Background

HSBC Broking Securities (Asia) Limited (“HSBC”) has between April 2015 and March 2016, executed 378 transactions of bonds listed under Chapter 37 of the Main Board Listing Rules (“Chapter 37 Bonds”), 153 of which involved recommendations or solicitations made to clients. The Securities and Futures Commission (the “SFC”) found that HSBC has systemic deficiencies in selling these Chapter 37 Bonds to its clients. Consequently, SFC has reprimanded and fined HSBCBS $9.6 million.

Regulatory requirements

General Principle 2 (diligence), paragraphs 3.4 (advice to clients: due skill, care and diligence) and 5.2 (know your client: reasonable advice) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”) require a licensed corporation to ensure that, through the exercise of due diligence, its investment recommendations to clients are based on thorough analysis and are reasonable in all the circumstances. Also, General Principle 5 (information for clients) of the Code of Conduct requires a licensed corporation to make adequate disclosure of relevant material information to its clients.

To ensure compliance, a licensed corporation should take steps to document and retain the reasons for its recommendations and to implement special procedures to document the rationale of the recommendations in making investment recommendations or solicitations to clients.

HSBCBS’s systemic deficiencies

The SFC found that HSBCBS has failed to:-

• conduct proper and adequate product due diligence on individual bonds before making recommendations or solicitations to its clients;
• have an effective system in place to assess its clients’ risk profile and to ensure that the recommendations or solicitations made to its clients in relation to bonds were suitable for and reasonable in all the circumstances;
• provide adequate product information to its sales staff to ensure that they fully understood the features and the risks involved so that they could provide adequate disclosure and explanation to the clients during the sale process; and
• maintain proper documentary records of the investment advice or recommendations given to its clients.

SFC’s consideration

SFC found that HSBCBS’s failures constitute a breach of General Principles 2 and 5, and paragraphs 3.4 and 5.2 of the Code of Conduct. Having concluded that HSBCBS has systemic deficiencies in selling the bonds, SFC has reprimanded and fined HSBCBS $9.6 million. In deciding such disciplinary action, SFC has taken into account the following factors:

• HSBCBS failed to put in place an effective system to ensure suitability of bonds recommended and/or solicited to clients despite the SFC’s repeated reminders to licensed corporations on the importance of compliance with their suitability obligations, and specific guidance regarding the selling of fixed income products, complex and high-yield bonds;
• a strong message has to be sent to the market to deter similar misconduct;
• HSBCBS has taken remedial measures to enhance its suitability framework;
• there is currently no evidence suggesting any client has complained about HSBCBS’s selling practices or suffered losses; and
• HSBCBS cooperated with the SFC in resolving its concerns.

Conclusion

This case serves as a reminder for bond sellers in relation to the system in place for due diligence, accessing clients’ risk profile, provision of information and maintenance of documentary records.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: regcom@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.