customer risk profile assessments from the sales process, where the assessment should be carried out by non-sales staff. In cases where this is not practicable, and independent review must be performed on the risk profile assessment conducted by sales staff.

“Customers should be provided with a copy of the risk profile and asked to confirm his/her agreement that the risk profile is accurate,” the HKMA says. “The assessment process should be audio recorded and the audio records should be retained for seven years.”

AIs should additionally put in place appropriate mystery shopper programmes to test sales procedures for investment products and long-term insurance products.

The HKMA says AIs have up to 12 months to comply with the guidance in its circular, available here, For compliance with the guidance on the holistic assessment of vulnerable customers, AIs have 18 months to comply.

The new investor protection requirements are more comprehensively detailed here.

separate circular and has also been issued outlining enhanced measures on the selling of annuity insurance products to retail banking customers, allowing AIs 12 months to comply. Details of the enhanced measures are set out here, while the requirements on the annuity payment table are set out here.

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