The Securities and Futures Commission (SFC) has publicly reprimanded Convoy Asset Management Limited (CAML) 1 and fined it $6.4 million pursuant to section 194 of the Securities and Futures Ordinance (SFO). CAML is licensed to carry on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the SFO.
Between March 2015 and January 2017, while recommending bonds listed under Chapter 37 of the Main Board Listing Rules to clients to be executed via a third party platform, CAML failed to:
(a) conduct proper and adequate product due diligence on the bonds before making recommendations or solicitations to the clients;
(b) have an effective system in place to ensure that the recommendations or solicitations made to its clients in relation to bonds were suitable for and reasonable in all the circumstances of each of its clients;
(c) maintain proper documentary records of the investment advice or recommendations given to its clients and provide clients with a copy of the written advice; and
(d) have adequate and effective internal controls and system to diligently supervise and monitor the sale of bonds through the third party platform and to ensure its compliance with applicable regulatory requirements.
Inadequate product due diligence
CAML did not have product approval and due diligence procedures on Chapter 37 Bonds which were sold to clients through the third party platform. CAML relied solely on individual consultants to conduct product due diligence and to assess the risks of the bonds. CAML’s reliance on individual consultants to conduct product due diligence raised serious regulatory concerns.
Ineffective systems to ensure product suitability for clients
CAML did not conduct adequate product due diligence on, and did not assign a risk rating to, the bonds sold through the third party platform. The SFC found that CAML did not have an effective system for ensuring product suitability for clients, and its suitability framework for bonds sold via the third party platform fell below the standards required of it in the Code of Conduct.
Failure to maintain documentary records of investment advice and recommendations
CAML stated that as most of the product explanation or 4 advice were done via face-to-face meetings with the clients, no formal written records were kept of the product explanation or advice given. In the absence of proper records of the investment advice, it would be difficult for CAML
(a) to effectively supervise and monitor its consultants to ensure that the recommendations or solicitations they made to the clients were suitable and reasonable in all the circumstances; and
(b) to assess its position if it receives client complaints about possible mis-selling of products by its consultants.
Lack of diligent and effective supervision and monitoring of the sales process
Apart from having senior consultants or responsible officers to attend client meetings with the consultants from time to time, CAML did not have any procedures in place during the period to ensure that its consultants had conducted proper and adequate product due diligence on the bonds recommended to clients. CAML did not appear to be aware that recommendation and/or solicitation of Chapter 37 Bonds might have been made to clients as its consultants often shortlisted a number of bonds for the clients to consider.
CAML’s failures constitute a breach of the Code of Conduct and the Internal Control Guidelines. Despite the repeated reminders given by the SFC to licensed corporations, CAML had not tightened up its controls and procedures in order that it had an effective system in place to ensure the suitability of bonds it recommended to clients during the period.
CAML has decided to cease selling Chapter 37 Bonds to clients and is now under the management of a new team of directors and managers-in-charge.
Date: 20 May 2020
Our regulatory compliance experts can help you determine if your company is up to date with the latest regulations with compliance reviews, and we offer as well ongoing support for all your compliance needs.
Follow us on LinkedIn.