The Securities and Futures Commission (SFC) in Hong Kong has imposed a fine of $66.4 million on a prominent banking institution due to significant regulatory breaches concerning the sale of investment products. This action is a response to various serious failures in the bank’s sales practices surrounding collective investment schemes (CIS) and derivative products over a period spanning nine years, specifically from February 2014 to May 2023.
The disciplinary measures were initiated following a referral from the Hong Kong Monetary Authority (HKMA), which uncovered a series of troubling practices related to the bank’s marketing of CIS offerings between June 2016 and November 2017. Investigations revealed that at least 111 client accounts engaged in over 100 transactions of CIS products, with many of these trades inaccurately classified as the client’s own decisions. In reality, relationship managers had unduly influenced clients, leading to an excessively high volume of transactions that contradict clients’ investment horizons and the products’ investment goals.
These high-frequency trades imposed substantial transaction costs on clients, negatively impacting their overall financial outcomes. The bank’s internal controls exhibited considerable deficiencies, failing to adequately oversee and monitor the sale of CIS to customers. A critical shortfall was the lack of a sufficient audit trail to verify that transactions were legitimately customer-initiated, coupled with insufficient mechanisms to follow up on transactions that might have raised red flags.
The investigation extended to the bank’s distribution of derivative products as well, where it became evident that multiple clients lacked the knowledge needed to comprehend the associated risks. Between February 2014 and December 2018, numerous clients made 629 transactions involving derivative funds, with a significant portion of these transactions exceeding the clients’ acceptable risk thresholds.
A joint inquiry by the SFC and HKMA identified further misconduct between November 2014 and May 2023, revealing that the institution retained financial benefits from client transactions that were not permissible under regulatory standards, imposed fees without prior disclosure, and inadequately informed clients about fee arrangements related to investment funds. Collectively, these actions resulted in the bank obtaining at least $22.4 million in unmerited benefits from its clients.
The SFC determined that the bank exhibited a failure to uphold essential duties such as acting with due diligence in the best interests of clients, maintaining necessary resources and policies for business operations, disclosing critical information to clients, managing conflicts of interest, and adhering to relevant regulatory standards.
These violations were originally highlighted through self-reports and external referrals to the SFC. The bank has since compensated affected clients and implemented corrective measures to bolster its internal controls.
When determining the sanctions, the SFC considered multiple factors, including the significant client losses resulting from the bank’s CIS-related failures and the necessity to convey a strong regulatory message. The institution’s cooperation with regulatory authorities and acceptance of the findings facilitated a timely resolution of the case, while its previously clean disciplinary record was also noted during the assessment process.
Overall, these actions underscore the critical importance of adherence to regulatory standards within the financial industry to protect customer interests and maintain market integrity.