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Enforcement collaboration between HKMA and SFC – SFC reprimands and fines Hang Seng Bank Limited HK$66.4 million for misconduct in selling practices of investment products

The following is issued on behalf of the Hong Kong Monetary Authority:

     The Securities and Futures Commission (SFC) has reprimanded and fined Hang Seng Bank Limited (HSB) HK$66.4 million for serious regulatory failures in relation to the bank’s sale of collective investment schemes (CIS) and derivative products and overcharging its clients and making inadequate disclosure of monetary benefits to them during various periods over the course of nine years between February 2014 and May 2023 (Notes 1 and 2).
 
Sales practices in relation to CIS

     The SFC’s disciplinary action stemmed from a referral by the HKMA whose investigation revealed a range of concerns regarding HSB’s sale of CIS products during the period from June 1, 2016, to November 30, 2017.
      
     Specifically, 111 client accounts were found to have executed 100 or more CIS transactions during the material period. While most transactions were declared as the client’s “own choice”, 46 clients had in fact been influenced by their relationship managers’ solicitation or recommendation in their trades. They were solicited into conducting excessively frequent transactions with short holding periods, a trading pattern which contradicted both the funds’ investment objectives and the clients’ preferred investment horizons. The frequent trades in CIS products resulted in significant transaction costs borne by the clients, which greatly affected their overall profit and loss.
      
     HSB’s internal controls were deficient in that they did not adequately supervise and monitor the sale of CIS to its clients. In this connection, the bank failed to keep a sufficient audit trail to ensure that transactions were genuinely initiated by clients. It also failed to put in place sufficient controls to monitor and follow up on potentially problematic transactions after they had been conducted.

Sale and distribution of derivative products

     The HKMA also referred its investigation findings in relation to HSB’s sale and distribution of derivative products to the SFC.  From February 17, 2014, to December 19, 2018, 388 clients who were not characterised by HSB as having knowledge of the nature and risks of derivatives purchased derivative funds in 629 transactions, and 148 of these transactions involved products whose risk level was higher than the clients’ risk tolerance level.

Overcharging and inadequate disclosure of monetary benefits

     A joint investigation by the SFC and the HKMA further found that, during various periods between November 2014 and May 2023, HSB had:
 

  • retained monetary benefits from client transactions in circumstances where it should not have done so under applicable regulatory standards;
  • charged its clients transaction fees beyond amounts previously communicated to them; and
  • failed to adequately disclose trailer fee arrangements to clients trading in investment funds (Note 3).
 
     In total, HSB received at least HK$22.4 million in excess benefits or fees from these transactions.
 
     In light of these findings, the SFC considers that HSB has failed to:
     
  • act with due skill, care and diligence, in the best interests of its clients and the integrity of the market;
  • have, or employ effectively, the resources and procedures which are needed for the proper performance of its business activities;
  • make adequate disclosure of relevant material information to its clients;
  • avoid conflicts of interest and ensure that its clients are treated fairly; and
  • comply with all relevant regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its clients.
 
     These issues were first brought to the SFC’s attention by self-reports from HSB or referrals of findings from the HKMA.  HSB has compensated impacted clients and has taken remediation steps and enhancement measures to rectify and strengthen its internal controls.
      
     The SFC’s Executive Director of Enforcement, Mr Christopher Wilson, said, “HSB’s misconduct in these cases was serious and systemic. In particular, clients who declared making investment decisions themselves were in fact repeatedly solicited by HSB’s relationship managers to engage in frequent and excessive CIS transactions. As a result, the clients ended up incurring substantial transaction costs to their detriment. HSB also overcharged a significant number of clients across a multitude of the bank’s business lines over an extended period of time. We will not hesitate to take robust enforcement actions against errant intermediaries, and the case underscores our determination to hold intermediaries to the highest standards.”
      
     “Our collaboration with the HKMA in this case exemplifies our shared commitment to maintaining the integrity of our financial markets and safeguarding the interest of investors.”
      
     The Executive Director (Enforcement and AML) of the HKMA, Mr Raymond Chan, said, “This enforcement outcome is a result of close collaboration between the HKMA and the SFC. It helps to send a strong message to the industry that they should have in place adequate systems to ensure compliance with applicable regulatory standards.”
      
