13 December, 2015
The SFC published its Consultation Conclusions on the Client Agreement Requirements on 8 December 2015, under which licensed companies are required to include a new clause in client agreements which imposes a contractual obligation to ensure the suitability of investment recommendations and solicitations.
The suitability requirement has always applied to retail clients. Changes to Hong Kong’s professional investor (PI) regime which will take effect from 25 March 2016 will mean the suitability requirement will also apply to professional investors who are individuals and to certain trusts and corporate investors (essentially those which are not engaged in investment activity by way of business and which do not qualify under a knowledge and experience assessment).
The new clause reads as follows:
("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.")
Licensed companies should revise their standard client agreements accordingly for use when taking on new clients. There is an 18 month transitional period (expiring on 9 June 2017) to amend existing agreements but the SFC expects intermediaries to start the process of amending or replacing agreements with existing clients immediately.
Various comments and concerns with the new clause were raised during the consultation process which have been almost universally rejected. For the most part, this is unsurprising. However, a couple are worthy of note:
- Concerns were expressed that a Court’s interpretation of the new clause might be different from the SFC’s interpretation and application of the suitability requirement, and result in inconsistent standards. The SFC has concluded that there should not be any practical conflict arising from making the suitability obligation both a contractual and a regulatory requirement. If a Court gives referable guidance on the interpretation of the suitability obligation in the new clause, the SFC would take such precedents into account when applying the analogous suitability requirement in the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC.
- There remains uncertainty about the application of the new clause to fund managers, who do not have any direct contractual relationship with underlying fund investors. The SFC’s Fund Manager Code of Conduct provides that the application form and offering document of an authorised fund may form the client agreement between a fund manager acting as distributor and investors. No change has been made to the Fund Manager Code of Conduct, so it would appear that the new clause will not apply to managers of authorised funds when they market to investors. However, the position is unclear for private (unauthorised) funds. It would be anomalous if the new clause is not required when selling to retail investors who are not PIs, but is required for high net worth individuals.
For further information, please contact:
