Hong Kong SFC licensing and compliance hints

Time to revisit BCP in light of COVID-19 vaccination programme

The SFC issued a circular on 1 June 2021 to urge licensed corporations to revisit their business continuity plans to consider vaccination as a critical part of operational risk management to ensure their business operations will not be disrupted by COVID-19. The SFC strongly encourages licensed firms to encourage critical staff members to get vaccinated and to arrange for periodic COVID-19 testing for those critical staff members who have not yet been vaccinated or are unfit for vaccination due to medical conditions.

In implementing arrangements to comply with the circular, licensed entities need to consider a number of issues including:

(i) 

the identification of critical operational functions and relevant staff;

(ii)

implementation and monitoring of the proposed arrangements; and

(iii)

potential employment law related issues in dealing with staff.

Revised financial return form postponed to 1 January 2022

The SFC issued a circular on 28 May 2021 and announced that the revised financial return (see our previous article of 21 July 2020) which was originally scheduled to come into effect on 1 July 2021 has been postponed to 1 January 2022. The revised return seeks to collect more data (such as proprietary investments) to enable the SFC to identify risks in a timely manner. Licensed firms should familiarise themselves with the new form and start collecting the newly required data so that there is sufficient time to enhance their systems as required.

Mandatory suitability anti-avoidance clause and suitability assessment in connection with discretionary management agreements

Although discretionary management agreements involve arrangements under which clients appoint their managers to manage their portfolios with full investment discretionary power (i.e. the mandate itself should not involve the selling of a particular investment product by the manager to the client), the suitability anti-avoidance (see extract further below) is still required to be incorporated into such agreements (see SFC FAQ #2 of 23 September 2016) verbatim except for consequential drafting amendments (see SFC FAQ #5 of 23 September 2016) when dealing with non-consenting Corporate Professional Investors (CPIs), CPIs that do not have specialised investment functions, Individual Professional Investors, and non-Professional Investors.

Having said that, managers must also ensure that the overall strategy is suitable for the above mentioned investors at the time of entering into the agreement, and must review the mandates regularly on an ongoing basis. For example, if there is a change in the circumstances of the client, the manager should consider whether the mandate’s investment strategy needs to be revised, and if revised the manager must ensure such revised mandate is suitable for that client and provide a copy of the rationale to the client in writing. The requirement to provide such copy at the time of revising the mandate (as well as setting up the initial mandate) is required for the above mentioned investor types regardless of whether the client requests for it or not (see FAQ #3(a) and (d) on Triggering of Suitability Obligations of 27 December 2018). This is in contrast to when a manager is promoting a product where it is only required to provide a copy of the rationale as to why a particular investment product is suitable only upon request by the above mentioned investor types (see Suitability FAQ #7 updated 23 December 2020).

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Suitability anti-avoidance clause extracted from 6.2(i) of the HK SFC Code of Conduct:

“If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause.”