     In deciding the sanctions, the SFC took into account all relevant factors, including:
 
  • HSB’s CIS-related failures exposed its clients to significant loss;
  • HSB’s monetary benefits-related failures occurred during various periods over the course of nine years and caused its clients to have been improperly charged fees of at least HK$22.4 million;
  • a strong message needs to be sent to the market to deter other market participants from allowing similar failures to occur;
  • HSB compensated clients for their loss and also refunded the excess monetary benefits retained;
  • HSB commissioned a number of internal and independent reviews upon discovery and self-reporting of its misconduct and enhanced its internal controls;
  • HSB’s co-operation with the HKMA and the SFC and acceptance of the SFC’s findings and disciplinary action facilitated an early resolution of the matter; and
  • HSB has no previous disciplinary record.
    
     A copy of the Statement of Disciplinary Action is available on the SFC website.

Note 1: This press release is issued jointly by the SFC and the Hong Kong Monetary Authority (HKMA).
Note 2: HSB is registered to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance.
Note 3: Trailer fee arrangements refer to commissions provided by fund houses to HSB in connection with its role in the distribution of funds. read more

East Asia

HAD opens temporary cold shelters

     â€‹In view of the cold weather, the Home Affairs Department has opened 18 temporary cold shelters in various districts today (January 27) for people in need of the service. The temporary shelters will remain open when the Cold Weather Warning is in force.
      
     Clean mattresses and blankets/quilts, hot meals and hot water will be provided to shelter users free of charge during the opening of the temporary shelters.
      
     To ensure that cold shelter users can rest in a quiet and undisturbed environment, members of the public or agencies wishing to make donations to shelter users are requested to register with the staff of the shelter first. Donors will then be directed to place the donated items at a specified indoor location. The staff will help notify the shelter users to collect the items on their own.
      
     Anyone seeking temporary refuge, or those with any questions about the donation arrangements at the cold shelters, may call the department’s hotline 2572 8427 for more information.
      
     The 18 temporary cold shelters are located at:
 
Hong Kong Island:
——————–
 
Central and Western:
Sai Ying Pun Community Complex Community Hall
3/F, Sai Ying Pun Community Complex,
2 High Street, Sai Ying Pun
 
Eastern:
Causeway Bay Community Centre
3/F, 7 Fook Yum Road, Causeway Bay
 
Southern:
Lei Tung Community Hall
Lei Tung Estate, Ap Lei Chau
 
Wan Chai:
Wan Chai Activities Centre
LG/F, Wan Chai Market, 258 Queen’s Road East, Wan Chai
 
Kowloon:
——————
 
Kowloon City:
Hung Hom Community Hall
1/F, Kowloon City Government Offices,
42 Bailey Street, Hung Hom
 
Kwun Tong:
Yau Tong Community Hall
38 Ko Chiu Road, Yau Tong

Sham Shui Po:
Nam Cheong District Community Centre
1 Cheong San Lane, Sham Shui Po
 
Wong Tai Sin:
Tsz Wan Shan (South) Estate Community Centre
45 Wan Wah Street, Tsz Wan Shan
 
Yau Tsim Mong:
Henry G Leong Yaumatei Community Centre
60 Public Square Street, Yau Ma Tei
 
New Territories:
—————-
 
Islands:
Tung Chung Community Hall 
G/F, Tung Chung Municipal Services Building, 39 Man Tung Road, Tung Chung
 
Kwai Tsing:
Tai Wo Hau Estate Community Centre
15 Tai Wo Hau Road, Kwai Chung
 
North:
Cheung Wah Community Hall
Cheung Wah Estate, Fanling
 
Sai Kung:
Hang Hau Community Hall
G/F, Sai Kung Tseung Kwan O Government Complex,
38 Pui Shing Road, Hang Hau, Tseung Kwan O
 
Sha Tin:
Lung Hang Estate Community Centre
Lung Hang Estate, Sha Tin
 
Tai Po:
Tai Po Community Centre
2 Heung Sze Wui Street, Tai Po
 
Tsuen Wan:
Lei Muk Shue Community Hall
G/F, Hong Shue House, Lei Muk Shue Estate, Tsuen Wan
 
Tuen Mun:
Butterfly Bay Community Centre
Butterfly Estate (near Tip Sum House), Tuen Mun
 
Yuen Long:
Long Ping Community Hall
Long Ping Estate, Yuen Long read more

East Asia