The Securities and Futures Commission (SFC) published its consultation conclusion on 23 May 2018 in relation to the proposed disclosure requirements for intermediaries providing discretionary account management services (Discretionary Account Managers). This consultation conclusion has been released in connection with the consultation on this topic issued by the SFC in November 20171. In view of the common practice resulting in some Discretionary Account Managers and/or their associates receiving benefits from product issuers and making trading profits which may incentivise them to trade certain products for their clients under discretionary portfolios, the SFC considers it helpful for clients to be made aware of such rewards or benefits in advance in order to address the potential risk of conflicts of interest and to enable investors to make better informed decisions when choosing Discretionary Account Managers.
The SFC has finalised the new paragraph 7.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct). In summary, the SFC has decided to adopt the specific disclosure requirement for monetary benefits under an explicit remuneration agreement rather than the alternative option (being disclosure of the aggregate amount of monetary benefits in percentage terms). As a Discretionary Account Manager will be required to make specific or generic disclosures in the situations set out below:
| Specific disclosures | Generic disclosures | ||
| Situation | Details to be disclosed | Situation | Details to be disclosed |
| 1. Discretionary Account Manager (and/or any of its associates) receives monetary benefits (whether quantifiable or not2) under explicit remuneration arrangement from a product issuer for effecting a transaction for a client | The maximum percentage of the monetary benefits receivable by it (and/or any of its associates) by the type of investment product | 1. Discretionary Account Manager effects a transaction in an investment product which is issued by it or any of its associates AND it will not explicitly receive monetary benefits when effecting such transaction for a client | The fact that it or any of its associates will benefit from effecting such transaction
|
| 2. Discretionary Account Manager takes no market risk and makes a trading profit from products purchased from or sold to third party for a client | The maximum percentage of the trading profit to be made by the type of investment product | 3. Discretionary Account Manager (and/or any of its associates) receives from a product issuer non-monetary benefits for effecting a transaction for a client | The existence and nature of such non-monetary benefits |
Other points to note
Discretionary Account Managers should make the above one-off disclosures to clients at the account opening stage or prior to entering into a discretionary client agreement. Disclosure should be communicated through electronic or other means and made in writing in English or Chinese according to the language preference of the client. It should be prominent, presented in a clear and concise manner and easy for average clients to understand. Where there are changes to the disclosures made, an update must be provided to relevant clients as soon as reasonably practicable.
Discretionary Account Managers may be exempt from the disclosure requirements with respect to Institutional and Corporate Professional Investors.3
Timeline
The amendments to the Code of Conduct were gazetted on 25 May 2018 and will come into effect in six months’ time. Discretionary Account Managers should review their client documentation and systems and controls, and arrange necessary operational support to ensure compliance with the new disclosure requirements.
1 Consultation Conclusions on Proposals to Enhance Asset Management Regulation and Point-of-sale Transparency and Further Consultation on Proposed Disclosure Requirements Applicable to Discretionary Accounts can be accessed via this link: http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=17CP7
2 Where monetary benefits are not quantifiable, the Discretionary Account Manager should also disclose the existence and nature of such benefits.
3 Please refer to the amended paragraph 15.4 of the Code of Conduct.