Undercover SFC Investigation Confirms that Exploitation of Retail Investors Is Widespread, But SFC Is Silent on How It Will Assist the Victims

Yesterday, the SFC released the results of its second undercover investigation into the sales practices of SFC-licensed corporations. The SFC found that mis-selling was widespread, apparently worse than in 2010, the year of its first study.

All of the misconduct was apparently motivated by intermediaries’ desire to sell products which paid higher commissions. In particular, the SFC noted that ILAS was being aggressively promoted by SFC-licensed intermediaries who also held an insurance brokerage license:

Mis-selling of ILAS

SFC noted that some intermediaries failed to rationalize why they recommended the products they did. The true reason, of course, was to line their own pockets at their victims’ expense.

Sales Reps Did Not Rationalize Recommendation

SFC also noted that some intermediaries, in effect, filled out the financial needs analysis forms for their victims. This allowed intermediaries to recommend unsuitable products which paid higher commissions—without getting caught.

Sales Reps Coached Clients Through FNA

At the conclusion of its paper, SFC outlined a “Way Forward”. Sadly, SFC only offered a recommendation that corporations should do better and implied it would have closed-door secret meetings with the executives of crooked companies, whose names have been kept anonymous, for their protection. The SFC said nothing about attempting to locate the victims of these companies and informing them of their right to file a complaint and seek compensation.

Inadequate Way Forward

A More Responsible “Way Forward”

SFC has strong evidence that millions of Hong Kongers have likely been mis-sold in recent years. Consequently, the SFC should focus a significant amount of its resources towards helping victims, most of whom probably have no idea that they were taken advantage of.

SFC has also admitted that the financial industry has become more predatory, and that recently introduced regulations have failed to protect retail investors. Clearly, the SFC needs to try something different, something that works.

It is widely known that mis-selling is motivated by the conflicts of interest inherent in the commission-based advisory model. This is why the UK decided to ban commissions and other forms of conflicted remuneration. 

Just a couple days ago, Martin Wheatley, the former CEO of the SFC and current CEO of the FCA (the British regulator), declared that the UK’s commission ban has been successful at reducing mis-selling (what he called “product bias”).

Hong Kong should start preparing for a move in the same direction.

One thought on “Undercover SFC Investigation Confirms that Exploitation of Retail Investors Is Widespread, But SFC Is Silent on How It Will Assist the Victims

  1. Manita

    At least the Hongkong Authorities have undertaken an investigation into this murky area where most victims dont even know how they have been ripped off!

    Unfortunately as the report says, these products are insurance linked, is
    i. Not understood by the victim
    ii. Not explained ( deliberately)by the Financial Advisers

    In several other Asian jurisdictions,e.g in Thailand – there are Financial Advisers operating freely, with the Securities Regulator doing nothing about it! These FA’s are advising illegally on such products that they little understand themselves as they are not qualified to do so and the receiving Bond Houses and Pension Trustees in Isle of Man and Guernsey Financial Bodies and regulators are complicit!


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