SFC Consultation Conclusions on the Proposed Amendments to the Professional Investor Regime and Further Consultation on the Client Agreement Requirements
Release Date: 2014-12-23
Dated: December 23, 2014
Hon. Christopher CHEUNG Wah-fung, SBS, JP
35/F, Cheung Kong Center
2 Queen's Road Central
Hong Kong
Intermediaries Supervision Department
Securities and Futures Commission
Subject: Response to the Consultation Paper on Proposed Amendments to the Professional Investor Regime and Client Agreement Requirements
In response to the Securities and Futures Commission's (SFC) consultation on amending the "Professional Investor Regime" and the "Client Agreement Requirements," we provide our insights and recommendations as follows:
Following the SFC's market consultation summary on the "Professional Investor Regime," a subsequent consultation focuses on "Client Agreement Requirements." The proposal suggests that all client agreements include a clause stating:
"If we [the intermediary] recommend or solicit the purchase of any financial product to you [the client], it must be reasonably suitable for you, considering your financial situation, investment experience, and investment objectives. No part of this agreement or any document we ask you to sign, nor any statement we ask you to make, will alter this clause."
We believe these proposed changes will significantly affect the financial services industry's future operations. Discussions with leading industry groups reveal that the original terms set by the SFC are often unclear, potentially leading to clients inadvertently gaining an advantage while putting operators at risk of legal action.
The amendments to the "Professional Investor Regime" are a response to the 2008 financial crisis, particularly the collapse of Lehman Brothers, which led to the devaluation of complex derivatives, like credit default swaps packaged as minibonds, resulting in heavy losses for many investors.
Despite the stock market crash in 2008, Hong Kong's securities industry remained stable, with no closures or major claims, as most brokerages mainly executed client instructions without promoting high-risk products like Lehman minibonds. Therefore, imposing stricter regulations based on an isolated event unrelated to actual securities trading appears unjust.
Considering the SFC's insistence on amending client agreements, we propose the following adjustments:
1. Clarification of "Financial Product" Definition
The term "financial product" in the proposed terms is overly broad. We recommend excluding "Hong Kong-listed securities (limited to listed companies)" as existing legal frameworks adequately protect investors. Brokerages executing client instructions or providing occasional advice should not fall under the new terms. Precise definitions are essential.
2. Clarification of "Solicitation" and "Recommendation"
The terms "solicitation" and "recommendation" lack clear definitions. We suggest restricting the scope to "recommendation" only. If "solicitation" must be included, limit it to personalized marketing efforts, where an intermediary directly encourages a client to invest in products not traded on the Hong Kong Stock Exchange. The term "recommendation" should only apply to fee-based, individualized investment advice. General presentations or ancillary opinions during trade execution should not be deemed "recommendations."
3. Client Awareness and Suitability Requirements
While new terms focus on suitability requirements, they omit assessing client knowledge. Intermediaries can't know all client financial details, even with due diligence, as clients might withhold information. Responsibilities should be limited to the client's disclosed financial situation, investment experience, and objectives.
Proposed Client Agreement Amendment:
"If we [the intermediary] provide one-on-one advice on any financial product or portfolio, it must be reasonably suitable for you, based on the financial situation, investment experience, and objectives you disclosed. We rely on your provided information, and you must verify its accuracy. Other provisions of this agreement or documents remain effective without altering this clause.
Financial products refer to... but exclude company securities listed on the Hong Kong Stock Exchange and..."
We urge the SFC to consider these suggestions carefully.
