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359.3404

insight

Enhanced Investor Protection through Pre-Investment Cooling-off Period

Wealth management has become increasingly popular in Hong Kong as a result of the Government's continued commitment to promote Hong Kong as an international asset management centre particularly since the abolition of estate duty in 2006. A number of factors such as a well-established legal system, good market infrastructure, and a transparent regulatory framework add to the attractiveness of investing in Hong Kong. This development has created opportunities for banks and other financial institutions to engage in the wealth management business in Hong Kong. It also benefits customers because they can enjoy greater investment choices given the greater variety of investment products available to them.

The banks' customer base for the wealth management business has gradually expanded from experienced investors to a wide range of customers including retail customers, who tend to have wider differences in investment experience, risk appetites and financial needs. While much has been done in the past months to strengthen investor protection generally, such as requiring banks to audio record the sale processes for investment products and physically segregate banking and investment services, the sale of derivative products to retail customers, particularly the elderly and the inexperienced, needs higher level of safeguards.

Against this background, the HKMA has been working with the banking industry on providing retail customers who meet certain criteria with additional protection when they purchase the increasingly popular derivative products.

It has already been a general practice of banks to advise their retail customers, especially the elderly and first-time buyers of derivative products who may not completely understand the products, to take a couple of days to re-consider their contemplated investment before placing an order. Following consultation with the banks, the HKMA has now decided that such a practice should be enhanced and consistently implemented through the introduction of a Pre-Investment Cooling-off Period (PICOP). Under the new arrangement, a bank not only needs to continue to ensure that financial products introduced to its customers are suitable for them and material information in relation to the product (including the nature, risks, indicative price(s) and other terms) is adequately disclosed, it should also allow the elderly and inexperienced customers at least two days to consider their contemplated investment, including whether the investment is appropriate taking into account the nature and risks of the product, their financial ability to assume the risks, and the need to consult third parties. The price(s) and terms of the transaction will only be fixed on the day when a customer confirms with the bank the placement of a purchase or a subscription order after the PICOP expires. Customers who should go through PICOP may be allowed to opt out of the arrangement only if they satisfy a number of criteria about their investment experience, age and investment amount as a percentage of their total wealth.

The HKMA today has issued a circular to all authorized institutions setting out the details, scope and operational arrangements of the PICOP. Banks have been requested to implement the PICOP on or before 1 January 2011.

We would like to take this opportunity to encourage the investing public to make good use of the PICOP arrangement, which serves to further protect their interests. It is important for customers to fully understand the key features and risks of an investment product before investing in it. It is always better to sit back and allow oneself more time to re-consider the appropriateness of an investment by reviewing the documents (such as the offering documents and marketing materials) and if necessary, consulting family members and friends. The PICOP arrangement will certainly further enhance investor protection by helping the customers concerned to avoid making hasty investment decisions.

Meena Datwani
Executive Director (Banking Conduct)
20 May 2010

Last revision date: 1 August 2011
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