In a consultation paper released last week, the watchdog set out new guidelines for the sale of “complex products” such as derivatives, synthetic exchange trade funds (ETFs) and hedge funds.
The SFC has proposed that investors purchasing such products online via investment platforms and robo-advisers will have to complete a suitability assessment.
The regulator has also suggested that online platform providers may be forced to sign post extra warnings to investors about the risks of such products before the point of sale or advice.
Suitability requirements would also be required for sales from advertisements with product-specific incentives, such as cash rebates, fee discounts, or those based on product-specific research reports on any investment product.
It also applies to adverts using terms such as ‘Don’t Miss Out!’ or ‘Act Now!’, said the SFC.
Risky products
The SFC added that it was considering such measures after becoming concerned that investors may not “fully understand” the risks involved in putting their money into complex products.
“New business models give rise to new risks including in the areas of cyber security and data protection. From an investor perspective, the lack of any interaction with a sales or advisory representative means that they may not be able to fully understand the nature and risks of an investment product prior to making an investment decision,” the SFC said in the consultation paper.
“We are not proposing additional protective measures for the sale of simple investment products, whether or not they are high risk. In the case of investment products, which are too complex for an average retail investor to understand, we have proposed additional protective measures,” it noted.
Simple products refer to stocks, ETFs, mutual funds, REITs, etc., according to the SFC. Complex products include derivatives and derivatives-based investments such as futures, equity derivatives, synthetic ETFs, futures-based ETFs, leveraged and inverse ETFs, bonds with special features, hedge funds, or other unlisted structured products.
The SFC said that depending on the consultation feedback, it will consider extending new rules to the “offline environment” and amend the Code of Conduct.
Robo-advisers
The SFC asked promoters of robo-advice services to give accurate and sufficient information, such as the description of their services, how their models work, and how portfolio rebalancing takes place.
“This would include information on the limitations, risks and how key components of its services are generated (such as a description of how underlying algorithms operate, any limitations of the algorithm, how a portfolio rebalancing mechanism works and associated risks).
“Robo-advisers should also inform and explain to investors the degree of human involvement (eg, advice via web-chat) provided,” said the regulator.
“Robo-advisers are also expected to put in place policies and procedures which define how the algorithm would handle a major market event.”
The SFC also proposed guidelines on other areas, including governance and controls, as well as suitability requirements.
The consultation is open for three months until 4 August 2017. The SFC added there will be a 12-month transition period after the guidelines are implemented.
