On 24 November 2017, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) issued a joint circular on the results of their joint review on the potential conflicts of interest which may arise from the sale of in-house products by licensed corporations and registered institutions (collectively, intermediaries) within a single financial group. The circular focuses on internal controls and compliance and aims to provide the basis for unified regulatory standards for the financial industry.
The circular emphasises that conflicts of interest are a major regulatory focus for both the HKMA and SFC, as their identification and management are essential for the protection of client interests. To achieve this, the circular reminds intermediaries of the standards expected by the HKMA and the SFC, and provides examples of good practice. These examples are predicated on the fundamental requirements that intermediaries should act in the best interests of their clients, disclose potential conflicts and, if the conflicts cannot be avoided, ensure the fair treatment of clients.
The circular further highlights the fact that senior management bear the primary responsibility for managing conflicts of interest, and emphasises the following roles which are expected of senior management:
- management of risk on a group-wide basis;
- holistic assessment of the robustness and effectiveness of systems; and
- ensuring group-wide compliance with all applicable legal and regulatory requirements.
Whilst the focus of the circular is on managing conflicts of interest arising from the sale of in-house products, there are important takeaways for all intermediaries, in particular, the continuing regulatory focus on managing conflicts of interest and the regulators’ expectations of senior management.