Distribution of complex and high-risk products

On 7 December 2018 the Securities and Futures Commission (SFC) issued a circular to remind intermediaries of the requirements governing selling practices, including the obligation to assess suitability under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), when they distribute structured products and corporate bonds with complex features or high risks. 

The SFC noted that recently sales of complex products such as equity-linked accumulators, which are derivative products with significant investment risks, have increased. Accumulators gave rise to significant losses in the wake of the 2008 global financial crisis, leading to protests outside the SFC’s offices and those of a number of banks and other intermediaries involved in the sale of such products

The SFC has also noted an increase in sales of complex bonds such as bonds with non-viability loss-absorption features. These may require investors to accept a write down, or a debt for equity swap in the event the bond issuer faces financial difficulties. The SFC is concerned that triggering events are complex, difficult to predict, and potentially result in a fundamental change in the nature of the investor’s interest and/or pay-out under the product. 

These types of products are considered complex products for the purpose of compliance with the Guidelines on Online Distribution and Advisory Platforms and the new paragraph 5.5 of the Code of Conduct. Under these requirements, with effect from 6 April 2019, intermediaries will be required to ensure that a transaction in a complex product is suitable for the client in all circumstances irrespective of whether a solicitation or recommendation is made. Intermediaries will also be required to provide information and warning statements about the complex products to the client. The SFC maintains a list of minimum information and warning statements for complex products which is available here