Structured products drive 34% increase in investment products sales in Hong Kong

The aggregate transaction amount for investment products sold in Hong Kong during the year ended March 31^st, 2018, was US$508 billion, 34% higher than the figure reported in the 2016 survey which covered the sale of investment products from April 2015 to March 2016, according to the latest Survey on the Sale of Non-exchange Traded Investment Products released by the country’s Securities and Futures Commission.

The increase was mainly driven by Mainland-based firms, some of which have expanded their wealth management businesses significantly, stated the regulator.

In line with the previous survey, structured investment products accounted for the largest share of the aggregate transaction amount, followed by fixed income products and collective investment schemes.

The survey also noted a significant increase in the sale of equity-linked products and non-investment grade corporate bonds as clients sought higher investment returns. These included equity-linked accumulators, high-yield bonds as well as complex bonds with non-viability loss-absorption features.

Compared to the 2016 survey, the transaction amounts for equity-linked products increased by 102% to US$121 billion and for non-investment grade corporate bonds by 65% to US$104 billion.

‘Given higher market volatility and the deteriorating credit outlook for some bond issuers, investors should fully understand the features and risks of products before investing,’ said Julia Leung (pictured), the SFC’s deputy chief executive officer and executive director of intermediaries. "Intermediaries are also reminded to comply with the requirements governing the distribution of complex products."

Today the SFC also issued a circular to intermediaries on the distribution of complex and high-risk products.

The number of licensed corporations engaged in the sale of investment products increased to 252 from 244 two years earlier while the top ten firms, representing about 70% of the aggregate transaction amount, continued to dominate the market.

The survey found that sales volumes of complex products such as equity-linked accumulators by licensed corporations have increased.

Investors are bound by contract to take up units of the underlying assets at the strike price when the market moves against them, crystallising losses. This downside risk is magnified when a “multiplier” condition is included.

The SFC conducted the survey to understand the industry landscape and obtain an overview of the types and value of investment products sold by licensed corporations to individual investors, and reminded intermediaries to ‘observe the requirements governing selling practices, including the suitability obligations under the Code of Conduct, when they distribute structured products and corporate bonds with complex features or high risks’.