As foreshadowed in the Consultation Conclusions on the Proposed Amendments to the Professional Investor Regime and Further Consultation on the Client Agreement Requirements issued by the Securities and Futures Commission (SFC) on 25 September 2014, the SFC has conducted a detailed study (including the gathering of industry views) of the requirement under paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code) that persons licensed by or registered with the SFC (collectively, Intermediaries) should, when making a recommendation or solicitation, ensure the suitability of the recommendation or solicitation for the client is reasonable in all the circumstances (Suitability Requirement).
In light of that study, the SFC issued the following further guidance to Intermediaries on 23 December 2016:
- Circular to Intermediaries - Frequently Asked Questions on Compliance with Suitability Obligations (informs Intermediaries that the SFC has published an updated set of FAQs on compliance with the suitability obligations under the Code, which include the Suitability Requirement (collectively, the Suitability Obligations);
- Frequently Asked Questions on Compliance with Suitability Obligations by Licensed or Registered Persons (Updated Suitability FAQs) (updates the suitability FAQs issued by the SFC in May 2007 (2007 Suitability FAQs) and sets out some practical considerations that Intermediaries should take into account (at a minimum) in the conduct of their business);
- Circular to Intermediaries - Frequently Asked Questions on Triggering of Suitability Obligations (Suitability Triggers Circular) (clarifies the scope of application of the Suitability Obligations and provides guidance and illustrations on whether and when they would be triggered under certain scenarios); and
- Frequently Asked Questions on Triggering of Suitability Obligations (Suitability Triggers FAQs) (provides guidance on whether the Suitability Obligations will be triggered where Intermediaries (i) have interactive communications with their clients on investment products; or (ii) provide discretionary account services to their clients).
In an SFC announcement that was also issued on 23 December 2016, Ms Julia Leung, the SFC's Executive Director of the Intermediaries Division, said that the Suitability Obligations are "the cornerstone of investor protection" and that the circulars "aim to provide clarity on what may trigger the Suitability Obligations, particularly when brokers or distributors deal with clients in person, by telephone or by other direct means of communication, and on what needs to be done when such obligations are triggered".
On 28 December 2016, the Hong Kong Monetary Authority (HKMA) also issued a circular to draw the attention of authorised institutions (AIs) to the SFC circulars above and to remind them of their own suitability obligations.
Please click here to read our briefing on the new guidance under the Updated Suitability FAQs (as compared to the 2007 Suitability FAQs), the Suitability Triggers Circular and the Suitability Triggers FAQs referred to above.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2019