The Securities and Futures Commission (SFC) has taken decisive action against Hang Seng Bank Limited (HSB), imposing a substantial fine of HK$66.4 million. This penalty comes as a result of significant regulatory failures identified within the bank’s operations over a nine-year period, from February 2014 to May 2023. The SFC’s investigation uncovered serious deficiencies in Hang Seng Bank’s sale of collective investment schemes (CIS) and derivative products, alongside instances of client overcharging and inadequate disclosure of monetary benefits.
Misconduct in Collective Investment Scheme (CIS) Sales
The disciplinary proceedings initiated by the SFC were triggered by a referral from the Hong Kong Monetary Authority (HKMA). The HKMA’s investigation brought to light several concerns regarding Hang Seng Bank’s sales practices related to CIS products between June 1, 2016, and November 30, 2017.
The investigation revealed that within this period, a concerning number of client accounts, specifically 111, engaged in a high volume of CIS transactions, each executing 100 or more trades. While the majority of these transactions were ostensibly declared as “own choice” by the clients, further scrutiny uncovered that in 46 cases, clients were indeed influenced by solicitations or recommendations from their relationship managers. These clients were encouraged to engage in excessively frequent trading with short holding periods. This trading behavior directly contradicted both the stated investment objectives of the funds themselves and the clients’ own expressed investment time horizons. The consequence of this frequent trading in CIS products was significant transaction costs incurred by the clients, substantially eroding their potential profits and impacting their overall investment performance.
Furthermore, Hang Seng Bank’s internal control mechanisms were found to be lacking in their effectiveness. The bank’s systems failed to provide adequate supervision and monitoring of CIS product sales to its clientele. Critically, the bank did not maintain a sufficient audit trail to reliably verify that transactions were genuinely initiated by the clients themselves. Equally concerning was the absence of robust controls designed to monitor and proactively follow up on potentially problematic transaction patterns after they had already occurred.
Deficiencies in Derivative Product Sales and Distribution
The HKMA’s investigation also extended to Hang Seng Bank’s sale and distribution of derivative products, and these findings were also referred to the SFC. Between February 17, 2014, and December 19, 2018, a significant number of clients – 388 in total – who were not classified by Hang Seng Bank as possessing the necessary knowledge and understanding of the nature and risks associated with derivatives, proceeded to purchase derivative funds. These clients engaged in 629 transactions. Alarmingly, in 148 of these transactions, the derivative products purchased carried a risk level that exceeded the clients’ formally assessed risk tolerance. This indicated a mismatch between the products being sold and the clients’ risk profiles, raising serious questions about the suitability of the advice and sales practices employed.
Overcharging and Lack of Transparency in Monetary Benefits
A joint investigation conducted by both the SFC and the HKMA unearthed further instances of misconduct related to client charges and transparency. Over various periods spanning from November 2014 to May 2023, Hang Seng Bank was found to have engaged in the following unacceptable practices:
- Retention of Undue Monetary Benefits: The bank retained monetary benefits from client transactions in situations where, according to applicable regulatory standards, it was not entitled to do so.
- Excessive Transaction Fees: Clients were charged transaction fees that surpassed the amounts that had been previously communicated to them. This lack of transparency and unexpected cost burden negatively impacted clients.
- Inadequate Disclosure of Trailer Fees: Hang Seng Bank failed to adequately disclose the existence and nature of trailer fee arrangements to clients who were trading in investment funds. Trailer fees, which are commissions paid by fund houses to distributors like Hang Seng Bank, represent a potential conflict of interest and must be transparently disclosed to clients.
Collectively, these instances of overcharging and undisclosed benefits resulted in Hang Seng Bank receiving at least HK$22.4 million in excess benefits or fees from client transactions. This substantial sum underscores the systemic nature of the issues and the potential financial harm inflicted upon a significant number of clients.
In light of these comprehensive findings, the SFC concluded that Hang Seng Bank had demonstrably failed in several critical areas of regulatory compliance and client protection. Specifically, the bank failed to:
- Act with due skill, care, and diligence, prioritizing the best interests of its clients and upholding the integrity of the financial market.
- Establish or effectively utilize the necessary resources and procedures essential for the proper execution of its business activities.
- Provide adequate disclosure of relevant material information to its clients, hindering their ability to make informed investment decisions.
- Avoid conflicts of interest and ensure fair treatment of its clients, leading to potential exploitation and financial disadvantage for customers.
- Comply with all pertinent regulatory requirements governing its business conduct, failing to promote and safeguard the best interests of its clients.
It is noteworthy that these serious issues were initially brought to the attention of the SFC through self-reports from Hang Seng Bank itself and referrals of findings from the HKMA. In response to these findings, Hang Seng Bank has taken steps to compensate affected clients for their financial losses and has initiated remediation efforts and implemented enhanced measures aimed at rectifying the identified deficiencies and strengthening its internal control framework.
Mr. Christopher Wilson, the SFC’s Executive Director of Enforcement, emphasized the severity of Hang Seng Bank’s misconduct, stating, “HSB’s misconduct in these cases was serious and systemic. In particular, clients who declared making investment decisions themselves were in fact repeatedly solicited by HSB’s relationship managers to engage in frequent and excessive CIS transactions. As a result, the clients ended up incurring substantial transaction costs to their detriment. HSB also overcharged a significant number of clients across a multitude of the bank’s business lines over an extended period of time. We will not hesitate to take robust enforcement actions against errant intermediaries, and the case underscores our determination to hold intermediaries to the highest standards.”
Mr. Raymond Chan, Executive Director (Enforcement and AML) of the HKMA, further highlighted the collaborative effort between the regulatory bodies, stating, “This enforcement outcome is a result of close collaboration between the HKMA and the SFC. It helps to send a strong message to the industry that they should have in place adequate systems to ensure compliance with applicable regulatory standards.”
In determining the appropriate sanctions, the SFC carefully considered a range of relevant factors. These included:
- The fact that Hang Seng Bank’s failures related to CIS products exposed its clients to the potential for significant financial losses.
- The prolonged duration of Hang Seng Bank’s monetary benefits-related failures, spanning nine years and resulting in improper charges of at least HK$22.4 million to clients.
- The necessity to send a clear and strong deterrent message to the market, discouraging other participants from allowing similar failures to occur within their own operations.
- Hang Seng Bank’s actions in compensating clients for their losses and refunding the excess monetary benefits that were improperly retained.
- Hang Seng Bank’s commissioning of internal and independent reviews upon discovering and self-reporting the misconduct, as well as the steps taken to enhance its internal controls.
- Hang Seng Bank’s cooperation with both the HKMA and the SFC, along with its acceptance of the SFC’s findings and disciplinary actions, which facilitated a more efficient resolution of the matter.
- Hang Seng Bank’s lack of any prior disciplinary record, which was also taken into account.
This enforcement action serves as a significant reminder to all financial institutions operating in Hong Kong of the critical importance of upholding regulatory standards and prioritizing the protection of investor interests. The substantial fine levied against Hang Seng Bank underscores the commitment of the SFC and HKMA to rigorously enforce these standards and hold firms accountable for misconduct.
