Hong Kong wealth management company Noah Holdings has been fined and publicly reprimanded by the region’s regulator over investment suitability, know-your-client, due diligence and other financial failings.
Hong Kong’s Securities and Futures Commission (SFC) said in a statement that it has publicly reprimanded and fined Noah Holdings (Hong Kong) Limited (Noah HK) HK$5m ($640,000) over Noah HK’s internal system and “control failures in its sale and distribution of investment products”.
The regulator said that in particular, Noah HK had failed to comply with various regulatory requirements on know-your-client, product due diligence, suitability assessment, information for clients, and sales supervision and controls.
The SFC’s disciplinary action followed an SFC inspection and an independent review jointly agreed by the SFC and Noah HK, which found that between January 2014 and June 2016, the company’s risk profiling questionnaires for assessing clients’ risk appetite and risk tolerance level were “defective in certain areas”; failed to ensure the features and risks of certain investment products were sufficiently considered when assigning a risk rating to the product as part of the product due diligence process.
‘The SFC found that Noah HK sold clients “potentially unsuitable” investment products as a result of its “deficient risk profiling questionnaires and product risk rating framework” and that it did not require its sales staff to document the rationale underlying the investment advice or recommendations prior to March 2016, nor did it require them to provide clients with copies of such information.
Noah HK also did not have an adequate supervision and control mechanism in place for monitoring the sale of investment products, the regulator said.
The SFC said that it took into account all relevant circumstances, including that Noah HK: engaged an independent reviewer to conduct an independent review to address the SFC’s regulatory concerns and review its internal systems and controls; agreed to reimburse the affected clients, took remedial actions to strengthen its internal systems and controls and proactively engaged an external consultant to assist in the process.
The company also undertook to provide the SFC with a report prepared by an independent reviewer within 12 months confirming that all the identified concerns have been properly rectified; cooperated with the SFC in resolving its concerns and has no previous disciplinary record with the SFC.
The SFC has also reprimanded and fined Hang Seng Investment Management Limited (HSIM) HK$3m ($384,000) for its failure to comply with regulatory requirements on cash management involving SFC-authorized funds.
The SFC’s disciplinary action followed an independent review jointly agreed by the SFC and HSIM. The review found that, from 2010 to 2016, these HSIM-managed funds maintained substantial cash deposits with connected persons, but the interest received on some of these cash deposits was at a rate lower than the prevailing commercial rate
The amount of interest involved was approximately HK$875,648. HSIM has agreed to make a voluntary payment of the equivalent amount to the affected funds.
The review also found that although HSIM had procedures in place to check the interest rate offered by other banks, it did not apply the procedures to deposits placed in the funds’ current accounts maintained with The Hongkong and Shanghai Banking Corporation Limited as it had inadvertently and mistakenly presumed that those accounts were non-interest bearing.
The misconception lasted until July 2016 when HSIM communicated with the funds’ trustees to confirm the nature of the current accounts, only then did the trustees indicate that those current accounts were in fact interest bearing, even though the interest rate at that time was 0%.