Hong Kong’s SFC Finds Several Compliance Lapses at Online Brokerages

Hong Kong’s Securities and Futures Commission (SFC) surveyed and reviewed the business models of 50 licensed corporations offering online brokerage, distribution and advisory services. The regulator found severe shortcomings in the operations of many companies.

The regulatory survey included the online trading platforms’ ways of client onboarding, types of products, services and functionalities. In addition, it evaluated the extent to which these platforms are using social media for marketing and communication.

Interestingly, the Hong Kong-based platforms have opened 96 percent of new accounts in the past 12 months through non-face-to-face (non-FTF) onboarding processes.

Several Lapses

However, the regulator found several concerning compliance lapses on the part of the trading platforms. These lapses cover client onboarding; online trading, distribution and marketing; insufficient product due diligence; inadequate client risk profiling; lack of monitoring of information and commentaries posted on platforms; and in a few other areas.

The regulator highlighted that “some LCs failed to conduct proper client identity verification procedures when onboarding clients online.” It includes deficiencies in recognizing if the client’s bank account is in Hong Kong and an independent assessment of facial recognition technologies used in client onboarding.

“Non-FTF client onboarding generally poses a higher risk of impersonation,” the SFC stated. “Therefore, LCs should conduct proper procedures for client identity verification as specified in the acceptable account opening approaches.”

Further, some of the platforms “have excluded their potential suitability obligations by including clauses and statements in client agreements and risk disclosures, and request their clients to make a blanket acknowledgment that no solicitation or recommendation was provided by the LCs.”

This, according to the regulator, is an attempt of restricting clients’ rights.

Moreover, the survey found that some of the trading platforms failed to perform sufficient product due diligence for measuring selling restrictions or additional regulatory requirements. On top of that, there was inconsistent identification and access of client information and detection of abnormal updates on the risk profiling questionnaires.

“LCs are also reminded that in promoting and providing services through online platforms to overseas investors, they should comply with the requirements imposed by domestic regulatory authorities applicable to them, including on the solicitation of clients, opening of client accounts as well as remittance of funds,” the regulator added.

Interestingly, the Hong Kong-based platforms have opened 96 percent of new accounts in the past 12 months through non-face-to-face (non-FTF) onboarding processes.