24 July, 2017
On 8 June 2017 the Hong Kong Monetary Authority (HKMA) announced that it has been working together with the Private Wealth Management Association to develop a Treat Customers Fairly Charter (the Charter) to further promote a customer-centric culture in the private wealth management (PWM) industry. The Charter is designed to complement, not change, current laws and regulations and the existing terms and conditions between banks and their customers. It is stated to be a commitment by private wealth management institutions in Hong Kong to support and implement the principle of treating customers fairly.
The Charter draws reference from good practices locally and overseas and from the G20 High-Level Principles on Financial Consumer Protection. For example, it bears resemblance to the UK FCA's consumer outcomes, in particular principle 6 which requires a firm to pay "due regard to the interests of its customers and treat them fairly". It comprises five high-level principles (the TCF principles) which are supplemented by examples to illustrate how such principles may be implemented by PWM institutions. However, these examples are not comprehensive, but are stated to be illustrations to enhance understanding of the "spirit" of the TCF principles.
The HKMA expects all Authorised Institutions which operate as private banks, or which have dedicated private banking units, to follow the TCF principles. It has stated that it expects senior management and boards of directors to ensure that their institutions and relevant staff abide by the TCF principles. We outline further details on each principle below.
THE TCF PRINCIPLES
Principle 1:
This states that products and client services should be designed to meet the needs of customers. PWM institutions should assess the financial capabilities and needs of customers before offering them products or services. The provision of advice or selling of financial products should take into account the interest of the customers, having regard to their profiles and the complexity of the financial products or client services in question.
This principle reflects the FCA's consumer outcomes 2 and 4 in the UK which requires retail firms to ensure that products and services are designed to meet the needs of identified consumer groups, and where consumers receive advice, the advice is suitable and takes account of their circumstances.
The examples of how TCF principle 1 could be implemented are:
- Products and client services should be designed to meet the needs of customers, rather than just to maximise profit;
- PWM institutions should not lend amounts to customers which are considered to be beyond their ability to repay;
- PWM institutions should have policies and procedures in place to ensure that the customers understand the nature and risks of investments, and ensure the suitability of the recommendation or solicitation for customers is reasonable in all the circumstances. In particular, when providing services to customers in relation to derivative products or any leveraged transactions, PWM institutions should assure themselves that customers have sufficient net worth to be able to assume the risks and bear the potential losses;
- PWM institutions should have policies and procedures in place to help identify and manage any conflicts of interest arising between themselves and their customers in the course of their business. This should include policies and procedures related to recommendations to or solicitation for customers in respect of in-house investment products. PWM institutions should try to avoid conflicts of interest and ensure that their customers are fairly treated if conflicts cannot be avoided. For instance, remuneration policies should be designed to ensure that the bonuses of sales staff are not calculated solely on financial performance, but in such a way as to encourage responsible business conduct with the aim of reducing the risk of conflicts of interest and biased advice, and preventing mis-selling practices, unreasonable risk taking, or other irresponsible practices; and
- PWM institutions should endeavour to provide training for staff and develop a talent pool of high ethical standards and professionalism.
Principle 2:
This states that PWM institutions should set out and explain clearly the key features, risks and terms of the products, including any fees, commissions or charges applicable to customers. Appropriate information should be provided to the customers before, during and after the point of sale. This principle reflects the FCA's consumer outcome 3 which provides that consumers should be provided with clear information and kept appropriately informed before, during and after the point of sale.
Examples of how TCF principle 2 could be implemented are:
- PWM institutions should have policies and procedures to promote transparency, reasonableness and efficiency in the execution of customer due diligence processes and joining international efforts for anti-money laundering and counter-terrorist financing work;
- PWM institutions should highlight to potential customers the key features of a service or product, including interest rates, fees and charges. For instance, for a time deposit, PWM institutions should highlight the fees and charges for early uplift of the deposit, if allowed. For a loan, PWM institutions should highlight the interest rates and any fees, charges for late payment or early repayment before entering into contracts with customers. Reasonable advance notice should be given to customers highlighting any changes to the interest rates, fees and charges levied on a service or product; and
- PWM institutions should ensure that adequate disclosure of product features and risks is made to the customers in the selling process, so that customers understand the associated risks and costs before investing in the products.
Principle 3:
This states that all marketing materials and information designed for customers should be accurate and understandable. Misleading representations or marketing practices should be avoided. This principle is also linked to the FCA outcome 3.
Examples of how TCF principle 3 could be implemented are:
- Marketing materials should present a balanced and adequate disclosure. PWM institutions should not engage in misleading or other unfair sales practice; and
- Where benefits are subject to conditions, such conditions should be clearly displayed in the marketing materials wherever practicable. Presentation of benefits and returns should come with associated risks of the products.
Principle 4:
This states that customers should be provided with reasonable channels to submit claims, make complaints, seek redress, and PWM institutions should not impose unreasonable barriers on customers to switch to other PWM institutions. This principle reflects the FCA's consumer outcome 6 which requires that consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
Examples of how TCF principle 4 could be implemented are:
- PWM institutions should provide customers with clear and understandable information on the complaints submission procedures;
- PWM institutions should ensure that procedures are in place to ensure that customer complaints are fully and promptly investigated and resolved in a satisfactory manner; and
- Where a customer decides to switch his/her accounts to another PWM institution, the “original” PWM institution should provide assistance to the customer, for example, by providing the customer with a list of the standing instructions, direct debit authorizations and auto-credits going through his/her account. The Charter states that this would help customers in making appropriate arrangements to avoid the risk of missed payment, rejected transactions and charging of penalty/handling fees.
Principle 5:
Recognising that consumers also have their responsibilities, this principle encourages PWM institutions to join force with government, regulatory bodies and other stakeholders in financial education to promote financial literacy.
Examples of how TCF principle 5 could be implemented are:
- PWM institutions should support the efforts of the government, regulators, other financial services industry and public bodies in assisting existing and potential customers develop the knowledge, skills and confidence to appropriately understand risks, make informed choices, know where to go for assistance, and take effective action to improve their own financial well-being, where appropriate. For instance, some PWM institutions have offered derivatives training to customers who have no derivatives knowledge, and training on some other wealth management products with special structure, features and risks (such as hedge funds, private equity funds); and
- Where there are leaflets from the Hong Kong Deposit Protection Board to educate the public on the Hong Kong Deposit Protection Scheme (DPS), PWM institutions who are also scheme members of DPS should support and help to send out those leaflets to their customers for information and reference.
CONCLUSION
While the Charter does not change any existing rules and regulations, it adds another layer of consumer protection that PWM institutions should be aware of. In particular, PWM institutions would be advised to:
- Ensure that relevant staff and senior management are made aware of the Charter and the TCF principles and their application;
- Review their existing policies and procedures to ensure that they align to the TCF principles, using the examples provided as a reference. In particular, the examples draw out the importance of having procedures to manage conflicts of interest fairly, and to ensure that customers are fully informed of all risks and charges or fees throughout the process of sale;
- Have reference to the TCF principles and examples in any update or amendment of terms and conditions with customers;
- Review (and if necessary, update) any marketing materials already provided to customers to check for any information that could be construed to be misleading; and
- Ensure that the procedures for customer complaints and to enable customers to switch to another PWM institution are aligned with TCF principle 4 above.
For further information, please contact:
William Hallatt, Partner, Herbert Smith Freehills
William.Hallatt@hsf.com