Endorsed by:
- Legislative Council (Financial Services) Member Christopher CHEUNG Wah-fung
- Hong Kong Securities Professionals Association
- Hong Kong Securities and Futures Professionals Association
- The Institute of Securities Dealers
- The Hong Kong Institute of Financial Analysts and Professional Commentators Limited
- Chinese Securities Association of Hong Kong
- The HK Association of Online Brokers
- Hong Kong Securities Association
- Hong Kong Securities and Futures Employees Union
- Hong Kong Precious Metals Traders Association
Hon. Christopher CHEUNG Wah-fung, SBS, JP
35/F, Cheung Kong Center
2 Queen's Road Central
Hong Kong
Intermediaries Supervision Department
Securities and Futures Commission
Subject: Response to the Consultation Paper on Proposed Amendments to the Professional Investor Regime and Client Agreement Requirements
In response to the Securities and Futures Commission's (SFC) consultation on amending the "Professional Investor Regime" and the "Client Agreement Requirements," we provide our insights and recommendations as follows:
Following the SFC's market consultation summary on the "Professional Investor Regime," a subsequent consultation focuses on "Client Agreement Requirements." The proposal suggests that all client agreements include a clause stating:
"If we [the intermediary] recommend or solicit the purchase of any financial product to you [the client], it must be reasonably suitable for you, considering your financial situation, investment experience, and investment objectives. No part of this agreement or any document we ask you to sign, nor any statement we ask you to make, will alter this clause."
We believe these proposed changes will significantly affect the financial services industry's future operations. Discussions with leading industry groups reveal that the original terms set by the SFC are often unclear, potentially leading to clients inadvertently gaining an advantage while putting operators at risk of legal action.
The amendments to the "Professional Investor Regime" are a response to the 2008 financial crisis, particularly the collapse of Lehman Brothers, which led to the devaluation of complex derivatives, like credit default swaps packaged as minibonds, resulting in heavy losses for many investors.
Despite the stock market crash in 2008, Hong Kong's securities industry remained stable, with no closures or major claims, as most brokerages mainly executed client instructions without promoting high-risk products like Lehman minibonds. Therefore, imposing stricter regulations based on an isolated event unrelated to actual securities trading appears unjust.
Considering the SFC's insistence on amending client agreements, we propose the following adjustments:
1. Clarification of "Financial Product" Definition
The term "financial product" in the proposed terms is overly broad. We recommend excluding "Hong Kong-listed securities (limited to listed companies)" as existing legal frameworks adequately protect investors. Brokerages executing client instructions or providing occasional advice should not fall under the new terms. Precise definitions are essential.
2. Clarification of "Solicitation" and "Recommendation"
The terms "solicitation" and "recommendation" lack clear definitions. We suggest restricting the scope to "recommendation" only. If "solicitation" must be included, limit it to personalized marketing efforts, where an intermediary directly encourages a client to invest in products not traded on the Hong Kong Stock Exchange. The term "recommendation" should only apply to fee-based, individualized investment advice. General presentations or ancillary opinions during trade execution should not be deemed "recommendations."
3. Client Awareness and Suitability Requirements
While new terms focus on suitability requirements, they omit assessing client knowledge. Intermediaries can't know all client financial details, even with due diligence, as clients might withhold information. Responsibilities should be limited to the client's disclosed financial situation, investment experience, and objectives.
Proposed Client Agreement Amendment:
"If we [the intermediary] provide one-on-one advice on any financial product or portfolio, it must be reasonably suitable for you, based on the financial situation, investment experience, and objectives you disclosed. We rely on your provided information, and you must verify its accuracy. Other provisions of this agreement or documents remain effective without altering this clause.
Financial products refer to... but exclude company securities listed on the Hong Kong Stock Exchange and..."
We urge the SFC to consider these suggestions carefully.
Endorsed by:
- Legislative Council (Financial Services) Member Christopher CHEUNG Wah-fung
- Hong Kong Securities Professionals Association
- Hong Kong Securities and Futures Professionals Association
- The Institute of Securities Dealers
- The Hong Kong Institute of Financial Analysts and Professional Commentators Limited
- Chinese Securities Association of Hong Kong
- The HK Association of Online Brokers
- Hong Kong Securities Association
- Hong Kong Securities and Futures Employees Union
- Hong Kong Precious Metals Traders Association