On 28 July 2023, the Hong Kong Monetary Authority and the Securities and Futures Commission issued a joint circular detailing a streamlined approach for compliance with suitability obligations when intermediaries deal with sophisticated professional investors ('SPIs') who possess higher levels of loss absorption ability and knowledge or experience (the ‘Streamlined Approach’).
The Streamlined Approach allows for a simplified point-of-sales procedure when executing eligible investment transactions for SPIs. In terms of impact, the Streamlined Approach is expected to benefit intermediaries such as private banks hosting long-term clients who trade frequently.
SPIs
SPIs are professional investors who satisfy the following criteria:
- Financial situation: the investor has (a) a portfolio of at least HK$40 million; or (b) net assets, excluding primary residence, of at least HK$80 million (or its equivalent in any other currency);
- Degree of sophistication: the investor is required to understand the risks arising from being treated as an SPI. Factors to consider on the investor’s degree of sophistication include the investor’s academic qualification, professional qualification (such as the CFA), relevant professional experience in the financial sector and trading experience; and
- Investment objectives: the investor’s investment objective cannot be those of a conservative client whose investment objective is capital preservation and/or seeking regular income.
Streamlined Approach
Eligible Investment Transactions
Transactions falling within the designated Product Categories and Streamlining Threshold (defined below) can be executed under the Streamlined Approach ('Eligible Investment Transactions').
Product Categories
Intermediaries should categorise investment products based on their terms, features, characteristics, nature and risks ('Product Categories'). Prior to executing transactions under a Streamlined Approach, the SPI should specify the Product Categories within which investment transactions. Intermediaries are required to document the choice made by the SPI, and provide a Product Category Information Statement to the SPI to explain the terms, features, characteristics, nature and risks of a particular Product Category.
Streamlining Threshold
The SPI should specify a maximum threshold of investment, as an absolute amount or a percentage relative to the SPI’s assets under management with the intermediary, which is acceptable to be executed under a Streamlined Approach ('Streamlining Threshold'). The SPI could specify a Streamlining Threshold appropriate to their circumstances and the intermediary is required to maintain proper records of such selected threshold, including the SPI’s rationale for such threshold. Intermediaries should establish and maintain effective systems and controls to ensure that the gross exposure arising from all investment transactions and positions remains at or below the Streamlining Threshold. Intermediaries should implement measures to detect any outsized or material transactions and issue warning statements to the SPI for these transactions.
Streamlined Approach
Where the Streamlined Approach applies, intermediaries will not be required to:
- match the SPI’s risk tolerance level, investment objectives and investment horizon with Eligible Investment Transactions;
- assess the SPI’s knowledge and experience, and concentration risk in Eligible Investment Transactions;
- provide product explanation, except upon request and/or any material queries being raised by the SPI. Intermediaries should provide SPI with up-to-date product offering documents, which could be done by sending a hyperlink to the offering documents or as attachments via email; or
- maintain records documenting the rationale underlying the investment recommendations made to the SPI.
Additional regulatory steps to be taken
To adopt the Streamlined Approach, an intermediary will also need to, among other things: (i) document the above Streamlined Approach of SPI assessment in writing; (ii) prior to applying the Streamlined Approach, enter into a written client agreement with each SPI for acknowledging and giving consent to be treated as an SPI; and (iii) carry out an annual review to ensure that the SPI continues to fulfil the criteria and remind the SPI in writing of the consequences of being treated as an SPI and the right for the SPI to withdraw from being treated as an SPI.
Takeaway
For intermediaries such as private banks, the Streamlined Approach enables them to execute transactions more effectively and efficiently for their long-term clients who qualify as SPIs and trade frequently.
However, for firms that are dealing with one-off or infrequent transactions by customers, firms should consider whether the benefit of implementing the Streamlined Approach would outweigh the operational costs. The Streamlined Approach will require a new set of documents, policies and procedures, and there will still be a need to reach out to customers for their written consent and annual review.
