Hong Kong Regulator Fines Saxo Capital Markets Over Virtual Asset Distribution Failures

Key Takeaways

• Retail Exposure to Complex Products: Virtual asset products intended for professional investors were made available to retail clients through an online platform.
• Control and Governance Gaps: Weak product identification and due diligence processes allowed VA products to go unflagged for years.
• Suitability Failures: Client knowledge assessments and VA-specific risk disclosures were not adequately carried out.
• Regulatory Message: The SFC is reinforcing expectations around online distribution controls and investor protection in virtual asset markets.

Deep Dive

Hong Kong’s securities regulator has fined Saxo Capital Markets $510,000 (HK$4 million) after finding that the firm allowed retail investors to trade complex virtual asset-related products that should have been restricted to professional investors.

In a disciplinary decision published on January 6, the Securities and Futures Commission said the breaches stemmed from how they distributed virtual asset (VA) funds and VA-related products through its online trading platform over a four-year period, from November 2018 to November 2022.

During the period under review, the SFC found that Saxo's executed 1,446 transactions involving 32 VA products for six individual professional investors and 130 retail clients. All of the products were classified as complex, including 21 exchange-traded derivative VA products.

Under regulatory guidance in force at the time, those products should only have been offered to professional investors. Instead, they were made available to retail clients via the firm’s online platform.

Missing Checks and Risk Warnings

The regulator said the problems went beyond who was allowed to trade. Before executing the transactions, they did not assess whether clients had sufficient knowledge or experience to invest in virtual asset products. Nor did it provide adequate product information or VA-specific risk warnings to help clients understand what they were trading.

For exchange-traded derivative VA products in particular, the SFC highlighted additional gaps. Among 87 clients who traded these instruments, 82 of them retail, the firm failed to gather enough information to properly assess their knowledge of derivatives or to classify them based on that knowledge.

Weak Controls Behind the Scenes

At the root of the issue, according to the SFC, was a lack of effective internal controls. Saxo's did not have dedicated procedures for conducting product due diligence on virtual asset products. Instead, it relied on group-wide protocols set by its parent company to identify instruments with VA exposure.

Those protocols proved inadequate. As a result, the 32 VA products were not identified as virtual asset products and were made available on the platform regardless of whether clients qualified as professional investors. The firm only became aware of the deficiencies in November 2022, after being alerted by its parent company.

The SFC concluded that Saxo Capital Markets failed to put in place adequate and effective policies to properly manage and supervise its online trading platform. These failures amounted to breaches of the Guidelines on Online Distribution and Advisory Platforms, as well as the Code of Conduct for licensed intermediaries.

In the regulator’s view, the firm also failed to ensure that transactions in complex VA products were suitable for clients in all the circumstances and that clients were given sufficient information to understand the nature, features, and risks of those products before making investment decisions.

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