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LCQ5: Regulation of financial products involving investment activities abroad

     Following is a question by the Hon Tommy Cheung and a reply by the Acting Secretary for Financial Services and the Treasury, Ms Julia Leung, in the Legislative Council today (April 18):


     In recent years, many foreign companies have launched various types of investment products in the financial market of Hong Kong for capital financing.  To avoid their savings being eroded by high inflation, many members of the public, including the elderly, purchase products with expected higher returns.  Yet some of them query that after the Lehman Brothers Minibonds incident, the vetting, approval and regulation of investment products by the regulatory authorities are still inadequate, and members of the public may at any time purchase defective investment products.  In this connection, will the Government inform this Council:

(a) how the due diligence of Hong Kong's regulatory authorities in vetting and approving investment products is ensured, so as not to allow defective investment products to be launched in the market, including ensuring that the businesses which are linked to such products are not involved in criminal offences, such as fraud, etc., both locally or abroad before the sale of such products in Hong Kong is allowed;

(b) whether it knows if the regulatory authorities have put in place an international notification mechanism to facilitate their regular monitoring of the investment products which are approved for sale in Hong Kong, and immediately inform the vendors and investors concerned to raise their alertness when the businesses linked to such products are found to be involved in criminal cases abroad and the persons or organisations involved are prosecuted, so as to enhance the transparency of the investment products and safeguard the right to know of investors; if they have, of the details; if not, whether they will consider setting up the relevant mechanism; and

(c) whether it knows, in the event that the businesses linked to those investment products which are approved for sale in Hong Kong are involved in criminal cases abroad and the persons or organisations involved are convicted, what actions the regulatory authorities take to safeguard the interests of investors; if action is not taken, of the reasons for that, and whether formulation of measures to take action under such circumstances will be considered with a view to enhancing the safeguard of the interests of investors?



     Hong Kong's regulation on investment products primarily relates to offers to the public.  Regardless of whether the issuer is a Hong Kong or non-Hong Kong entity, they are regulated by the same set of criteria and mechanism.  

     Before the products can be offered to the public of Hong Kong, unit trusts/mutual funds, investment-linked assurance schemes and unlisted structured investment products must be authorised by the Securities and Futures Commission (SFC) in accordance with the Securities and Futures Ordinance (SFO).  These products must comply with the "SFC Handbook for Unit Trusts and Mutual Funds, Investment-linked Assurance Schemes and Unlisted Structured Investment Products" (SFC Handbook) which came into effect in June 2010.  The SFC Handbook was introduced by the SFC after the global financial crisis with a view to strengthening the regulatory regime of publicly offered investment products in Hong Kong.  The SFC has conducted public consultation on this issue.  The SFC Handbook aims to enhance the transparency for various types of products so as to promote investor protection, including a requirement to provide product key facts statements that summarise the key features and risks of the investment products.  The SFC Handbook covers areas such as duties and obligations of product providers, disclosure requirements, ongoing monitoring of the product and disseminating information to investors.  Besides, the SFC Handbook contains the new "Code on Unlisted Structured Investment Products", which strengthened the regulation for these types of products.  According to the "Code on Unlisted Structured Investment Products", the reference assets for the structured investment products must be acceptable to the SFC, and that issuers also have to offer a post-sale "cooling-off" period for certain unlisted structured investment products and arrange for market making in accordance with the requirements, so that there will be a chance for investors to exit from the investment.  

     My reply to the three parts of the question is as follows:

(a) To protect Hong Kong's investors, investment products that intended to be sold to the public will need to submit an application to SFC for approval.  Generally speaking, if the retail investment products to be sold to the public are to be approved by the SFC under the SFC Handbook, the product issuer must demonstrate compliance with the applicable eligibility requirements.   If the product issuer is a subject of disciplinary proceeding or enforcement action, and that these proceedings and enforcement actions may materially affect its financial condition, status as a regulated entity, or ability to perform its regulated activity, then the product issuer's application will be rejected.  In particular, regarding unit trusts and mutual funds, fund managers must satisfy the eligibility requirements in the "Code on Unit Trusts and Mutual Funds", including the requirement that the SFC must be satisfied with the overall integrity of the applicant fund managers.  The disciplinary record of the fund managers and their directors is one of the key factors that would be taken into consideration.  As for unlisted structured products, an issuer shall have to meet the eligibility requirements in the "Code on Unlisted Structured Investment Products", including those on net asset value and credit rating, those required of a regulated entity, and that it must not be the subject of any disciplinary proceeding or enforcement action etc.  The reference assets to which the structured investment product is linked shall have to be acceptable to the SFC.   Under certain circumstances, SFC may request the applicant to provide a guarantor or request the products to be secured by collaterals in accordance with relevant requirements.  Where the issuer is based in an overseas jurisdiction, the SFC will also conduct overseas regulatory checks as appropriate.  

(b) As regards the international exchange of information, the SFC has been working closely with its counterparts worldwide concerning regulatory and enforcement co-operation.  Hong Kong is a signatory to the "Multilateral Memorandum of Understanding" of the International Organization of Securities Commissions; around 80 jurisdictions have signed the above-mentioned Memorandum.  This Memorandum is an international arrangement for regulatory authorities to exchange information globally and co-operate with each other.  It sets out international co-operating standards for combating breaches on securities and derivatives legislation.  Moreover, throughout the years, SFC has concluded many bilateral or multilateral co-operative agreements with different jurisdictions.  With these arrangements, SFC can seek information that are not available in the public domain, and seek their assistance to investigate evidence and documents in the Mainland and overseas.    

     For the disclosure requirements of the investment products, product providers must ensure that they have effective measures to disseminate relevant information and will closely monitor issues that investors must be aware of.  The "Code of Unit Trusts and Mutual Funds" sets out that fund managers have to inform holders as soon as reasonably practicable of any information which is necessary to enable holders to appraise the position of the fund, including any material adverse change in the financial conditions or business of fund managers, and any other changes that may materially prejudice holders' rights or interests.  Moreover, SFC has set out in the "Code on Unlisted Structured Investment Products" that issuers must comply with continuing disclosure obligations.  In particular, if an issuer ceases to meet the eligibility requirements, or if there is any change that has a material adverse effect on the issuer's fulfillment of its commitment in connection with the product, the issuer must bring this promptly to the attention of the SFC and investors of the product.

     In situations deemed appropriate, SFC will keep in close liaison with overseas regulators for the ongoing monitoring of issues arising from overseas issuers of the retail investment products, as these issuers are regulated by the SFC Handbook.

(c) The question tapped on whether there will be actions and what actions will be taken by the regulatory authorities in the event that the businesses linked to those investment products which are approved for sale in Hong Kong are involved in criminal cases abroad, and the persons or organisations involved are convicted.  It is difficult to provide a general answer, as the actions taken will depend on the actual situation of each case.   Generally speaking, if there is a breach of any applicable provision, the SFC may consider whether such failure adversely reflects on a person's fitness and properness in so far as that person is a licensed corporation or registered institution, and whether the product, the offering documents and advertisements should remain authorised.  The SFC may impose additional authorisation condition(s) which may include restricting the further offering of the product to the public.

Ends/Wednesday, April 18, 2012
Issued at HKT 18:49


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