Following our article in June 2022 about the Securities and Futures Commission’s (SFC) Consultation Paper on Proposed Amendments to Enforcement-related Provisions of the Securities and Futures Ordinance, the SFC issued the Consultation Conclusions on Proposed Amendments to Enforcement-related Provisions of the Securities and Futures Ordinance (Consultation Conclusions) on 8 August 2023. Taking into account public comments on the proposed amendments regarding the exemption in section 103 of the Securities and Futures Ordinance (SFO) relating to the issue of advertisements of investment products to professional investors (PIs) and the SFC’s power to apply for court orders under section 213 of the SFO, the SFC has decided not to proceed with these amendments at this juncture.
Proposed amendments relating to advertisements of investment products
The SFC noted in the Consultation Conclusions that the major concerns with the proposal to amend the professional investor exemption under section 103(3)(k) (PI Exemption) and the consequential amendments to section 103(3)(j) are two-fold:
(i) Necessity: Many respondents questioned the necessity of the amendments, as there is no material risk for retail investors to be exposed to unauthorised advertisements of investments products if they are unable to invest in them; and the existing regulatory requirements (e.g. know-your-client (KYC), suitability assessments and risk disclosures) already provide sufficient protection for retail investors. Some respondents also take the view that the amendments are disproportionate to the alleged “harm” to investors in light of the existing disciplinary sanctions for intermediaries and the criminal penalties for breaches of section 103.
(ii) Operational difficulties and impact on business: There were also concerns relating to operational difficulties and disruption to common marketing activities. As we pointed out in our article in June 2022, the proposal effectively requires intermediaries to only issue unauthorised advertisements to PIs who have already been identified as such through KYC and related procedures, which can be difficult in reality as PIs are generally unwilling to provide their KYC information at the preliminary marketing stage. As such, the majority view is that the proposal would significantly reduce intermediaries’ ability to market to prospective investors (including undue restriction on online marketing effects), and may give rise to an unfair advantage to more sizable financial institutions who already have a large existing client base to which they can market new products without having to conduct KYC again.
In response, the SFC remarked that the proposal aims to enhance investor protection by ensuring that retail investors will not be exposed to unauthorised advertisements of investment products intended only for PIs and to reduce the risk of the PI Exemption being abused by advertisers. The SFC highlighted that they are very concerned about the protection of retail investors in an era of increasingly complex and accessible investment products, particularly in light of multiple instances of products intended for PIs being sold to retail investors in breach of suitability rules. However, the SFC acknowledges that the proposal may give rise to practical difficulties in the marketing process, and has decided not to proceed with the proposal in its current form, but will continue to monitor the need to introduce new policies over the longer term and consult the industry again if necessary.
Even though the proposed amendments will not go ahead, the SFC reminds the industry that, to invoke the PI Exemption, a clear intention to dispose of the investment product only to PIs must be demonstrated. To demonstrate and evidence a genuine intention as such, the SFC specifically states that, at a minimum, the issuer of the advertisement should ensure it is plainly apparent from the face of the advertisement that the underlying investment product is intended only for disposal to PIs.
Proposed amendments to the SFC’s power to apply for court orders
Respondents raised five major concerns over the proposed amendments to section 213 of SFO to expand the basis on which the SFC may apply for remedial or other orders against a regulated person. The industry comments, and the corresponding responses from the SFC, are summarised below.
The SFC has decided to put the proposal to amend section 213 on hold to thoroughly consider the implementation issues highlighted in the Consultation Conclusions as well as the other options to achieve the policy objective.
The Consultation Conclusions also cover the proposed amendments to the insider dealing provisions of the SFO, which are supported by most of the respondents and the SFC will proceed with these amendments. Please refer to our legal update for further information on the expanded scope of insider dealing provisions.
For further information, please contact:
Pinky Siu, Partner, Deacons
pinky.siu@deacons.com
