The Securities and Futures Commission (SFC) has issued a circular to intermediaries reminding licensed and registered persons to take extra care to comply with their Code of Conduct^[1] obligations to ensure that they are acting in their clients’ best interests given the potential impact of the COVID-19 outbreak on market volatility and liquidity, as well as credit quality, with a view to ensuring the fair and orderly functioning of Hong Kong markets.

Under the Code of Conduct, when distributing investment products (such as funds and bonds) to their clients, licensed and registered persons are obliged to: (i) ensure the suitability of investment products when making a solicitation or recommendation; and (ii) disseminate information in a timely manner when they hold an investment product directly or indirectly on behalf of their clients.

Suitability of investment products

In order to fulfil their suitability obligations under and demonstrate compliance with the Code of Conduct^[2], licensed and registers persons should (among others things):

• ensure that due diligence is conducted on investment products on the current approved products list, and that this is performed on a continuous basis at regular intervals. The due diligence should take into account any factors which may have an impact on the risk return profiles and growth prospects of the investment, including any deterioration in credit quality or liquidity, and market and industry risks related to the COVID-19 outbreak;
• give due consideration to all relevant circumstances specific to a client when assessing the suitability of an investment product for the client, including the client’s current financial situation, investment objectives, risk tolerance, investment horizon and liquidity needs, as well as the risk profile and concentration risk of the existing investment portfolio;
• explain the risks and features of the investment product to the client, including its credit quality, liquidity, termination conditions and transaction costs; and
• when recommending an investment product to a client, present a balanced view at all times, explaining the disadvantages of products (e.g. credit deterioration and illiquidity) and not focusing solely on more advantageous terms (e.g. high coupon rates).

Timely dissemination of notices

Where licensed or registered persons hold investment products directly or indirectly on behalf of their clients, they should ensure that they disseminate notices (and other communications prepared or issued by the investment products’ issuers, product arrangers or management companies) to their clients on a timely basis upon receipt^[3]. Notices or communications may include material information or updates crucial for investment decisions, for example untoward circumstances relating to a fund which may include use of liquidity risk management tools by a fund manager.

[1] Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

[2] The suitability obligations are set out in paragraph 5.2 of the Code of Conduct and supplemented by FAQs on Triggering of Suitability Obligations and FAQs on Compliance with Suitability Obligations issued in December 2016.

[3] Please refer to the Circular on Obligations Relating to Selling / Distribution of Investment Products dated 28 May 2010.