21 October, 2016
The new requirement under the SFC’s Code of Conduct for intermediaries to include a clause (the New Clause) in their client agreements imposing an obligation to ensure the suitability of recommendations or solicitations they make will come into effect on 9 June 2017.
On 23 September 2016, the SFC published FAQs to provide guidance on this requirement, including three FAQs on its application to discretionary investment management agreements (IMAs).
The FAQs make it clear that the New Clause must be included in all client agreements, including IMAs, unless no client agreement is required because the client qualifies as an institutional professional investor or a qualified corporate professional investor. In other words, it will always be required when dealing with individuals, or when dealing with corporate professional investors who, whilst meeting the asset tests in the Professional Investor Rules, do not meet the investor knowledge and experience assessment requirements under the new paragraph 15.3A and do not comply with the new paragraph 15.3B of the Code of Conduct.
In practice, the New Clause will be redundant in IMAs where full discretion is given to the intermediary in managing the client’s portfolio, as no recommendation or solicitation of a financial product will take place.
The mandate given under the IMA should be suitable for the client, and investments made pursuant to that mandate must be in compliance with the mandate. However, where the intermediary makes investment decisions for the account of the client in execution of the mandate without reference to the client, no recommendation or solicitation will be made in respect of those portfolio transactions, so the suitability obligation does not arise.
However, if in fact the intermediary consults with his client before making investments, a recommendation or solicitation may well occur, in which case the suitability assessment will need to be conducted in respect of those investments.
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