HKMA Directs Banks to Review, Enhance Sales Practices

A mystery shopping programme has identified product disclosure, risk profiling, and suitability assessment as some of the key areas where improvement is needed.

The HKMA (Hong Kong Monetary Authority) has released the findings of a mystery shopping programme to test check investment and insurance product selling practices by banks.

The HKMA engaged a service provider to run the programme from the second half of 2018 to 2020, to identify areas for improvement and good practices to share with the banking industry and promote good compliance culture among individual banks. A total of 351 branches of 20 retail banks of different sizes were part of the mystery shopping programme.

In a new report, the HKMA has summarised the findings and good practices identified by the mystery shoppers.

With regard to the sale of investment products, banks were generally compliant with requirements around KYC procedures, suitability assessments and the implementation of additional safeguards for less sophisticated customers (including a pre-investment cooling-off period), save for some isolated samples.

In some cases, bank sales staff introduced investment products without confirming that there was a valid RPQ (risk profile questionaries) result for the shoppers. In a few cases, sales staff tried to influence shoppers into giving specific answers or amend the answers of the RPQs to achieve a higher customer risk tolerance assessment result. In one sample, the sales staff guided the shopper to provide aggressive answers in the RPQ regarding investment experience, for instance.

“These kinds of behavior undermined the effectiveness of the client profiling for suitability assessment,” the HKMA said.

Some bank staff also did not disclose some product features, risks and sales related information to the shoppers, such as in relation to the non-guaranteed nature of high-yield bond risks or issuer risks associated with equity-linked and currency-linked instruments. In addition, some bank staff presented unbalanced views to shoppers in relation to fund product risks, such as by simply referring to product risk ratings or to the track record of certain fund managers.

With regard to suitability assessments, most banks were consistent at avoiding unsuitable investments based on shoppers’ risk tolerance assessment results. However, in one case, the sales staff proactively recommended a risk-mismatched product and provided justifications for why it was suitable. In a few other cases, sales staff presented fund products as having high liquidity and saying they could be switched frequently, like stock trading, to realise the profit or loss.

With regard to the sale of insurance products, banks generally complied with the relevant requirements, but room for improvement was identified in a few areas, including KYC procedures, suitability assessments, and disclosure of product features and risks.

Specifically, some sales staff did not properly conduct a financial needs analysis in the sale of NLTI (non-investment-linked long term insurance) products, or the information collected was inadequate for ensuring the suitability of the recommended plans. Information about life protection needs, wealth management needs, financial situation, and ability and willingness to pay premiums were also not collected or adequately evaluated in some cases.

The mystery shopping programme also revealed that some sales staff did not collect adequate information from the shoppers for proper suitability assessment, did not alert the shoppers of the mismatch and/or did not explain why the mismatched products were suitable when recommended products did not match with their circumstances, such as in cases where the premium exceeded the shopper’s willingness and ability to pay.

In some samples, sales staff also did not adequately explain the key risks of insurance plans, such as the consequences of early surrender or early premium discontinuance. Sales staff were also found to have not disclosed options of additional safeguards available to vulnerable customers, while others failed to explain the implications of policy replacement or adequately.

The HKMA has started to follow-up with banks on the observations of the mystery shopping programme, requiring them to take appropriate actions to address the issued identified and enhance their policies and controls.

Banks are expected to “give due regard” to the findings of the programme, review their policies and controls, and “promptly implement appropriate measures to enhance the selling process, staff training, compliance monitoring and other relevant internal controls,” the HKMA said.

The full report is available here.

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