Fri, Jan 23, 2015

The Proposed New Professional Investor Regime

In its latest consultation conclusions, the Securities and Futures Commission (SFC) reiterated the suitability requirement (that is, the obligation on licensed intermediaries to determine that all investments suggested are suitable for the investor), is the cornerstone of investor protection, especially for individual investors.

In Hong Kong, the Professional Investor (PI) Regime operates to differentiate retail investors and professional investors, who may not require full regulatory protection. Under the current Professional Investor Regime, there are three types of Professional Investors: Institutional Professional Investors Corporate Professional Investors (CPI) and Individual Professional Investors.

Whilst CPIs and Individual Professional Investors may meet the statutory monetary thresholds under the current regime, the SFC considers that there is no guarantee of their sophistication.

To that end, the SFC published its consultation conclusion in September 2014 in relation to its proposed amendments to the Professional Investor Regime. With respect to Individual Professional Investors, the SFC proposes that all individuals, regardless of their wealth, should be covered by the same protection under the Code of Conduct, and essentially shall be treated in the same manner as a retail investor under the Code.

The SFC also introduced a new CPI assessment in determining whether a CPI is eligible for Code exemptions which has three criteria: the CPI must have an appropriate structure, investment process and controls in place; the person responsible for making investment decisions must have sufficient investment background; and the CPI is aware of the risks involved.

This principles-based approach will be adopted to determine whether CPIs may afford exemptions to the licensed company from demonstrating the PI Requirements in the same manner as Institutional Professional Investors. Previously adopted “bright line” tests have been found to be poor indicators of knowledge and investment experience, if taken in isolation. Therefore the SFC has concluded that a principles-based assessment should instead be used to determine whether a CPI is eligible for certain Code exemptions to be dis-applied.

Finally, the Consultation Conclusion also discussed a provision to be incorporated contractually, into Client Agreements. The SFC has decided a new clause should be inserted into client agreements, which will seek to act as a legally clear and certain clause which may be readily interpretable by the Courts. The new clause is to be inserted into all client agreements:

“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.”

This proposal as well as the proposed effective implementation date of the new clause will undergo a further consultation process to be concluded on 24 December 2014.

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