On 5 May 2017, the Securities and Futures Commission (SFC) issued a consultation paper on the proposed guidelines on online distribution and advisory platforms (Proposed Guidelines).
The Proposed Guidelines are a response to the recent expansion of different forms of online platform, which offer a wide range of investment services and functions to various investors. While the new business model brings business opportunities, it also brings certain risks, as users of these online platforms often make investment decisions based heavily on the information and materials posted on the online platform and without any interaction with a sales representative. The SFC therefore proposes to introduce the Proposed Guidelines to provide tailored guidance and clarity on the design and operation of online platforms.
The Proposed Guidelines focus on three main areas: (i) six core principles with which all SFC-licensed or registered persons who operate online platforms (known as platform operators) should comply; (ii) how the suitability requirement would operate in the context of an online platform; and (iii) additional requirements applicable to the sale of complex products on an online platform.
The suitability requirement, which requires an SFC-licensed or registered person to ensure the suitability of the recommendation or solicitation for the client is reasonable in all circumstances when making a recommendation or solicitation, is a key conduct requirement under the Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission. The SFC has previously issued two circulars to provide further guidance regarding the suitability requirement in general and in the “offline” context in December 2016. The Proposed Guidelines clarify that, in the context of online platforms, posting factual, fair and balanced materials online should not in itself trigger the suitability requirement, as this would not necessarily amount to a solicitation or recommendation. This is consistent with the SFC’s “offline” approach, where the mere posting of an advertisement for an investment product or the wide dissemination of research reports would unlikely trigger the suitability requirement.
For the sale of complex products, however, the SFC takes a more rigorous approach. The SFC proposes to extend the suitability requirement to all online sale of complex products, including any sale on an “unsolicited basis”. Complex products refer to products whose terms, features and risks are not easily understood by retail investors due to their structure, and which are difficult to value. Due to the complexity of these products, retail investors may find it difficult to fully understand the nature and the risks associated with a complex product based solely on the information provided online. The SFC therefore considers it appropriate to extend the applicability of the suitability requirement to protect investors in the sale of complex products. This means that platform operators would be required to ensure that any transaction in a complex product is suitable for the client in all circumstances, even in circumstances where no solicitation, recommendation or advice has been provided.
The consultation will last for three months. The public may submit their comments to the SFC on or before 4 August 2017. A copy of the consultation paper on the Proposed Guidelines can be accessed here.