Hong Kong’s new regulations for structured investment products 

4 June, 2010: The Securities and Futures Commission (SFC) of Hong Kong has been doing rounds of consultative papers in order to update the regulatory framework which would provide better protection to the investing public yet keeping the markets conducive for development. In September 2009 SFC issued a consultative paper which covered investment products and conduct of intermediaries and the final revised conclusions have been issued as Consultative Conclusion on Proposals to Enhance Protection for the Investing Public on May, 2010. 

SFC proposes a consolidated Handbook which includes revised product codes for products like Mutual Funds, Unit Trusts, Investment Linked Insurance Scheme and a new code for Unlisted Structured Investment Products (SIP) and will come into effect from the date of its publication in the Government Gazette. 

The code aims to protect the interest of the investors and each stage of investment and requires the issuers to maintain high levels of transparency in disclosures at all times. It requires the issuers to provide for a Product Key Facts Statement (KFS) as a part of the offer document which would provide for appropriate levels of risk with regard to the counterparty exposures and with regard to conflict of interest. The code provides for advertising guidelines to be issued for unlisted SIP, market making requirements to provide liquidity, initial and continual disclosures of material information and take full responsibility of all the material facts disclosed by the issuer and so. Further the regulators have made the laws more stringent by ensuring appointment of a Hong Kong regulated Product Arranger even if the issuer is not a Hong Kong regulated entity. The Code also requires the issuer to determine priority of claims over collateral while structuring the transaction and mentions is implications for the investors in the offer document. 

A noteworthy requirement introduced with regard to unlisted SIPs is introduction of “cooling period” where the issuers are to provide exit channels to investors in case of unlisted structured investment products which have long lock up period, and/ or no dealings or liquidity provisions on a frequent basis.  

The Code though may result in additional cost implications for the issuers but its’ clear intent is to safeguard the interest of the investors in these structured investment products.

[Reported by: Nidhi Bothra] 

Links: See the full text of the Consultative Conclusion here

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