Referrals from Shenzhen

The firm must assess whether the consultants are carrying on regulated activities in Hong Kong. If they are soliciting clients, advising on securities or assisting with account opening as part of the firm's business, they may be performing regulated activities without a licence. Paying 40% of management fees to unlicensed introducers is a strong indicator that they are incentivised to solicit business rather than merely provide administrative support. The firm cannot rely on the fact that the client signs in Hong Kong if the solicitation and advice occur in Shenzhen. The SFC's guidance on cross-border marketing and online distribution should be considered.

The Mainland activity also raises PRC regulatory issues. Offshore firms generally cannot market or provide securities services in Mainland China without the required approvals, and the consultants' seminars and WeChat marketing may breach Mainland rules. The firm should take PRC legal advice. The simplified Chinese website and the advertisement of "Hong Kong investment accounts" may be directed at Mainland investors and could amount to marketing in the Mainland. The firm should also consider whether the arrangement triggers notification obligations to the SFC and whether the firm's licence covers the activities being performed. The fact that onboarding and risk profiling occur in Shenzhen increases the cross-border risk and may undermine the quality of the suitability assessment.

The 40% referral fee creates a conflict of interest because the consultants are incentivised to refer clients regardless of suitability. The firm must ensure that clients understand the fee arrangement and that the consultants are not providing investment advice unless licensed. The firm should assess whether the fee is commensurate with the services provided and whether it creates a risk of churning or unsuitable recommendations. The arrangement should be documented in a written agreement with clear scope, compliance obligations, termination rights and audit rights. The firm should also consider whether the consultants are acting as agents and whether their acts can be attributed to the firm.

Onboarding in Shenzhen raises KYC and suitability concerns. The firm must verify client identity, address, source of funds and tax residency, and ensure that risk profiling is conducted properly. Non-face-to-face onboarding requires enhanced due diligence and robust authentication. The firm should review whether the consultants completed forms without proper training or supervision, whether clients understood the risks, and whether any clients are PEPs or subject to sanctions. The firm should also assess whether the account-opening process complied with the SFC's suitability requirements and whether the clients received the required risk disclosures. The firm should consider re-papering affected accounts and conducting a sample review of the 120 clients.

Compliance should immediately suspend new Mainland referrals and stop paying referral fees pending review. It should preserve records, interview the consultants and relationship managers, and review a sample of client files for KYC, suitability, fee disclosure and cross-border marketing. It should assess whether any clients were solicited in the Mainland, whether the firm's website targeted Mainland investors, and whether the consultants performed regulated activities. The firm should take Hong Kong and PRC legal advice on licensing and cross-border issues.

The firm should consider self-reporting to the SFC. The SFC expects prompt notification of material breaches, including unlicensed activities, cross-border marketing and control failures. The report should be factual, explain the remediation and avoid speculation. The firm should also consider whether client remediation is needed, including re-papering, fee refunds or compensation. Remediation should include a proper introducer policy, due diligence and training for introducers, clear disclosure of referral fees, restrictions on unlicensed activities, and a compliance monitoring programme. The firm should review its website and marketing materials, implement geo-blocking or disclaimers where appropriate, and ensure that onboarding outside Hong Kong is properly supervised. Finally, it should strengthen board and senior management oversight of cross-border activities.