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SFC consults on changes to the professional investor regime

On 15 May 2013, Hong Kong's Securities and Futures Commission (SFC) published a Consultation Paper on the Proposed Amendments to the Professional Investor Regime and the Client Agreement Requirements (the Consultation Paper). The Consultation Paper is available here.

The proposed changes to the professional investor regime have significant implications and will affect all intermediaries that offer products or services to professional investors. The proposed changes to the client agreement requirements seek to narrow the scope of exclusion clauses in client agreements and give contractual status to the suitability obligation towards individual professional investors.

The deadline for submissions on the Consultation Paper is 14 August 2013.

Key change to the professional investor regime – no waiver of Code requirements permitted for individuals who are professional investors

The Consultation Paper proposes separating professional investors into three categories for the purposes of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code):

  1. Institutional Professional Investors– banks, insurers and other financial institutions falling within paragraphs (a)-(i) of the definition of "professional investor" in the Securities and Futures Ordinance;
  2. Corporate Professional Investors – trust corporations, corporations or partnerships that qualify as professional investors under the Securities and Futures (Professional Investor) Rules (the PI Rules), other than investment vehicles that fall within the definition of Individual Professional Investors;
  3. Individual Professional Investors – individuals that qualify as professional investors under the PI Rules and wholly owned investment vehicles that are owned by such persons or by family trusts.

When dealing with Individual Professional Investors, intermediaries will need to comply with the Code in full. Waivers from certain Code provisions that intermediaries currently rely on will no longer be available when providing services to Individual Professional Investors. In particular, intermediaries will need to ensure the suitability of any recommendation or solicitation for Individual Professional Investors.

The proposed change means there is less regulatory distinction between retail clients and Individual Professional Investors. Intermediaries will need to adopt the same sales and advisory processes for both. However, intermediaries can continue to offer a broader range of products to Individual Professional Investors than to retail clients.

The Code requirements for Institutional Professional Investors and Corporate Professional Investors will be substantially the same as at present.

Proposed changes to the client agreement requirements

The SFC proposes that an intermediary's agreements with its clients:

  1. must include the "suitability requirement" – the obligation of intermediaries to ensure the suitability of any recommendation or solicitation for their clients is reasonable in the circumstances;
  2. must clearly describe the actual services the intermediary will provide;
  3. must not include any provision that is inconsistent with the intermediary's obligations under the Code – potentially challenging given the Code is a principles-based document rather than establishing clear and specific statutory requirements.

These proposals are the SFC's response to recent court cases that confirmed that common statements in client agreements and other documents (e.g. that any information or advice the intermediary provides is not to be construed as investment advice and that the client is solely responsible for investment decisions) were effective to limit an intermediary's contractual liability to its clients for any recommendations it made.

Intermediaries will need to be careful to ensure that their client agreements describe the actual services they are providing to their clients and are consistent with their conduct and dealings with clients. Intermediaries will also need to monitor whether the actual services provided to a client change over time (e.g. from a pure execution arrangement to one that includes both investment advice and execution) and so whether the client agreement needs to be updated. The proposed changes limit intermediaries' ability to use contractual terms to narrow the scope of services offered. This is likely to give rise to issues where for example distributors make statements to investors which could be construed as advice.

The requirement to include the suitability obligation in client agreements will give investors the right to seek damages in the event of breach.

Key Contacts

Scott Carnachan

Consultant | Financial Services

Email or call +852 2825 9265

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