Another HKMA investor protection regulation on the way
Mario Bassi of Profidata Group
Apr 24, 2012
In January, the Hong Kong Monetary Authority (HKMA) circulated yet another investor protection circular – one which comes with a series of major changes to be implemented by 20th May 2012.
For this circular, the HKMA requires Authorized Institutions (AI) to undertake specific processes before a transaction is executed; including disclosing concentration risks, highlighting uncommon product features, and providing trade-related documents (such as term sheets). The circular even prescribes the process for client risk assessment, ensuring that clients understand their risk profile.
The most impactful element of the circular is a more stringent restriction on retail clients. If private banks wish to undertake securities business, including selling investment products to retail clients, they should now have a physical segregation of this retail securities business from their ordinary banking business. For pure-play private banks which do not have retail banking operations to which they can readily transfer their affected part of the business, this presents a real challenge.
The current regulatory environment is getting so intense that AIs without a strategic focus on investment suitability will increasingly struggling to serve clients effectively within the established regulatory rules and restrictions. In a number of cases, private banks are working on training staff with an interim solution.
Indeed, interim solutions are crucial for compliance, especially when the timeline is tight, but they also have enormous consequences on a relationship manager’s (RM’s) efficiency and, potentially, client satisfaction.
A recent study shows that RMs spend as much of their time marketing services to new clients as dealing with administrative matters. The loss of valuable face time with clients potentially leads to less-informed and less-satisfied clients. Additionally, maintaining the client experience is more challenging when clients are constantly requested to fill additional questionnaires and forms with the same information.
From our project experience, the best way to deal with the regulatory demands and the subsequent internal challenges is to employ an effective and dynamic investment suitability framework. Within this framework, appropriate policies, systems and processes can be implemented, adapting the different elements to satisfy any new regulation.
Some discerning AIs are now going beyond the regulatory aspect of circulars and are looking to differentiate themselves with client-friendly investment processes enabled by their investment suitability framework.
We believe that the trend for increased regulation will continue and more stringent requirements are on their way. A robust investment suitability framework in such a dynamic environment is therefore of paramount importance for an AI’s operational success.
If this is not now the top priority for AIs, what is?
Senior Advisor Business Development APAC at Profidata Group
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