The "treat customers fairly" charter for Hong Kong's private wealth management industry is drawn from good banking practices and from the principles for financial consumer protection set out by the 'Group of 20' industrialised nations in 2011.

This month the Hong Kong Monetary Authority announced that it had been working with the Private Wealth Management Association to develop a TCF Charter to promote a customer-centric culture in the private wealth management (PWM) industry. The charter is designed to complement, not change, current laws and regulations and the existing terms and conditions between banks and their customers. It describes itself as a commitment by private wealth management institutions in Hong Kong to support and implement the principle of treating customers fairly.

The charter bears a resemblance to the British Financial Conduct Authority's "consumer outcomes," in particular outcome 6 which requires a firm to pay "due regard to the interests of its customers and treat them fairly." It comprises five general principles and supplements them with examples which are not comprehensive but merely illustrations of the 'spirit' of the principles.

The HKMA expects all authorised institutions which operate as private banks, or which have dedicated private banking units, to follow these principles. It has also stated that it expects senior managers and boards of directors to ensure that their institutions and relevant staff abide by them. PWM institutions would be well advised to:

• make relevant staff members and senior managers aware of the charter and the TCF principles and their application;
• review their existing policies and procedures to ensure that they obey the principles, using the examples which emphasis the importance of having procedures to manage conflicts of interest fairly, and to ensure that customers are fully informed of all risks and charges or fees throughout the process of sale;
• refer to the TCF principles and examples in any update or amendment of terms and conditions with customers;
• review (and if necessary, update) any marketing materials already provided to customers to check for any information that could be construed to be misleading; and
• ensure that the procedures for customer complaints, plus procedures to enable customers to switch to another PWM institution, are aligned with TCF principle 4 below.

[Editor's note: the rest of this article consists of the examples of how firms might follow the principles as they appear on the official sheet.]

Principle 1: Products and client services should be designed to meet the needs of customers.

• Products and client services should be designed to meet the needs of their customers, rather than designing products and services just to maximize profit.
• PWM institutions should not lend amounts to customers which are considered to be beyond their affordability.
• Policies and procedures should be in place to ensure that the customers understand the nature and risks of the investment, and ensure the suitability of the recommendation or solicitation for that customer is reasonable in all the circumstances. In particular, when providing services to a customer in derivative products or any leveraged transactions, PWM institutions should assure themselves that customers have sufficient net worth to be able to assume the risks and bear the potential losses.
• PWM institutions should have policies and procedures in place to help identify and manage any conflicts of interest arising between themselves and their customers in the course of their businesses. These should include policies and procedures related to recommendation or solicitation for customers in respect of in-house investment products. PWM institutions should try to avoid conflicts of interest and ensure that their customers are fairly treated if conflicts cannot be avoided. For instance, remuneration policies should be designed to ensure that the bonus of sales staff is not calculated solely on financial performance but in such a way as to encourage responsible business conduct with the aim of reducing the risk of conflicts of interest and biased advice, and preventing mis-selling practices, unreasonable risk taking, or other irresponsible practices.
• PWM institutions should endeavour to provide training for staff and develop a talent pool of high ethical standards and professionalism.

Principle 2: PWM institutions should set out and explain clearly the key features, risks and terms of the products.

• PWM institutions should have policies and procedures to promote transparency, reasonableness and efficiency in the execution of customer due diligence processes and joining international efforts for anti-money laundering and counter-terrorist financing work.
• PWM institutions should highlight to potential customers the key features of a service or product, including interest rates, fees and charges. For instance, for a time deposit, PWM institutions should highlight the fees and charges for early uplift of the deposit, if allowed. For a loan, PWM institutions should highlight the interest rates and any fees, charges for late payment or early repayment before entering into contracts with customers. Reasonable advance notice should be given to customers on any changes to the interest rates, fees and charges levied on a service or product. The changes should be highlighted in the notice.
• Adequate disclosure of product features and risks should be made to the customers in the selling process, so that customers understand the associated risks and costs before investing in the products.

Principle 3: All marketing materials and information designed for customers should be accurate and understandable.

• Marketing materials should present a balanced and adequate disclosure. PWM institutions should not engage in misleading or other unfair sales practice.
• Where benefits are subject to conditions, such conditions should be clearly displayed in the marketing materials wherever practicable. Presentation of benefits and returns should come with associated risks of the products.

Principle 4: Customers should be provided with reasonable channels to submit claims, make complaints, seek redress, and PWM institutions should not impose unreasonable barriers on customers to switch to other PWM institutions.

• PWM institutions should provide customers with clear and understandable information on the complaints submission procedures.
• Procedures should be in place to ensure that customer complaints are fully and promptly investigated and resolved in a satisfactory manner.
• Where a customer decides to switch his/her accounts to another PWM institution, the 'original' PWM institution should provide assistance to the customer, for example, by providing the customer with a list of the standing instructions, direct debit authorizations and auto-credits going through his/her account. This would help customers in making appropriate arrangements to avoid the risk of missed payment, rejected transactions and charging of penalty/handling fees.

Principle 5: PWM institutions should join force with the Government, regulatory bodies and others in financial education to promote financial literacy.

PWM institutions should support the efforts of the Government, regulators, other financial services industry and public bodies in assisting existing and potential customers develop the knowledge, skills and confidence to appropriately understand risks, make informed choices, know where to go for assistance, and take effective action to improve their own financial well-being, where appropriate. For instance, some PWM institutions have offered derivatives training to customers and training on some other wealth management products with special structures, features and risks, such as hedge funds and private equity funds.

Where there are leaflets from the Hong Kong Deposit Protection Board to educate the public on the Hong Kong Deposit Protection Scheme (DPS), PWM institutions that are also scheme members of the DPS should support and help to send out those leaflets to their customers for information and reference.

* William Hallatt can be reached on +852 2101 4036; Richard Norridge is on +852 2101 4107; Hannah Cassidy is on +852 2101 4133; and Joanna Caen is on +852 2101 4167.