The Securities and Futures Commission (SFC) in Hong Kong has imposed a hefty fine of $66.4 million on a major banking institution for serious regulatory violations concerning the sale of collective investment schemes (CIS) and derivative products. The actions leading to this penalty stemmed from an investigation carried out by the Hong Kong Monetary Authority (HKMA), which uncovered multiple serious infractions linked to the bank’s practices over a nine-year span from February 2014 to May 2023.
The inquiries noted particular problems during the sale of CIS products from June 2016 to November 2017. A detailed analysis revealed that 111 client accounts were involved in over 100 CIS transactions each in this timeframe. A significant number of these transactions, although presented as client-initiated, actually reflected substantial influence from their relationship managers. These managers often solicited clients to conduct excessively frequent trades with short holding periods, which were incompatible with the investment objectives of the funds and the clients’ preferences. As a result, clients faced considerable transaction costs, adversely impacting their overall financial performance.
Inadequate internal controls surfaced as a critical issue in the audit. The bank failed to properly supervise and monitor CIS sales, lacking sufficient audit trails to verify that transactions were genuinely initiated by clients. Furthermore, there was a significant failure to monitor and follow up on potentially problematic trades post-execution, which is crucial for maintaining investor protection.
The HKMA’s assessment also highlighted shortcomings in the sale and distribution of derivative products, wherein 388 clients who lacked the requisite knowledge regarding the nature and risks of these derivatives participated in 629 transactions from February 2014 to December 2018. Alarmingly, 148 of those trades involved products that exceeded the clients’ risk tolerance.
Subsequent joint investigations between the SFC and the HKMA revealed ongoing misconduct. Between November 2014 and May 2023, the bank retained financial benefits from client transactions under circumstances that were not compliant with applicable regulatory standards. Moreover, it charged transaction fees beyond what had been previously agreed upon with clients and failed to adequately disclose trailer fee arrangements associated with investment fund trades. This misconduct resulted in the institution receiving at least $22.4 million in excessive fees or benefits.
In light of these findings, the SFC determined that the bank had fundamentally failed to act with the necessary skill, care, and diligence expected in the best interests of its clients and the financial market’s integrity. It fell short in effectively employing the resources and procedures vital for the appropriate execution of its business activities, resulting in inadequate disclosures to clients. This compromise on transparency led to conflicts of interest, negatively impacting fair treatment of clients and contravening various regulatory requirements designed to promote client interests.
The serious nature of these concerns was initially brought to the attention of the SFC through self-reports or referrals from the HKMA. The bank has since addressed the issues by compensating affected clients and implementing corrective measures to improve internal controls.
In deciding to impose sanctions, the SFC considered several factors, including the substantial potential losses that the regulatory breaches could have inflicted upon clients. The authority emphasized the necessity of sending a strong warning to the market regarding such misconduct. Cooperative behavior by the bank in working with the HKMA and SFC, alongside its acceptance of the investigation findings, contributed to a more expedited resolution of these matters, especially in light of its previously unblemished disciplinary record.
This case underscores the critical importance of regulatory compliance and the consequences of failing to uphold established standards in the financial services industry, emphasizing the need for institutions to prioritize the interests of their clients and the integrity of the financial markets.