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Banks struggle to implement SFC’s new due diligence requirements

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Banks in Hong Kong are feeling the pressure mount as the Securities and Futures Commission’s (SFC) April implementation deadline for the new suitability requirements edges closer, according to an industry professional.

In a bid to strengthen investor protection, the Hong Kong watchdog revised its due diligence regulations last year. According to the new rules, suitability checks are required for every complex product transaction regardless of whether or not the bank offered advice. Currently, such checks are only necessary following bank recommendations.

“One of the areas in which the banks are struggling is to increase the due diligence coverage for their investment universe in order to reduce direct impact on their transaction-based revenues,” Anu Meha, manager at consulting firm Synpulse, told Asian Private Banker.

Pressures on the product front include banks having to conduct due diligence for every investment product, categorising each as complex or non-complex before ensuring the subsequent suitability processes are in place. To facilitate the undertaking, the SFC published a non-exhaustive list of complex and non-complex online products in its consultation conclusion in March last year but has left the final decision regarding the distinction in the hands of the banks.

Although the consultation for the proposed guidelines on online distribution and advisory platforms was concluded in May 2018, the consultation conclusion on offline requirements applicable to complex products was published in October, both with an April deadline to ensure a level playing field for online and offline product distribution.

“The main challenge of complying with the new suitability requirements on the sale of complex products is that banks only have six months to adopt these changes, the time period being very short considering the scope of changes required,” Anu Meha said.

Further, the revised regulations make banking across multiple jurisdictions more complicated for international private banking clients.

“Banks that allow their clients to book assets across Hong Kong and Singapore booking centres are forced to implement consistent regulatory practices across both jurisdictions. Naturally, this leads to the stricter of the Hong Kong or Singapore regulations being implemented across both booking centres for managing these cross-booked assets,” she explained.

Despite the revisions, Anu Meha said private clients’ preference for Hong Kong as a banking destination won’t necessarily change.

“One of the biggest markets of Hong Kong is China as location and cultural proximity is important,” she said. “Hong Kong still remains a key location for investors from China, however, there is strong competition from Singapore as it does provide clients geographical diversification.”

As in Hong Kong, Singapore’s regulators have also prioritised client protection. Implemented earlier this month, the Monetary Authority of Singapore’s (MAS) revised accredited investor regime includes an additional layer of consent for investors who meet the accredited investor threshold requirements but want as much protection as their retail counterparts.

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