22 May 2020 Sumit Indwar  - Clara Hackney Financial Regulation

HKMA & SFC to review spread charges and trading capacity disclosures

The HKMA and SFC have put out a joint circular informing intermediaries of their plan to carry out a thematic review of intermediaries’ spread charges and their disclosures of trading capacity and monetary benefits under the Code of Conduct. The review will take place in the second half of the year, and the findings of this concurrent thematic review be shared with industry along with any extra guidance which the HKMA and SFC may deem appropriate.

The circular points to the possibility of conflicts of interest arising where intermediaries manage clients’ trades. Managing conflicts of interests is an area in which the SFC and HKMA has previously carried out a joint review, by looking at the sale of in-house products by intermediaries within the same financial group.

This new thematic review will be looking at whether intermediaries’ charges go beyond the disclosed fees or spreads set out in standard client documentation. The circular notes that the review will also look at whether spreads may be increased after a trade is executed and if the price improvement is retained without agreement with or disclosure to clients. A related issue the thematic will be assessing is whether intermediaries understand and properly disclose the capacity in which they are acting when conducting trades for clients.

The circular reminds intermediaries of some of the general principles in the Code of Conduct which are relevant to the issue of client charges, and the associated expected compliance measure which may be assessed as part of the thematic review. These include:

  • appropriate policies, systems, controls and management supervision over order handling and spread charges;
  • properly disclosing price, fees, monetary benefits received and trading capacity to clients; and
  • maintaining adequate records to ensure compliance with internal policies and procedures as well as with regulatory requirements and to enable reviews or investigations by the intermediaries, their external auditors and the regulators.

Through the review, the HKMA and SFC will assess intermediaries’ compliance and may take regulatory action in the event of identifying breaches.