The Securities and Futures Commission (SFC) of Hong Kong has reprimanded and fined Hang Seng Bank Limited (HSB) $66.4 million for serious regulatory failures in relation to the bank’s sale of collective investment schemes (CIS) and derivative products and overcharging its clients and making inadequate disclosure of monetary benefits to them during various periods over the course of nine years between February 2014 and May 2023.

The SFC’s disciplinary action stemmed from a referral by the HKMA whose investigation revealed a range of concerns regarding HSB’s sale of CIS products during the period from 1 June 2016 to 30 November 2017.

Specifically, 111 client accounts were found to have executed 100 or more CIS transactions during the material period. While most transactions were declared as the client’s “own choice”, 46 clients had in fact been influenced by their relationship managers’ solicitation or recommendation in their trades. They were solicited into conducting excessively frequent transactions with short holding periods, a trading pattern which contradicted both the funds’ investment objectives and the clients’ preferred investment horizons.

The frequent trades in CIS products resulted in significant transaction costs borne by the clients, which greatly affected their overall profit and loss.

HSB’s internal controls were deficient in that they did not adequately supervise and monitor the sale of CIS to its clients. In this connection, the bank failed to keep a sufficient audit trail to ensure that transactions were genuinely initiated by clients. It also failed to put in place sufficient controls to monitor and follow up on potentially problematic transactions after they had been conducted.

The HKMA also referred its investigation findings in relation to HSB’s sale and distribution of derivative products to the SFC. From 17 February 2014 to 19 December 2018, 388 clients who were not characterised by HSB as having knowledge of the nature and risks of derivatives purchased derivative funds in 629 transactions, and 148 of these transactions involved products whose risk level was higher than the clients’ risk tolerance level.

A joint investigation by the SFC and the HKMA further found that, during various periods between November 2014 and May 2023, HSB had:

• retained monetary benefits from client transactions in circumstances where it should not have done so under applicable regulatory standards;
• charged its clients transaction fees beyond amounts previously communicated to them; and
• failed to adequately disclose trailer fee arrangements to clients trading in investment funds.

In total, HSB received at least $22.4 million in excess benefits or fees from these transactions.

In light of these findings, the SFC considers that HSB has failed to:

• act with due skill, care and diligence, in the best interests of its clients and the integrity of the market;
• have, or employ effectively, the resources and procedures which are needed for the proper performance of its business activities;
• make adequate disclosure of relevant material information to its clients;
• avoid conflicts of interest and ensure that its clients are treated fairly; and
• comply with all relevant regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its clients.

These issues were first brought to the SFC’s attention by self-reports from HSB or referrals of findings from the HKMA. HSB has compensated impacted clients and has taken remediation steps and enhancement measures to rectify and strengthen its internal controls.

In deciding the sanctions, the SFC took into account a variety of factors, including the fact that HSB’s CIS-related failures exposed its clients to significant loss; the need to send a strong message to the market, as well as HSB’s cooperation with the HKMA and the SFC and acceptance of the SFC’s findings and disciplinary action facilitated an early resolution of the matter. The regulator also took into account HSB’s clean disciplinary record.