SFC Warns Brokers, Traders on Client Facilitation Conduct

The SFC has found brokers that are failing to comply with the expected standards on client facilitation, and plans to take action against both individuals and firms.

Hong Kong’s SFC (Securities and Futures Commission) has warned brokers and traders against improper conduct and noncompliance with expected standards on client facilitation.

Client facilitation services have been a focus area for the SFC since 2016, when a thematic review found a number of recurring conduct issues associated with client facilitation, including conflicts of interest and inconsistent practices.

In February 2018, the SFC issued guidance on its expectations of licensed corporations providing client facilitation services. In particular, licensed corporations are expected to:

  • establish policies, procedures and controls covering key areas such as client consent, order visibility, system access, the accuracy of indications of interest, and position limits;
  • segregate agency and client facilitation traders, where all communication should be recorded and monitored;
  • make proper Managers-in-Chargeto clients and obtain their prior consent to ensure they are aware of the inherent conflicts of interest of client facilitation services; and
  • only disseminate IOIs (indications of interest) when they are based on genuine client or proprietary intent to trade.

In a circular this week, the SFC said it has been conducting inspections of selected brokers to review their compliance with the expected standards on client facilitation.

The inspections found that some traders misrepresented a house or client facilitation trade as an agency trade, or in some cases were not adequately transparent about whether facilitation would be involved in a trade.

Some traders also failed to obtain explicit pre-trade consent from clients when effecting client facilitation trades, and some IOIs were not based on a genuine client intent to trade, as is required.

The SFC also found that some firms’ policies and procedures – as well as written notifications to clients – were not clear and could not ensure compliance with the expected standards.

“The SFC takes these findings seriously and wishes to reiterate that brokerage firms and their traders should obtain explicit client consent prior to each client facilitation trade. Client consent should never be unidirectional, blanket, implied by the making of disclosure or obtained after the trade.”

Licensed corporations should “critically review” existing policies and procedures, and revise them as appropriate, to ensure that they are clear, in full compliance with the expected standards and have been properly implemented and communicated to all relevant staff, the SFC said.

“The SFC will not hesitate to investigate any apparent improper conduct and non-compliance, and shall take regulatory action against the individuals (including relevant Managers-in-Charge) as well as the brokerage firms as appropriate,” the circular said.

Last year, soon after the release of the February guidance, the SFC fined CLSA and UBS Securities for failures related to client facilitation trades.

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