SFC and HKMA to commence a joint thematic review on spread charges and other practices

SFC and HKMA have announced that they will commence a joint thematic review (second half of this year) to assess the spreads charged by intermediaries on OTC products, and other practices they use to manage conflicts of interest.

The thematic review aims to ascertain whether charges may be in excess of the spreads or fees disclosed in the intermediaries’ standard documents to clients, or as agreed with or understood by the clients, and whether spreads may be increased after a trade is executed and the price improvement is retained without agreement with or disclosure to clients.

The review will cover the selected intermediaries’ policies, procedures, systems and controls as well as management oversight of the distribution to clients of non-exchange traded investment products such as bonds and structured products.

It will also cover intermediaries’ understanding of and compliance with requirements governing the disclosure of trading capacity and monetary benefits as required under the Code of Conduct.

This announcement of the SFC-HKMA review is broadly in line with a similar thematic paper by MAS (Monetary Authority of Singapore) earlier in February, covering sales and advisor practices in private banking.

These announcements and exercises by regulators emphasise the need for private banks to review and upgrade their conflicts of interest policies/ procedures, pricing frameworks, fee disclosure requirements and controls in the sales/ advisory process. For certain firms, a complete overhaul of the operating model may be required as a result of these thematic studies and the strict regulations that may follow.  

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