SFC Fines Investment Manager HK$5 Million Over Risk Assessment Failures

The Hong Kong regulator says Noah Holdings failed to adequately assign risk appetite to investors

The Securities and Futures Commission (SFC), a Hong Kong regulator, announced today that it is fining Noah Holdings Limited (Noah HK) HK$5 million ($640,000). The regulator stated that the investment manager failed to meet regulatory standards regarding internal systems and controls in its sale and distribution of investment products. The announcement comes shortly after the Hong Kong regulator fined Citigroup HK$57 million ($7.26 million) for a botched listing application.

The SFC did note that Noah HK had no prior disciplinary action taken against it by regulatory authorities. Moreover, the investment manager hired an independent reviewer to address the SFC’s concerns and review its internal systems and controls.

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Nonetheless, the regulator proceeded with its fine. It claims that the firm’s risk profiling systems were insufficient as they did not properly identify clients’ risk appetite and tolerance levels.

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Wrong risk appetite, wrong risk analysis

In a similar vein, the SFC noted that the company did not sufficiently analyze certain features of investment products. This meant the firm did not assign adequate risk ratings to those products.

As a result of this failure to properly analyze investment products, the firm effectively mis-sold them to clients. This was combined with the inadequate risk profiling of clients meaning products which were not assigned an adequate level of risk were sold to clients whose risk appetites were inaccurately defined.

The independent reviewer hired by Noah HK found that 1243 transactions, worth approximately $523 million, were affected by the above procedures. These transactions involved 757 clients, and Noah HK will have to pay clients for any previous losses incurred as a result of them. They will also have to redeem or sell clients’ current holdings and reimburse them for any losses incurred.

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