Stepping Into the Digital Era: SFC Guidance on Online Advisory

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The Guidelines on Online Distribution and Advisory Platforms, published by the SFC in March 2018, aim to provide welcome clarity to the design and operation of online platforms that sell financial products to investors in Hong Kong. The guidelines will become effective on 6th April, 2019.

The Guidelines include guidance on the design and operation of online platforms; and clarifications regarding the suitability requirement, set out in the SFC’s Code of Conduct, applies to the sale of investment products in an online environment.

The comprehensive nature of the Guidelines and the detail examples to assist their implementation by platform operators (PO) are welcomed by existing sophisticated operators. The potential for uninformed or even unscrupulous operators to enter the market and cause significant disruption was apparent, and the SFC has acted to mediate this risk. We at Finex Asia are a first mover and market leader, and welcome the Guidelines, which largely reinforce the best practices adopted by the leading firms.

The SFC has outlined six core principles with which operators of online platforms selling investment products via will need to comply. The principles should be nothing new for seasoned financial services professionals as they largely enshrine the basic principles of all well-managed firms selling financial products, tweaked for the virtual marketplace. The principles cover the areas of: Proper Design; Client Disclosure; Risk Management; Governance; Review and Monitoring; and Record Keeping.

The Design and Risk Management elements include the risks from the virtual world. Ensuring the design and safety of the platform and having protocols for any malfunction have introduced new elements and risks to the selling of financial products. But all six principles, whilst also important in the offline world, have elements that are peculiar to online platforms given the nature of the Internet, for instance the governance, skills and resources required may be marginally or in some cases radically different from the offline world.

Additionally the SFC has categorised three types of selling practice for investment product distribution: where no advice is offered by the PO; where advisory services are offered by the PO; or where advice is offered via Robo advisor. It has also divided the nature of products into Complex and Simple Products.

The SFC has handily provided a broad range of transaction scenarios for professionals to use to determine the product nature, essentially to determine whether the product: has a high derivative content; has adequate disclosure; is illiquid or difficult to value; has a risk of losing more than the investment amount; and incorporates any complex features or terms affecting risk and return. Complex Products are those financial products not reasonably likely to be understood by retail investors due to their complex structures.

The essential safeguard required by the SFC is to ensure that in all circumstances financial products are suitable for the investor. Product suitability is increasingly important in a world with an increasing array of financial products. Online Platforms allow faster and deeper reach to the brokerage world and even allows operators based offshore to access investors in Hong Kong.

The Guidelines are comprehensive and when combined with the non-exhaustive but long list of scenarios offer a clear insight into the SFCs desire to protect investors. Aligning the online and offline channels is also good for the market. For established existing large online operators such as ourselves the implementation of the Guidelines is not problematic. The The Guidelines should provide good advice to offline, offshore and small operators thinking of entering the market, however. Ultimately the online market for financial products will grow and robust regulation has to be a benefit for the market.

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