The Securities and Futures Commission (SFC) has reprimanded and fined Saxo Capital Markets HK Limited (SCMHK) $4 million for failures in distributing virtual asset (VA) funds not authorised by the SFC and VA-related products on the firm’s online trading platform.

Between 1 November 2018 and 25 November 2022 (Relevant Period), SCMHK allowed retail clients to trade certain VA Products on the Online Platform. These products should only be offered to professional investors (PIs) according to two SFC circulars to intermediaries which were effective at the material time.

The SFC’s investigation revealed that during the Relevant Period, SCMHK executed 1,446 transactions involving 32 VA Products for six individual PIs and 130 retail clients on the Online Platform. All of them were complex products, including 21 exchange-traded derivative products.

Contrary to the guidance in the two SFC circulars, prior to effecting these transactions, SCMHK did not assess whether the clients had knowledge of investing in VA Products, nor did it provide them with sufficient information and warning statements specific to VAs.

During the Relevant Period, SCMHK did not have in place any specific procedures for conducting product due diligence on VA Products. It relied on certain protocols established on a group-wise basis by its parent company to identify instruments with VA exposure. Due to deficiencies in the protocols, the 32 VA Products were not identified as such. As a result, they were made available to SCMHK’s clients, regardless of whether they were PIs, on the Online Platform. SCMHK did not realise the deficiencies until it was notified by its parent company in November 2022.

The SFC found that SCMHK failed to implement adequate and effective policies and controls to effectively manage and adequately supervise the operation of the Online Platform to ensure that it meets the relevant regulatory requirements and expected standards and practices in distributing VA Products.

The SFC also found that SCMHK failed to ensure that:

• transactions in complex VA Products effected via the Online Platform were suitable for the clients in all the circumstances; and
• sufficient information on the key nature, features and risks of such VA Products and appropriate warning statements were provided on the Online Platform to enable clients to understand them before making investment decisions.

Furthermore, with respect to the 87 clients – comprising 82 retail clients and five individual PIs – who traded the 21 Exchange-traded derivative VA Products, the SFC found that SCMHK did not make adequate enquiries or gather sufficient information which would enable it to properly assess the clients’ knowledge of derivatives and characterise them based on such knowledge.

The regulator concluded that SCMHK’s failures constituted breaches of the Guidelines on Online Distribution and Advisory Platforms and the Code of Conduct.

In deciding the disciplinary sanction, the SFC has taken into account all relevant circumstances, including:

• SCMHK’s failures persisted for over four years;
• SCMHK self-reported its misconduct to the SFC;
• SCMHK has taken remedial actions including voluntarily compensating clients for losses incurred from trading VA Products during the Relevant Period;
• SCMHK has ceased carrying on regulated activities;
• SCMHK’s cooperation with the SFC and acceptance of the SFC’s findings and disciplinary action facilitated an early resolution of the matter; and
• SCMHK’s otherwise clean disciplinary record.