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New Consultation on Online Distribution and
Advisory Platforms by SFC

Written by: Mr. Daniel Chan - Senior Risk Consultant

With the prevalence of internet and advanced technology, the online platform can now be easily accessed by investors in managing investment products. Investors can simply check the materials posted on the platform and make the investment decisions based on the robo-advice which is very different from the face-to-face advice provided by sales representatives in traditional offline environment.

Since the use of online platform is a new business model, regulatory policies such as licensing is required to mitigate the new associated risks in areas including data protection and cybersecurity. To provide tailored guidance and clarity to the industry on the design and operation of online platforms in compliance with the existing regulatory requirements, the Securities and Futures Commission (the “SFC”) proposed the new “Guidelines on Online Distribution and Advisory Platforms” (the “guidelines”) and launched a three-month consultation. The proposed guidelines focus on the appropriate disclosure of investment products to enhance investors’ understanding and protect their interests.

Four major areas are highlighted in the guidelines including:

  • Core principles for the operation of online platforms
  • Robo-advice
  • Application and discharge of the Suitability Requirement in online context
  • Sale of complex products on online platforms on an unsolicited basis

In this newsletter, we are going to discuss the first two major areas.

Core principles for the operation of online platforms
Other than the existing conduct requirements which include the General Principles in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, the SFC proposes to introduce six core principles for the operation of online platforms as follows:

  • Proper design: the online platform should be properly designed
  • Information of clients: clear and adequate disclosure of relevant material information should be available on the online platform
  • Risk Management: reliability and security of the online platform (including data protection and cyber security) should be ensured
  • Governance, capabilities and resources: good governance of the operation of platform and adequate human, technology and financial resources should be provided
  • Review and monitoring: ongoing review and monitoring of all activities should be conducted
  • Record keeping: Proper record keeping should be maintained

Robo-advice
Robo-advice means that the online platforms provide investment advice such as automated portfolio construction or model portfolios based on a client’s personal circumstances.

According to the proposed guidelines, the robo-advisors should comply with the suitability requirement and the code of conduct.

  • The robo-advisors should ensure that the information provided is accurate and sufficient for investors in making decisions.
  • Client profiling questionnaire should be properly designed so that the robo-advisors can obtain sufficient information and hence provide clients with suitable advice in accordance with clients’ personal situation.
  • The design, development, deployment and operations of algorithms should be properly documented, supervised and tested.
  • When errors are located, the robo-advisors should have sufficient resources and measures to rectify the problems in a timely manner.
  • For any automatic rebalancing generated by the robo-advisors, the clients should be informed of the frequency of the rebalancing, additional cost incurred and associated risks. In addition, policies and procedures should be established to define how the algorithm would handle significant market event.

For the other two focused areas of the proposed guidelines, we are going to discuss in the next issue.


Source:
Consultation Paper on the Proposed Guidelines on Online Distribution and Advisory Platforms, The Securities and Futures Commission, May 2017.


If there are any aspects which we may assist, please do not hesitate to contact:

Managing Partner - Mr. Roy Lo
roy.lo@shinewing.hk (Tel. 3583 8048) or

Senior Risk Manager - Ms. Gloria So
gloria.so@shinewing.hk (Tel. 3583 8517)

 

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T. (852) 3583 8000

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W. www.shinewing.hk

E. risk@shinewing.hk

 

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