Further to the Consultation Conclusions on Proposals to Enhance Asset Management Regulation and Point-of-sale Transparency and Further Consultation on Proposed Disclosure Requirements Applicable to Discretionary Accounts, the Securities and Futures Commission (SFC) released, on 23 May 2018, its Consultation Conclusions on Proposed Disclosure Requirements Applicable to Discretionary Accounts and decided to proceed with the enhanced disclosure requirements for intermediaries providing discretionary accounts services.
The changes are set out in new paragraph 7.2 of the Code of Conduct for Persons Licensed by, or Registered with, the Securities and Futures Commission. These changes will take effect on 25 November 2018.
Separately, in respect of non-SFC-regulated products under discretionary accounts that authorized institutions (AIs) managed, the Hong Kong Monetary Authority (HKMA) issued on 25 May 2018 a circular informing AIs that they are also required to disclose monetary and non-monetary benefits for such transactions in accordance with requirements in the new paragraph 7.2 of the Code of Conduct. The effective date for changes under the HKMA circular is 25 November 2018.
The disclosure requirements are applicable where:
- The intermediaries or their associates explicitly receive monetary benefits from product issuers for effecting transactions for clients;
- The intermediaries take no market risks and make trading profits for effecting purchases of investment products from third parties for clients or sales of investment products to third parties for clients;
- The intermediaries effect transactions in investment products that they or their associates issued with no explicit monetary benefits; and
- The intermediaries or their associates receive from product issuers non-monetary benefits for effecting transactions for clients.
Assessing type of benefit and nature of arrangement. Depending on the type of benefit and arrangement, a discretionary account manager will be required to make specific or generic disclosures (see tables on the left).
Review and revise processes and documentation to comply with enhanced disclosure requirements. Processes should be put in place to ensure that relevant disclosures are made in writing to clients at the account-opening stage, or before entering into a discretionary client agreement.
Only one-off disclosures are required, but where there are changes, such as additional investment product types or an increase in the maximum percentage of the monetary benefits receivable, updated disclosures should be provided as soon as reasonably practicable.
The length or style of disclosures are not prescribed. Provided the requirements are observed, intermediaries are free to adopt any manner of disclosures appropriate to the facts and circumstances of each case. The SFC expects intermediaries to exercise their professional judgment in determining the form of the disclosure.
Monetary benefits from a product issuer (whether quantifiable or not) under explicit remuneration arrangement.
Maximum percentage of monetary benefits receivable by type of investment product;
Where benefits are non-quantifiable, the existence and nature of the benefits.
Trading profit made from products purchased from or sold to a third party for a client (no market risk taken).
Maximum percentage of trading profit made by type of investment product.
Monetary benefits for effecting a transaction in an investment product issued by the intermediary or its associates under a non-explicit remuneration arrangement.
The fact that the intermediary or its associates will benefit from the transaction.
Non-monetary benefits from a product issuer for effecting a transaction for a client.
The existence and nature of the