Structured product providers in Hong Kong will be required to align themselves to the global regulatory trend which is increasingly focused on the early stages of the product life-cycle, as well as the product governance of the product providers throughout the product life-cycle, according to the Guidance on the Internal Product Approval Process issued by the Hong Kong Securities and Futures Commission (SFC).
Under the new guidelines which came into effect from the start of this month, product providers are expected to comply with all the general principles contained in the SFC guidance and all new applications for the authorisation of SFC-authorised products submitted on or after July 31 are required to submit the confirmation to the regulator as part of the application process.
According to the securities watchdog, the new set of rules explains the requirements for a “robust internal product approval process” for financial product providers; covers the entire chain from inception of the product to post-sale; and reminds product providers of their duty to consider investors’ interests as part of the product-design process.
“This set of Guidance is built upon certain existing requirements under the SFC Products Handbook, in particular the requirement that Product Providers shall act honestly, fairly and professionally (GP1 under Chapter 3 of the Overarching Principles Section),” read the SFC circular.
The new SFC Guidance comprises 14 general principles including among other things the accountability of product providers to consider investors’ interests as part of their internal product approval processes; as well as a consideration of the target market for a product – where product providers should identify the target market and consider investors’ interests and design their products accordingly.
“This market assessment should include the target market’s investment objectives, knowledge and experience; risk appetite; expected investment return; and expected tenor having regard to the age and life expectancy of the target market,” it said. “[Product providers should also assess] whether the product and its risks would be generally understood by the target market and whether the product’s investment objectives and risk/return profile match the needs of the target market.”
Under the new rules issuers of structured products in Hong Kong will also be required to ensure fair and proportionate fees which are in line with the investment objectives and risk/return profile; and exert control over the distributor selection – i.e. ensuring that the distributors chosen are appropriate for covering the target market identified and that the distributors have the necessary product knowledge to understand the product and advise investors accordingly (and provide sufficient, ongoing training to the selected distributors).
Tim Hailes, chairman of the JAC, told SRP that the circular has been sent to members and will be discussed in the next meeting of the association.
“The JAC has identified “product governance” as an area for potentially significant regulatory evolution for some time in the structured products markets, particularly in EMEA and Asia Pacific, and previous memoranda have made reference to Iosco’s work at the international level in this area,” he said.
This guidance is applicable to product providers in respect of SFC-authorized unit trusts and mutual funds, SFC-authorised investment-linked assurance schemes and SFC-authorised unlisted structured investment products.
Click in the link to read the Guidance on Internal Product Approval Process issued by Hong Kong’s SFC.
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