SFC’s Consultation Paper on the Proposed Amendments to the Professional Investor Regime and the Client Agreement Requirements
Release Date: 2013-08-01
August 1, 2013
2 Queen's Road Central
Cheung Kong Center, 35th Floor
Hong Kong
Securities and Futures Commission
Intermediaries Supervision Department
Via Regular Mail
2 Queen's Road Central
Cheung Kong Center, 35th Floor
Hong Kong
Securities and Futures Commission
Intermediaries Supervision Department
Via Regular Mail
SFC’s Consultation Paper on the Proposed Amendments to the Professional Investor Regime and the Client Agreement Requirements
We hereby express our comprehensive opposition to the proposals outlined in the consultation paper, advocating for the retention of current measures while recommending the regulation of non-traded products through an annex.
Following thorough examination and extensive discussions among our members regarding the aforementioned consultation paper, we have consolidated the following conclusions and viewpoints:
Introduction
On July 16, industry leaders, including [names], voiced significant concerns during the Legislative Council's Financial Affairs Panel hearing. It is widely perceived that the proposed amendments arise from regulatory challenges linked to complaints from Lehman minibond investors, prompting lawmakers and regulatory authorities to consider tightening regulations for professional investors and account-opening procedures. This movement has been viewed as an unjust burden on brokers operating solely with exchange-traded products. Lehman minibonds are complex structured products characterized by high risk and leverage, which can be challenging for the average investor to comprehend. While enhanced oversight is warranted, products traded on exchanges, such as stocks, ETFs, futures, and options, typically have standardized requirements and transparency, fostering a strong level of investor trust. The exchange also actively promotes new products and adheres to comprehensive listing regulations for oversight. Consequently, imposing additional complex regulations on account-opening procedures is unwarranted. Aligning the regulatory standards of unique structured products, particularly over-the-counter offerings, with those of straightforward, established exchange-traded products would be excessive and could hinder market flexibility, impeding development. While the Securities and Futures Commission (SFC) has a duty to safeguard investor rights, it must also facilitate market growth and enhance industry competitiveness by simplifying account-opening processes. Failure to do so may unduly burden the industry and exacerbate the trust deficit between brokers and investors, potentially leading to unnecessary bureaucratic self-protection measures, avoidance of contentious business, and detrimental effects on market evolution and regional competitiveness.
The professional investor regime plays a critical role in providing flexibility and mobility for equity placements and refinancing in both primary and secondary markets. The existing framework defines professional investor qualifications based on an investment portfolio of at least HKD 8 million, a minimum of 40 transactions annually, and a trading experience of no less than two years, allowing exemptions from certain conduct requirements. Although not without flaws, this system is pragmatic and effective. Historical financial crises have primarily centered on disputes related to over-the-counter financial products sold by banks, with instances involving exchange-listed products being rare. Significant reforms could disrupt listing and refinancing activities, negatively impacting secondary market dynamics and incentives, and potentially leading to an uptick in disputes. Should these proposals be enacted, brokers would be compelled to renegotiate client agreements with all clients, incurring substantial administrative and technical challenges, ultimately causing more harm than benefit. We strongly advocate for the preservation of existing client agreements for exchange-traded products and the discussion of alternative regulatory frameworks for over-the-counter products through an annex.
The consultation paper proposes (1) incorporating suitability requirements as contractual elements in client agreements; (2) ensuring client agreements do not include terms conflicting with conduct standards. We strongly oppose the notion of imposing the responsibility of differentiating professional investors onto practitioners, as this creates a regulatory grey area that may incentivize opportunistic behavior among investors. The current definition of professional investors is clear, objective, and straightforward, minimizing the potential for disputes. The latter proposal unjustly undermines brokers' rights to self-protection, and our industry will firmly resist it. Previous reforms suggested by HKEx and SFC, under the pretext of internationalization, have inadvertently burdened local brokers and diminished their competitiveness. Historical reforms have disproportionately favored larger clients, creating opportunities for manipulation while marginalizing smaller investors and eroding investment value and confidence. Many local brokers have lost interest, leading to numerous closures. Despite ongoing internationalization efforts, has there been a notable increase in foreign participation in Hong Kong stocks? Has there been a rise in stock transactions? In reality, daily transactions have plummeted to HKD 45 billion, and excluding derivatives hedging activities, retail investor engagement is minimal. HKEx has increasingly become a platform for a select few to speculate on derivatives, turning into a zero-sum game that ultimately undermines HKEx's financing capabilities. The financial sector, a cornerstone of Hong Kong's government pride, fails to offer a reasonable employment landscape for practitioners. In recent years, many frontline workers have faced unemployment, and the exchange is losing its capacity to provide listing and refinancing services crucial for economic growth. Concurrently, numerous low-quality listed companies engage in improper practices, severely undermining investor confidence. We urge the SFC to adopt an open and transparent approach, heed industry feedback, and proceed with caution to avoid hasty decisions that conflict with public sentiment and enforce unpopular measures.
Responses to the Consultation Paper Questions:
1. We support the continued participation of both institutional and individual professional investors in private placements.
2. We oppose raising the minimum total value threshold for institutional and individual investors, as the current framework is effective, and alterations would lead to unnecessary disputes.
3. We disagree. We agree that intermediaries should be exempt from conduct standards when trading with individual professional investors, given their requisite level of investment knowledge and experience.
4. We oppose this suggestion. Investment tools held by individuals and family trusts should qualify as individual professional investors.
5. We strongly oppose shifting the responsibility of distinguishing professional investors to practitioners, as this creates a regulatory grey area that may encourage opportunistic behavior. The existing definition of professional investors remains clear, objective, and straightforward, significantly reducing disputes.
6. We strongly oppose the introduction of suitability requirements for the reasons stated in response 5.
7. We oppose arbitrary changes to current client agreements, as removing brokers' rights to self-protection is unjust. The current arrangements are effective and accepted by all stakeholders, with no significant disputes. Unwarranted adjustments would only increase administrative burdens unnecessarily, squandering time and resources. Forced implementation would lead to greater bureaucratic self-protection measures or avoidance of contentious business, adversely affecting market development and regional competitiveness.
The above seven points encapsulate our opposition to the “Consultation Paper on the Proposed Amendments to the Professional Investor Regime and the Client Agreement Requirements” for your reference.
Best regards,
Hong Kong Securities and Futures Professionals Association