Inadequate investment product selling practices result in HK$5m fine for Noah Holdings
An independent review has revealed deficiencies in the KYC and account opening procedures in place at the Hong Kong securities firm.
Adequate assessment of each client’s risk profile and investment objectives is crucial according to Hong Kong laws. Violations of these rules leads to regulatory action, with the latest example in this respect provided today.
Hong Kong’s Securities and Futures Commission (SFC) has reprimanded securities firm Noah Holdings (Hong Kong) Limited, also known as Noah HK, and fined it HK$5 million over internal control failures in relation to its investment product selling practices.
The five problematic areas, according to the SFC, are:
- know your client;
- product due diligence;
- suitability assessment;
- information for clients; and
- sales supervision and controls.
In January last year, the SFC and Noah HK jointly engaged an independent reviewer to review Noah HK’s internal control framework in respect of its sale and distribution of investment products during the period from January 1, 2014 to June 30, 2016 (Relevant Period). The reviewer found a number of problems.
For example, with regard to KYC procedures, during the Relevant Period, Noah HK used four different versions of risk profiling questionnaires (RPQs) to gather client information such as the clients’ financial position, risk appetite and investment objective, knowledge and experience. Clients were categorised into one of five risk profiles depending on the ultimate scores of their answers to these questionnaires.
According to the regulator, the design of the RPQs was defective and failed to establish the clients’ risk profiles fairly and accurately. For instance, the scoring mechanism adopted by Noah HK permitted clients with low risk appetite and/or low risk tolerance to attain a high risk score under the questionnaires, leading to the potential recommendation of high risk products to clients with low risk appetite.
The Independent Review also pointed to numerous deficiencies in Noah HK’s account opening and know your client procedures. For instance, the company did not have proper procedures in place to assess its clients’ knowledge of derivatives. Furthermore, the review revealed missing client signatures and incomplete client information in 66 out of 120 samples of account opening documents checked.
According to the SFC, the conduct of Noah HK constitutes a breach of a number of clauses of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). The company was found to have breached, inter alia, the principle which requires a licensed person, in conducting its business activities, to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market, as well as the rule which requires a licensed person to take all reasonable steps to establish the true and full identity of each of its clients, and of each client’s financial situation, investment experience and investment objectives.
In addition, the company was found to have violated the principle which requires a licensed person to have internal control procedures which can be reasonably expected to protect its operations and its clients from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions.
In deciding on the disciplinary measures against Noah HK, the SFC took into account that the company engaged an independent reviewer to conduct a review, agreed to reimburse the affected clients and implemented remedial measures to bolster its internal systems. The company has also agreed to provide the regulator with a report prepared by an independent reviewer within 12 months confirming that all the identified concerns have been adequately rectified.
