Monday, November 28, 2011

Hong Kong Securities Regulator Will Amend Code of Conduct to Help Implement Financial Dispute Resolution Center

The Hong Kong Securities and Futures Commission fully supports the Financial Dispute Resolution Center proposed by the government to provide a mediation and arbitration process for mostly small retail disputes between brokers and other intermediaries and their customers. The Commission is currently consulting on changes to the Code of Conduct obligating all those licensed by or registered with the SFC to participate and comply with the FDRC scheme. The establishment of the FDRC will give rise to a dispute resolution regime that will uphold investors’ rights and interests, said Ashley Alder, the SFC’s Chief Executive Officer.

According to SFC Director of Enforcement Mark Steward, the process of mediation is designed to leverage an agreed outcome and the FDRC will have experienced mediators who will work with banks, brokers and their customers to arrive at an agreed resolution quickly and cheaply. If mediation is unsuccessful, the parties have the option of arbitration which will result in an arbitration award binding on both parties.

In recent remarks at the Hong Kong Securities Institute, the Enforcement Director said that the SFC proposes to add to the Code of Conduct an obligation that banks and brokers act in good faith when engaged with the FDRC process. This is an important obligation, he noted, because the success of mediation and arbitration depends very much on the mediators and arbitrators having access to the relevant documents and, potentially, the staff that explains what happened with the customer. Without access to the right material, he continued. the mediation and arbitration process may result in unfair outcomes which will trigger successive waves of discontent and cynicism. This obligation is mirrored in other jurisdictions with financial services ombudsman or dispute resolution schemes and it is an important feature, he emphasized.

The Director noted that the Commission does not expect the FDRC to be used to handle many complaints. The Commission has an expectation and a strong preference for internal complaint handling, he said, which should be sufficient to deal with most complaints. For this reason, the internal complaint handling process will be supplemented with an obligation upon each financial institution to examine the subject matter of the complaint. This is designed to help ensure that the inarticulate complainant with a genuine grievance is treated fairly and also to oblige financial firms to have a concern for what may be behind or on the horizon. One complaint may raise issues that affect other customers, he reasoned, and the earlier these risks can be identified and managed the better.

There are also new obligations to notify and report certain matters to the SFC when the FRDC is engaged. These obligations are set out in the consultation document; and the Director expects to get strong responses to these new obligations.

The SFC also proposes to amend the Code of Conduct to impose an obligation on firms to report actual or suspected misconduct by clients. The Commission has already warned the industry that firms who execute self-evidently suspicious or manipulative orders will be disciplined. Some people have been the subject of enforcement action because they have allowed their systems to be exploited by manipulators in circumstances where manipulation was obvious. The Commission believes that it is a short but necessary step to require firms who receive a manipulative order which they may decline to execute to report to the SFC. He assured that the reporting would be confidential.

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