In particular, the Barber Asia case, which was the first time in Hong Kong that an investor successfully sued an IA for negligent advice, is a reminder that IAs have a duty to properly assess the suitability of products for clients, and they may not be able to avoid responsibilities even if their clients have acknowledged the risks of the investment.
The SFC said the 15 IAs included in the inspection represent about 10% of the total number of IAs engaged in selling financial products to the public, including banks and insurance intermediaries. The financial products include traditional unit trusts and mutual funds, hedge funds and other collective investment schemes, structured products and investment-linked insurance policies.
The SFC said it found apparent breaches of regulatory or statutory requirements, and most of the problematic regulatory issues could have been avoided if IAs had strictly observed the existing Code of Conduct and Internal Control Guidelines. The SFC added that it is also investigating some cases where investment products without SFC authorisation were offered to the public.
“We have investigated a number of cases in which clients have complained that the nature of and the risks associated with a financial product were not adequately explained to them. We have determined that some of these complaints are valid and reveal serious shortcomings in the performance of certain IAs,” the SFC said.
The report listed three examples of cases where recommendations made were questionable. In one case, a 90-year old investor was sold an investment product with a long lock-in period, the SFC noted.
“It is not enough for an IA to hand over documents saying ‘read these, they explain the product and its risk’," the SFC noted. "Instead of just focusing on the good points of a financial product, the IA should always present a balanced view, drawing clients’ attention also to the disadvantages and risks as well. Our investigations have shown that in some cases, documents given to clients do not adequately explain the risks inherent in products," the SFC said.
During the inspection, the SFC found a number of IAs tended to sell more financial products that reward them with higher commission rebates. Some IAs were also found to recommend only 'in-house' product or only one product. One IA even advised its clients to sell or liquidate all their existing investments and use the proceeds to invest in these products.
The SFC, which plans to conduct another inspection in 2006, said it will further study the issues in this report, and possible measures to enhance investor protection, such as by requiring IAs to disclose to clients the commissions received from product providers, requiring IAs to take up professional indemnity insurance and also disclosing the exact nature of services provided to clients in an agreement.