Our Ref: B1/15C
3 March 2006
The Chief Executive
All Authorized Institutions
Dear Sir / Madam,
Retail Wealth Management (RWM)
Business
The Hong Kong Monetary Authority (HKMA) has completed a round of
on-site examinations on Authorized Institutions (AIs) which are
active in selling wealth management products to retail customers.
The objective is to assess the effectiveness of AIs' risk
management controls in this line of business, particularly in
respect of customer suitability management, know-your-customer
documentation, new product development process and complaint
handling procedures.
We would like to share with the industry some of the best
practices on customer suitability management observed during our
on-site examinations:-
- Compliance with relevant codes of conduct -
All AIs engaging in RWM business should regularly review and assess
their operations to ensure compliance with relevant codes and
guidelines including "Code of Conduct for Persons Licensed by or
Registered with the Securities and Futures Commission",
"Management, Supervision and Internal Control Guidelines for
Persons Licensed by or Registered with the Securities and Futures
Commission" and the "Code of Banking Practice"(particularly section
18.7).
- Customer profiling - AIs should ensure that
the customer profiling process is conducted for all RWM customers
and that assessment of customer's risk tolerance level should, as
far as possible, be based on objective and pre-determined
benchmarks such as customer's disposable assets, age profile,
investment and liquidity needs, investment experience, etc.
Customer's consent to the results of risk profiling including the
assigned risk tolerance level should be documented. There should
also be adequate controls to ensure proper establishment and
periodic update of customer's risk profile.
- Product suitability assessment - AIs should
establish specific policies and procedures to ensure that their
front line sales staff would, before recommending certain RWM
product to a customer, give due consideration to relevant factors
including product tenor, product risk as well as the customer's
risk appetite, age, investment horizon, investment experience and
financial needs. AIs should also note that under normal
circumstances, products with potentially very long lock-in period
are not suitable for customers whose need for liquidity may
generally be higher (e.g. the elderly).
- Risk disclosure - AIs should ensure that
proper risk disclosure policies and procedures are vigorously
applied. When selling RWM products to vulnerable customers such as
the elderly, illiterate or visually impaired, additional
precautionary measures (e.g. advise the customers to avoid hasty
decisions, invite their relatives or friends to attend, and/or
assign more than one staff to conduct, the suitability assessment
interview and product presentation) should be implemented to
safeguard the interests of these customers and to mitigate any
legal and reputational risks the AIs might be exposed to. AIs
should not sell complex RWM products to customers who may have
difficulty in fully understanding the nature and risks of these
products. AIs should also ensure that the wording and terms used in
their risk disclosure statements can be easily understood and have
explicitly highlighted the underlying risks.
- Management oversight - To ensure effective
management oversight of the selling practices adopted by front line
sales staff, AIs should establish appropriate management
information system (e.g. to regularly report to senior management
RWM transactions which might be unsuitable for the customers
concerned) and implement the requirement for regular review of RWM
operations by independent units.
The HKMA intends to conduct in the second quarter of 2006
another round of on-site examinations on AIs engaging in RWM
business, focusing on their selling of insurance and structured
products to retail customers. AIs' implementation of the above
practices will also be reviewed.
Should you have any question on the above, please feel free to
approach your usual supervisory contacts at the HKMA.
Yours faithfully,
Arthur Yuen
Executive Director
(Banking Supervision)
Chinese translated version of this circular
(PDF file, 106KB)
本通告中文譯本 (PDF檔案，106KB)
- c.c.
- Mr Stephen Po
Senior Director
Intermediaries and Investment Products
The Securities & Futures Commission
