Tue. May 11th, 2021

Regulation HK

Financial Regulator

HKMA Relaxes Rules on Retail Sales of Government Bonds

2 min read

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Banks can forgo suitability assessments and audio recordings when distributing low-risk, non-complex retail tranches of Hong Kong or Mainland government bonds.

The HKMA (Hong Kong Monetary Authority) has said it will allow simplified arrangements for banks to conduct the sale and distribution of eligible plain vanilla and low-risk retail bonds issued by the government and its related organisations.

The latest relaxation follows a September 2019 circular prohibiting banks from selling and distributing investment products in areas of branches that are used for deposit-taking activities (i.e. physical segregation). The guidance also required audio recordings of the face-to-face sales process with retail banking customers, and to allow vulnerable customers to bring along a companion to witness the sales process.

The HKMA now says banks can execute customers’ orders of certain retail bonds without triggering the suitability requirement, having to audio-record the sales process, or implement the companion requirement for vulnerable customers – if solicitation or recommendation is not involved.

The streamlined approach is applicable to retail tranches of bonds issued by the Hong Kong or Mainland government; bonds issued by entities wholly owned by the Hong Kong government; and bonds issued by Mainland development finance institutions and policy banks. Such bonds must be denominated either in Hong Kong dollar, Renminbi or US dollar; classified as non-complex; and assigned with a low product risk rating.

Where there is a solicitation or recommendation, banks may adopt a risk-based approach in performing the suitability assessment. Given the low-risk nature of the eligible bonds, banks may only need to consider the investment horizon of the customer and the liquidity of the bond; and any concentration issues applicable to the personal circumstances of the customer.

Where there is no risk mismatch, audio-recording is not required, and a companion for vulnerable customers is not required.

Determining whether solicitation or recommendation is involved will depend on how the posting of any fee discount is presented to customers. Advertisements of eligible retail bonds do not amount to solicitation or recommendation.

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