Hong Kong SFC Finds Compliance Lapses at Online Brokerages

The Securities and Futures Commission of Hong Kong surveyed 50 licensed online brokerage firms that offer distribution and advisory services. The regulator discovered alarming flaws in the operations of many companies.

The regulatory survey evaluated the online trading platforms’ ways of client onboarding, types of products, services and functionalities. In addition, it investigated to what degree these platforms are leveraging social media for marketing and communication purposes.

Most new accounts on Hong Kong-based platforms are opened through non-face-to-face (non-FTF) processes, at 96% in the past 12 months.

Several Lapses

The regulator found several compliance lapses on the part of the online trading platforms, which are described in more detail as follows. Amongst other things, the lapses include issues with online trading, distribution and marketing, insufficient product due diligence, and client risk profiling. Furthermore, they had no way to keep track of or moderate the information and comments posted on different platforms.

According to the regulator, some LCs failed to verify client identity when onboarding new clients online properly. The report highlights flaws in facial recognition technology employed during customer onboarding and the lack of ability to discern if the client’s bank account is located in Hong Kong.

According to the SFC, the Non-FTF client onboarding generally poses a higher risk of impersonation.” Therefore, LCs should follow specified procedures for verifying their client’s identities during account opening.

In addition, some platforms have attempted to exempt themselves from their potential obligations by including clauses and statements in client agreements and risk disclosures. These requests ask clients to make a blanket acknowledgment that the LCs did not give them any solicitation or recommendation.

According to the regulator, this attempts to restrict clients’ rights.

Furthermore, research revealed that some trading platforms failed to conduct adequate product testing to evaluate selling restrictions and other regulatory necessities. Also, there was no set way to discover or input client information, and updates on risk profiling questionnaires were often abnormal.

The regulator also added that LCs promoting and providing services to overseas investors through online platforms should comply with the requirements of domestic regulatory authorities, including