Capital attraction: SFC and HKMA streamline suitability obligations for sophisticated professional investors

Further detail

(A)  Qualifying criteria – who is eligible to be a “Sophisticated PI”?

A Sophisticated PI refers to an Individual Professional Investor who satisfies at least each of the following criteria:

(B)  Eligible Investment Transactions – which transactions may be executed under the Streamlined Approach?

Intermediaries must only execute investment transactions for a Sophisticated PI under the Streamlined Approach where the transactions fall within the “Product Categories” and the “Streamlining Threshold” (collectively, “Eligible Investment Transactions”). 

The following summary breaks down the requirements:

• Product Categories – This involves three key steps:
  
  • Intermediaries must devise (or adjust as appropriate) Product Categories to categorise investment products based on the terms and features, characteristics, nature and extent of risks of investment product. ^[3]
    
  • The Sophisticated PI should then specify the Product Categories within which investment transactions could be executed under a Streamlined Approach. 
    
  • Intermediaries must then document the choice of the Sophisticated PI and provide a Product Category Information Statement (Product Statement) to the Sophisticated PI to explain the terms and features, characteristics, nature and extent of risks of investment products within such Product Category, including any warning statements in relation to the distribution of complex products. See paragraph 7 of Annex 1 for more details.
• Streamlining Threshold – The Sophisticated PI must specify a maximum threshold of investment, as an absolute amount or a percentage relative to the Sophisticated PI’s assets under management (AUM) with the intermediary, that is acceptable to be executed under a Streamlined Approach (Streamlining Threshold). The Sophisticated PI may then specify a Streamlining Threshold appropriate to their circumstances and the intermediary is required to maintain proper records of setting any such threshold, including the Sophisticated PI’s rationale that provides support for setting such threshold. Intermediaries are required to establish and maintain effective systems and controls to ensure compliance with the Streamlining Threshold, including to discuss the Streamlining Threshold with the Sophisticated PI at least annually. See paragraph 8 of Annex 1 for more details.

(C)  Streamlined Approach – which intermediary procedures can be “streamlined”?

A number of procedures can be streamlined when dealing with Sophisticated PIs in Eligible Investment Transactions.

For transactions with a recommendation or solicitation executed under a Streamlined Approach, intermediaries are not required to do the following:

For transactions in a complex product without recommendation or solicitation executed under a Streamlined Approach, intermediaries are not required to do the following:

To be clear, Sophisticated PIs must still receive up-to-date product offering documents (which can be by electronic means) and other requirements must still be met. 

(D)  Application of the Streamlined Approach – how should intermediaries implement the Streamlined Approach?

• Written Sophisticated PI assessment – An intermediary should apply the Streamlined Approach when dealing with a Sophisticated PI only if the intermediary is reasonably satisfied that the Sophisticated PI has the degree of sophistication to understand and take on the risks arising from a Streamlined Approach by meeting the qualifying criteria (i.e. financial situation, knowledge or experience and investment objectives). Intermediaries should keep proper records of its assessments. 
• Client acknowledgement – Prior to applying the Streamlined Approach, when dealing with a Sophisticated PI in Eligible Investment Transactions, the intermediaries should:
  • enter into a written agreement with each Sophisticated PI for acknowledging and giving consent to be treated as a Sophisticated PI;
  • specify in writing the assessment criteria under which the client qualified as a Sophisticated PI;
  • specify in writing the Product Categories and the Streamlining Threshold within which investment transactions could be executed under a Streamlined Approach; and
  • fully explain to the Sophisticated PI the consequences of being treated as a Sophisticated PI and the Sophisticated PI’s right to withdraw from being treated as such at any time, including those set out in the Circular. 
• Annual review – Intermediaries must carry out a review annually to ensure that the Sophisticated PI continues to fulfil the requisite requirements (as summarised in section (A) above) and continues to agree for the intermediary to execute investment transactions falling within the Product Categories and Streamlining Threshold. In carrying out the annual review, intermediaries should remind the client in writing of:
  • the consequences of being treated as a Sophisticated PI;
  • the Product Categories and related information as contained in the Product Statement;
  • the Streamlining Threshold and an alert to the Sophisticated PI where there was any instance of breach; and 
  • the right for the Sophisticated PI to withdraw from being treated as a Sophisticated PI, to add or remove a Product Category and/or to amend the Streamlining Threshold at any time.

Key action points

The Circular will be particularly relevant to wealth management and private banking businesses. However, we are also examining its relevance to other emerging asset segments including virtual assets.

We recommend asking the following key questions:

• Would any of my existing and target new clients satisfy the criteria of Sophisticate PIs and is there are an opportunity to leverage the Streamlined Approach?  
• If so, what are the Product Categories which can be offered more widely under the Streamlined Approach?
• Which policies, procedures, systems and documents would need to change?
• Are any operational changes needed and is the overall value proposition of the Streamlined Approach sufficiently strong to justify adopting it?

Please let us know if you have any questions. We would be delighted to help.

Any reference to “Hong Kong” or “Hong Kong SAR” in this article shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.